The Property Management Shop

The Consequences of Rent-Credit Agreements

by Marc Wilson

Q. My wife and I entered into a rent-credit agreement with a tenant two years ago. In essence, we reduced the tenant's rent by $200. The agreement was unambiguous, for it stipulated our right to increase the rent back to the former rent. The agreement stated that �the landlord reserves the right to cease any further credit of upcoming rent and to require you to then pay all future rent in full.� Lately, we have noticed a distinct spike in the local rental market—just last week we rented a unit at higher rent than what we received prior to the issuance of the rent credit in 2003. Today, our tenant with the rent-credit agreement is clearly paying below-market rents. I spoke with her yesterday, and she indicated that she was not inclined to honor our rent-credit agreement. She said that this agreement was contrary to the San Francisco Rent Ordinance and that my proposed rent increase constituted an illegal rent increase. What should we do?

A. I always figured that this �chicken would come home to roost.� I personally wrote a lot of rent-credit agreements during 2002 and 2003 when the market was falling like a stone. Like yours, my agreements were very clear and unambiguous as they pertained to rent increases returning later to the original contract rents. At the time, I figured that if I didn't lower the rents, tenants would find comparable apartments for less money and simply vacate. I was even able to weed out most of my obnoxious tenants by refusing to lower their rents. Believe me—undesirable tenants quickly got the message when I continued to raise their above-market rents in the face of a falling rental market.

The truth is that I have never decreased a rent without first recognizing that there was a strong possibility I might never get the rent back up to the contract rent. My philosophy was to never reduce the rent to a level that I was not prepared to live with permanently. My ability to raise the rent back to the contract rent, notwithstanding my agreement with a tenant, was always sufficiently vague and uncertain as to render the agreement practically worthless. I personally have not yet had the opportunity to increase any of my previously reduced rents. In most cases, the tenants whose rents I decreased, vacated long ago. I'm sure that three or four of my tenants with such agreements could stand increases back to their contract rents, but I'm not particularly motivated in ferreting them out at this time. Although the rental market is growing stronger, it has not appreciated enough yet for me to go through the hassle of invoking my right to the original contract rents.

This is not to say that I do not intend to enforce my rent-credit agreements. These agreements are clear, concise and unambiguous, as well as decidedly not subject to debate. No reasonable person can quibble with the tone, tenor and intent of the agreement.

Why in the world would your tenant enter into an agreement that she does not intend to honor? The entire agreement was her idea in the first place. So what is her argument now? �I didn't sign the agreement? That's not my signature? I didn't understand the agreement? I was not contractually capable at the signing of the agreement? I was intoxicated? I never asked the landlord for a charitable rent credit? I thought the rent credit was forever? I did not understand the agreement?� Ultimately, she will have to pass the straight-face test. She will have to testify to a third party—that is the Rent Board—and promulgate one of the aforementioned arguments, all with a straight face. I believe that even the average San Francisco tenant will decide that his or her self-esteem is worth more than $200 a month.

First things first—never have verbal business communications with your tenant. Unless you are exchanging innocuous pleasantries or receiving compliments relative to your management style, you should have no substantive verbal interaction with your tenants. Absolutely all such interactions with your tenants should be in writing, including, but not limited to, rent increases, repair requests, admonishments for poor behavior and much more. What did you expect your tenant to say when you passed her in the hall and announced a $200 rent increase? �Thanks for the rent increase! Can't you raise my rent more?� You're lucky she didn't push you down the stairs. Simply mail a copy of your original agreement with a notice to �cease any further credit of upcoming rent� or similar paraphrasing of your particular document. In this way, your tenant will reread the rent-credit agreement and, in all probability, honor the agreement and the corresponding cessation notice.

What do you do if your tenant subsequently fails to pay her original contract rent? I recommend the following four strategies. First, serve the tenant a Three Day Notice to Pay Rent or Quit for the rent shortfall. Most attorneys would describe this strategy as a risky bluff. It is risky because you are threatening to evict a tenant based on a rent increase that the Rent Board might not validate. It could be a bluff because no attorney would advise you to actually pull an unlawful detainer and complaint predicated on the tenants' failure to abide by the rent-credit agreement. I don't see any reason not to serve a three-day notice. Why not flush out your tenant early? She will probably just pay.

Second, if the tenant still doesn't pay, you could petition the Rent Board for approval and validation of your rent-credit agreement. Not even God knows how the Rent Board will rule, but it's better than doing nothing.

Third, you could hire an attorney and petition the court to rule on your agreement before you sue the tenant. I believe that the process is called �declarative relief.� It should be called �wallet relief� because of what this strategy will do to the money in your wallet.
Fourth, you could send a letter to the tenant that clearly states (a) you are not waiving your rights and (b) the acceptance of the lower rent does not mean that you do not reserve the right to enforce the agreement, evict the tenant or exercise any other rights you might possess in the future.

Personally, I would pursue either the second or fourth strategy. I would definitely go with the fourth strategy if initially the rent credit was minimal. You can always take all or some of the rent arrearages out of the tenants' security deposit when she vacates. I'm philosophical about the outcome of these disputes, because I knew the risks when I entered into these agreements with my tenants.

I know a lot of owners who offered rent rebates instead of credits when the economy was weak. These owners actually mailed rent rebates to their tenants every month instead of lowering the rent payable with a rent-credit agreement. I was never interested in the increased work load. Besides, most of these tenants have since vacated, meaning the entire exercise was a waste of time. Most, if not all your tenants, will honor their rent-credit agreements.

My advice is for you to strive to be very businesslike in all your dealings with your tenants. Give each of them the courtesy of a copy of the original rent-credit agreement and a written notice that terminates this agreement. Your documents should be professionally prepared, properly served and presumptive in regard to the enforcement of your agreements with your tenant. Let me know if you want a copy of my standard rent-credit agreement. Good luck.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Marc Wilson is the president of SFAA. Marc has specialized in the brokerage of San Francisco apartment buildings for 20 years. He can be reached at 415-229-1275. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.