Lease renewals: What are the new terms of your unwritten contract?

What agreement do you have with your tenants after the lease has expired? Does it automatically renew? If so, what are the terms of your agreement?

In today’s post, we look at the laws in California regarding automatic lease renewals. If you are a landlord and you have not updated your contracts in a long time, you may not know what the law says about your current agreement with your tenants.

This is for your information only and is not legal advice. Always consult an attorney if you have specific questions about what you should or should not do, and if you would like to add properties to your rental portfolio, then call me.

The law on expired leases

The California Civil Code section 1945 reads: “If a lessee of real property remains in possession thereof after the expiration of the hiring, and the lessor accepts rent from him, the parties are presumed to have renewed the hiring on the same terms and for the same time, not exceeding one month when the rent is payable monthly, nor in any case one year.” What does this mean?

We have key parts that I want to highlight. This code applies when (1) a tenant continues to live in (possess) the rented property and (2) the landlord has accepted rent from him or her. This does not apply if the landlord has not accepted rent. That is a holdover tenant, and that tenant may be evicted for violating the lease. When both conditions are true, then this section of code creates a legal presumption.

A legal presumption is something the court accepts as true unless parties provide evidence to the contrary. Usually, it is the person who wishes for the situation not to be guided by a legal presumption that has the burden of providing the required evidence. For example, if you’d like to prove that the lease ended, you may have to show evidence that you never accepted additional rent, or that apart from accepting additional rent that you did not intend for the lease to be extended by the terms of this code.

Always start with the expired contract

Legal presumptions are not needed when you have an express agreement that settles the matter. Many rental agreements have a term that states what happens at the end of the contract. It is common to see a term that says that the contract renews automatically as a month-to-month lease at the end of the term, or that it renews for a one-year lease with payments due monthly. Absent a law to the contrary, the express terms of the contract will remove the need for legal presumptions.

A tenant may void an express renewal provision if it is not written correctly. Read more about how a tenant can void your express renewal term below. First, let’s look at what the law presumes about your lease if you have no express term for autorenewal. (Click here to jump forward in this post and see how to rescue your renewal clauses.)

What does the law presume about expired leases?

When the lease has expired and the landlord continues to accept rent, the law presumes that the landlord and the tenant renewed the contract for the “same terms and for the same time.” ¹

The length of time is modified by the same code. Even though the contract renews for the “same time,” if the rent is paid monthly, the automatically renewed contract may not be longer than one month. ² If the contract is for more than one year, then the renewed contract is cut off at one year. ³

If the length of time is modified, then the process repeats again the next time the landlord accepts rent money. In other words, under this section of the code (Civ. Code, § 1945), the new contract, which is no longer in writing, is presumed to be exactly the same contract as the previous agreement but with a new term lasting only until the next rent payment.

Therefore, if you have continued to accept rent payments every month, chances are very good that your new contract is a month-to-month agreement, and the terms of the agreement are exactly the same as the agreement you have in writing and signed for the first year, month or other period.

Automatic renewal clauses might be voidable by your tenant

Above, I mentioned that having a renewal clause in your contract may remove the need for the presumption. But, the presumption may still apply if your lease agreement is voided by the tenant.

After 1966, the party who did not draft the lease agreement could void an autorenewal clause in certain circumstances.⁴ Usually, the landlord drafts the rental agreement, so the tenant would be the one who could void the renewal clause.

I mentioned above that it is common for a lease to include a renewal clause. The clause often permits automatic renewal if the lessee remains in possession “after the expiration of the lease or fails to give notice of his [or her] intent not to renew.”⁵

For the tenant to have this power, the text of the renewal clause had to fail when compared against the minimum standard set forth in California Civil Code section 1945.5.

Under this section of code, the renewal clause had to be at least (1) eight-point boldface type, and (2) “immediately prior to the place where the lessee executes the agreement” there had to be a notice in at least eight-point boldface type stating that a renewal clause was in the contract.⁶

If you have an automatic renewal clause in your lease, make sure you check to see that the renewal clause meets these basic criteria!

The law assumes your lease is month-to-month

If you forgot to specify a term in your residential lease agreement, then the default term is month-to-month. “A hiring of real property, other than lodgings and dwelling-houses, in places where there is no custom or usage on the subject, is presumed to be a month to month tenancy unless otherwise designated in writing . . .”⁷

Protect Yourself

Naturally, there are many nuances to the law, and I find the easiest way to stay on top of my rental properties is to hire a management company. I started using management companies last year when my baby was born so that I could spend more time with my family. The management company uses forms approved by the California Association of Realtors, and these forms have been drafted with considerations of all the loopholes and problems that often confront a lessor.

Grow your investment portfolio

I try to serve my clients by being the best realtor in Bakersfield for their needs. Watson Realty has provided me a home where I can grow, and I strive to learn as much as I can for my investor clients so that I can provide useful information when it matters most.

If you are looking to grow your investment portfolio, call me and let’s talk about how to achieve your goals with Bakersfield rental properties. Often, I can help you find a profitable multiplex with as little as $70,000 cash and good credit. Some of my more aggressive investor clients take the cash out of their home equity line and pay down the home equity line with the rental proceeds. Talk to a financial planner or a CPA before making any changes to your financial position.