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One is the Lovliest Number
by Curtis F. Dowling
SFAA has created a new Notice of Objection to Occupancy of Unapproved Subtenants. The notice is designed to object to the occupancy of an unapproved subtenant in a rental unit. It is not designed for approved subtenants, as you should never approve a subtenant under any circumstances. Even if the master tenant has some form of statutory right to move in a replacement roommate or family member, you should not approve such persons to be roommates or subtenants. If the master tenant has a contractual right to request approval, you should still deny it. The act of approval turns such people into “tenants.” Explicit, written disapproval keeps them “unapproved subtenants” who can be evicted under Rent Ordinance § 37.9(a)(7) as unapproved holdover subtenants when the master tenant voluntarily terminates his tenancy, but leaves unapproved roommates behind.
The opinion of this author is that, if an owner’s goal is to maximize rental income from a building and to preserve rent increase rights as much as possible, the owner should always include a blanket prohibition on subtenancies in her leases. If market conditions require that you relax such a rule, then so be it. If they permit such a rule, you should follow it.
There is generally no advantage to be gained by approving subtenants, but there are definite and known downsides. For example, as noted above, if you approve a subtenant, that person becomes a “tenant” as defined by San Francisco Rent Ordinance § 37.2(r). You may as well add that person to the existing lease, and we know this is something you should never do. If an unapproved subtenant is unruly or cannot pay his rent to the master tenant, and that master tenant defaults in his obligations to you (warranting an eviction), the master tenant will ultimately be responsible.
Equally important, an approved subtenant is also someone whose principal residency in the unit will keep it rent controlled and defeat a Rule 1.21-based petition to increase base rent, even after your master tenant has moved away to principally reside elsewhere. An approved subtenant is also someone potentially entitled to a large Prop. H or Ellis Act relocation assistance payment in the event of a no-fault eviction, whereas an unapproved subtenant is not.
Rule 6.14 and the Costa-Hawkins Rental Housing Act
The Costa-Hawkins Rental Housing Act is arguably the most significant legislation to benefit San Francisco landlords since rent control was first adopted here in 1979. It was passed in 1995, started to phase certain of its provisions into effect from 1996-1999, and then went fully into effect in 1999. What Costa Hawkins chiefly does is ban vacancy control throughout the state, except for certain rare, permitted exceptions. This portion of Costa-Hawkins does not affect San Francisco landlords, who have never been forced to deal with locally imposed vacancy controls (unlike Berkeley). It also puts an end to revolving chain tenancies in which one roommate after another moves in and out of an apartment, keeping the subsidized, below-market rent of a long-gone master tenant in place. This was a large problem in San Francisco, fueled in part by the old version of Rule 6.14.
The former version of Rule 6.14 (first adopted in 1989) is substantially different from its current version. The old version permitted chain tenancies if created by
the “landlord’s permission, toleration, passive consent” or “written or oral agreement.” The old version provided that, if an owner knew that an unapproved subtenant had moved into the rental unit and voiced no objection, her silence alone became approval, turning the subtenant into a “tenant” who could independently keep the rent controlled.
When Costa-Hawkins was passed in 1995, Rule 6.14 was amended, purportedly to implement Costa-Hawkins, since it indisputably preempted and rendered constitutionally invalid the old Rule 6.14 and any other local law that would attempt to perpetuate chain tenancies in violation of the rights given by Costa-Hawkins to owners. However, a careful comparison of Costa-Hawkins and Rule 6.14 reveals that the current version of Rule 6.14 attempts to water down owners’ Costa-Hawkins rights. The chief difference relates to the important concept of “waiver.”
Under Costa-Hawkins, a landlord waives the right to set the initial base rent on a holdover subtenant when: the owner receives written notice from the master tenant that the master tenant “no longer permanently reside[s] there” and thereafter accepts rent. If the master tenant voluntarily terminates the master tenancy with a written notice, it is critical to ensure that you do not accept rent from anyone after the voluntary termination date. Instead, you need to either create a new tenancy with any unapproved holdover subtenants, or begin an eviction if they refuse to move.
Under Rule 6.14, the possibility for waiver is much greater. An owner waives increase rights in most cases by: “affirmatively representing” to the subtenant that he can remain in the unit at the same rent; failing, “within 90 days of receipt of written notice that the last original occupant is going to vacate the rental unit or actual knowledge that the last original occupant no longer permanently resides at the unit,” to serve written notice of a rent increase or reservation of “the right to increase the rent at a later date”; or receiving written notice from the master tenant that a subtenant has moved into the unit and “thereafter accepting rent unless, within 90 days of said acceptance of rent, the landlord reserved the right to increase the rent at a later date.” It is probably the case that these expanded waiver rules are preempted by Costa-Hawkins and therefore unconstitutional, but the issue has apparently never been decided by a court of law.
Why the New Notice?
It has been the opinion of this author since 1999 that 6.14 notices were basically unnecessary (because Costa-Hawkins simply does not condition exercise of its rights on such a notice), but that there was no harm in serving one. One justification for serving such a notice was ensuring that the owner’s response to learning of an unapproved subtenancy was not merely silence. Sometimes, the argument that “silence equals acceptance” succeeds in court. The notice ensures that the owner’s response is not simply silence.
The San Francisco Rent Board is now apparently taking the position that Costa-Hawkins and Rule 6.14 are two distinct and independent reasons for rent increases, and that, if an owner serves a 6.14 notice, the owner has somehow “elected” to pursue rights under Rule 6.14 and “abandoned” rights under Costa-Hawkins. As a result, the owner must then contend with the more expansive waiver provisions set forth in Rule 6.14. Moreover, the Rent Board has also taken the position that service of a 6.14 notice on a subtenant approves that subtenant’s occupancy, at least for purposes of denying a landlord’s petition to raise rent on a master tenant to market rent under Rule 1.21. While these positions are legally dubious, real problems now arise from the service of 6.14 notices. To the extent that a 6.14 notice is not needed to exercise rights under Costa-Hawkins, then it serves little purpose. To the extent that it is designed to express explicit disapproval and to counter the “silence is acceptance” argument, the new notice does exactly this, without invoking Rule 6.14 or claiming any rights under it.
Procedure for Use of the Notice
If you receive a request to approve a subtenant or roommate, or learn that an unapproved subtenant is residing in a unit, you should immediately respond in writing to your master tenant(s) with the new notice. It is recommended that you serve the notice on the master tenant(s) by at least certified mail and a certified mail return receipt. It is recommended that you keep copies of the postmarked envelopes with a copy of the notice in a file, along with a proof of mailing from the post office. If possible, you should also scan the notice and email it to your master tenant(s). This practice should eliminate any debate over whether you explicitly objected to a proposed or actual subtenancy. To the extent the master tenant demands a reason for the refusal of a proposed subtenancy, you can respond that you will not approve any proposed subtenant, regardless of relation or reason for occupancy, because you will not turn or convert any new, additional person into a “tenant” whose principal residency will keep the unit rent controlled indefinitely into the future. You should keep the circle of persons who are “tenants” as small as possible and ideally it should be a circle of one. If you learn of an unapproved subtenancy in violation of a lease provision, and want to evict under Rent Ordinance § 37.9(a)(2) as a result, then you should immediately serve the notice on your master tenant(s) and consult an attorney. You should make sure not to accept a rent payment from anyone upon learning of the violation, pending consultation with counsel. If you accept the payment with such knowledge prior to evicting, you will likely waive the right to evict for breach of the lease based on the subletting itself. After consulting with counsel, if you decide that an eviction is either not proper or, more likely, not worth the expense and effort, then resume depositing rent payments from your master tenant, and wait for the day when the master tenant decides to leave.
While Costa-Hawkins gives owners the right to establish an initial base rent for approved subtenants (who first started occupancy in the unit on or after January 1, 1996) when the master tenant vacates, that is the only lease term that can be changed. Again, if you approve a subtenant, you may as well add that person to the lease. However, to the extent that standard lease terms have in the meantime improved to the benefit of landlords, you will not be able to impose new terms with a new lease, only a new rent when given notice the master tenant is vacating. It is more advantageous for your master tenant’s roommates to be unapproved subtenants who will have no choice but to agree to a new lease on negotiated terms and at market rent, or else be evicted as unapproved holdover subtenants under Rent Ordinance § 37.9(a)(7).
The opinions expressed in this article are those of the author, and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Curtis F. Dowling is a partner at Beckman Marquez, LLP and can be reached at 415-495-8500. Copyright © 2009 by Black Point Press. All rights reserved.