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SF Apartment : February 2013

court talk

Rent Control Birthright

by Clifford E. Fried

This column usually focuses on published decisions from the California Courts of Appeal. But most legal battles are fought in the trial courts and are not published. In this issue, “Court Talk” focuses on a few cases that were recently decided in San Francisco Superior Court and concern the Costa-Hawkins Rental Housing Act.
Costa-Hawkins, enacted in August 1995, establishes what is known among landlord-tenant specialists as “vacancy decontrol.” It declares that, notwithstanding any other provision of law, all residential landlords may, except in specified situations, establish the initial rental rate for a dwelling or unit. Costa-Hawkins is a tremendous benefit to landlords in rent controlled cities. It permits landlords to impose whatever rent they choose at the commencement of a tenancy. The purpose of the law is to stop revolving door tenancies on units with very low rents. Because of these benefits, Costa-Hawkins is hated by most rent control advocates and rent boards.

The problem with Costa-Hawkins is that it was hastily written and contains many ambiguities. The lack of clarity in this law seems to work to the advantage of tenants. The only way to clarify the law would be to convince lawmakers in Sacramento to revise the law, or to file lawsuits and have judges interpret some of the ambiguities. Until we understand the true meaning of Costa-Hawkins, there will continue to be revolving door tenancies with rents far below market levels.

Galu v. Rey
In Galu v. Rey, the landlords filed a lawsuit in the Superior Court of San Francisco to obtain a declaration that they were entitled to increase the rent on a unit because the last original tenant had passed away. The landlord also filed a claim for damages and fraud because the defendant hid the fact that his mother passed away as he proceeded to rent out rooms to others.

At issue is a four-plus-bedroom flat being rented for $594 per month. At the same time, the defendant collects more than $594 from his “roommates.” The fair market value of the flat exceeds $3,000! The potential for profit is great. The question: who is entitled to this profit?

At trial, the defendant testified that he moved into the unit with his mother 40 years ago when he was 17 years old. He also claimed that he never vacated and that he considered the flat his permanent home. The landlords presented evidence that the defendant had been married twice and lived in other homes, including one in Pacifica where he claims a homeowner’s tax exemption. The defendant’s cars are registered in Pacifica. The defendant’s wife and children reside in Pacifica. The defendant’s business is licensed in Pacifica. The defendant votes in Pacifica, and the defendant was named in several lawsuits where he claimed a residence in Pacifica.

Costa-Hawkins says that if the original occupants who took possession of the unit pursuant to the rental agreement with the owner no longer permanently reside there, an owner may increase the rent by any amount allowed by this section to a lawful sublessee or assignee who did not reside at the dwelling or unit prior to January 1, 1996. The defendant claimed that he was an “original occupant” because he moved in with his mother 40 years ago and that his rent should remain $594 a month.

The critical moment at trial was a surprise site inspection by the judge. During the inspection, all that could be seen in the flat were the possessions of an elderly woman and a flat that looked like it hadn’t been cleaned in years. There were also several rooms with deadbolts, where the defendant’s subtenants resided. It was clear that the defendant did not reside in the unit.

The judge in this case ruled in the landlord’s favor. His reasoning is that when the defendant’s mother passed away, the last original occupant no longer permanently resided in the unit. In other words, the defendant son was not an original occupant. Alternatively, the judge ruled that the defendant doesn’t reside at the premises—he is only pretending to reside there.

The court declined to award damages for fraud. For over one year, the defendant had avoided contact with the landlord. He delivered rent in a drop box at the landlord’s office to avoid any face-to-face interactions. He even opened a new bank account with checks that looked very similar to his mother’s checks. Nevertheless, the judge didn’t feel that the landlord met its burden of proof on fraud.

This case is important for several reasons. First, the court ruled that a minor who lives with his parents is not an original occupant who takes possession pursuant to the rental agreement. Second, a person cannot claim to be an original occupant by saying he lives somewhere and never intended to vacate. Here, the judge looked at the reality of what was happening: the defendant lived in Pacifica and was merely pretending to live in the rent controlled apartment.The landlord in this case chose not to have this dispute heard at the San Francisco Rent Board—and for good reason. The bias of the rent board judges and senior staff causes most cases like this to go in the tenant’s favor.

So instead of having a speedy hearing at the rent board where the landlord would have lost, the landlord litigated the case in court where the rules of evidence apply, there is a right of cross-examination and there is much less, if any, tenant bias.

Drolapas v. San Francisco Rent Board
The more conventional way of challenging a tenant’s claim of permanent occupancy is for the landlord to file a petition at the rent board. Or, the landlord could increase the rent under Costa-Hawkins and wait for the tenant to file a petition at the rent board. In either case, an administrative law judge will make a decision under the guidance and control of senior rent board staff.

Drolapas v. Rent Board is a case arising out of a rent board petition. In 1995, parents moved into a rent-controlled unit as original tenants. Their 6-year-old child moved in with them, but ultimately became an adult while continuously residing in the rental unit. At some point, the parents bought a house in Daly City, and their now-adult child remains in the rent controlled apartment.

The landlord then sought to adjust the rent under Costa-Hawkins, contending that the last original occupants no longer permanently reside in the apartment, and that the now-adult child is a lawful sublessee/assignee who should be paying market rent. The child contested the rent increase by filing a petition at the rent board. The administrative law judge ruled that the child was an original tenant notwithstanding the fact that, when the original tenancy began, he was a minor. This ruling was based on a finding that there is no legal authority for the contention that a minor cannot be an original occupant.

On appeal, the San Francisco Rent Board Commission said that, consistent with prior rent board decisions, Costa-Hawkins applies “to any original occupant authorized to occupy the unit under the rental agreement, regardless of age.” Furthermore, the commission noted that because the real party in interest moved into the apartment prior to January 1, 1996, Costa-Hawkins did not apply.

The landlord filed a writ of administrative mandamus in San Francisco Superior Court. This is the process for making a judicial challenge to an incorrect rent board decision. The matter was argued in December 2012 and the court has ruled against the landlord. A statement of decision, explaining the ruling, had yet to issue at press time.

It is possible that the court affirmed the rent board decision, and ruled in the tenant’s favor, because the courts give great deference to rent board decisions. However, Costa-Hawkins is a California statute and the courts should be interpreting any ambiguity in the law.

An appeal of this decision is expected. On appeal, a higher court will be asked to define “original occupant” and to decide whether a minor can ever be an original occupant. This is important because many tenants sign leases and have children move in with them. If the parents move out and the children hold the same rights of occupancy as their parents, the rental unit will be tied up for years. A young couple and their minor children could potentially lock up a rent controlled unit for 100 years.

An interpretation of Costa-Hawkins that grants tenancy rights to minors will promote housing discrimination against families with children. Landlords will not want minor children moving in for fear of children inheriting the tenancy from their parents.

HAL 347 EDDY SF, LLC v. San Francisco Rent Board
This is another case where parents signed a lease and moved in with their 8-year-old daughter. At some point, the parents moved out without giving notice to the landlord, and left their daughter behind. When the landlord learned that the original tenants moved, it increased the rent from $568.65 to $1,050 a month.

The rent board ruled that the now-adult daughter is an “original tenant” as that term is used in Costa-Hawkins and that the landlord created a new tenancy with the daughter by accepting rent from her for the past several years and treating her like a tenant. The landlord filed a writ of administrative mandamus arguing that a minor cannot be an “original occupant,” as that term is used in Costa-Hawkins.

As in the Drolapas case discussed above, the trial court ruled in favor of the tenant. This case adds the additional question of whether the mere acceptance of rent creates a tenancy and whether treating an occupant like a tenant creates rent control rights in the occupant.

Costa-Hawkins clearly says that the acceptance of rent by the owner does not operate as a waiver of an owner’s rights to establish the initial rental rate, unless the owner has received written notice from the tenant that is party to the agreement and thereafter accepted rent. The rent board ignored this part of Costa-Hawkins.

The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Clifford Fried is with Fried & Williams, LLP and can be contacted at 415-421-0100. © 2013, Fried & Williams, LLP. All rights reserved.