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Arbitration Provisions in Residential Lease Agreements

Residential landlords must be careful in the wording and explanation of arbitration provisions in lease agreements, especially with Spanish speaking residents. In a recent case, Penilla v. Westmont, a California Appeals Court found that an arbitration provision in a mobilehome park rental agreement was unconscionable, and thus unenforceable, when it (1) substantially benefited the landlord, (2) imposed fees and limitations that would have substantially deterred residents from asserting their claims and (2) 15 of the 46 named parties spoke little or no English. The arbitration agreement, attached to the lease, required the tenants to pay half of the arbitration costs up front and determined that a failure to do so would result in a default judgment in favor of the landlord. The court found that due to the low income nature of the tenants, virtually none of them would be able to afford the cost of arbitration.

Further, the landlord did not provide the non-English speakers copies of the agreement in Spanish and, although the Park's managers explained to the residents, in Spanish, that they were required to sign the rental agreement, the managers never explained the arbitration provision or its terms.

However, a crucial aspect of the ruling was that the tenants were under substantial economic pressure to sign the agreement, as most, if not all, had already paid for their mobilehomes or made a large down payment when they were presented with the agreement. Failure to sign would have forced them to look for new housing which many of the tenants could not afford. In addition, the court found that the arbitration provision lacked mutuality as unlawful detainer actions were carved out in the landlord's favor.

The key reasons for the court's finding that the agreement was unconscionable resulted from the resident's inability to read English, the poor and confusing drafting of the arbitration agreement, the limitations and restrictions on the remedies and damages available to the tenants, the extreme financial pressure residents were under to sign the agreement, and due to the provision requirement of payment of fees of $2500 to $5000 up front, per day, for each day of arbitration.

Although this case arises from a mobilehome park residency, the applicability and unenforceability of an arbitration provision in any residential lease agreement should be carefully reviewed. Going forward, it is crucial for landlords or mobilehome park owners to understand the requirements relating to translation of documents and updating the arbitration provision as needed. Discussing these issues with experienced attorneys to determine the best way to prevent future headaches, and costly litigation, down the road.

Liam Perry is an Associate Attorney at The Loftin Firm. For questions relating to this blog post or any other California real estate, land use, corporate, or estate planning matter, contact The Loftin Firm at (760) 814-9649. 

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