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Sizing Up Subtenants
by Curtis Dowling, Saul Ferster, Clifford E. Fried & David Wasserman
Over the past several years, there has been a lot of discussion about how owners should acknowledge subtenants. SFAA recognizes that even where the lease prohibits subletting, the local law permits master tenants to replace roommates and to live with immediate family members. As such, subletting is a common reality for many San Francisco landlords.
Beginning in the 1980s, the San Francisco Rent Board has promulgated a regulation, known as Section 6.14, to allow owners the ability to reset rent once the last original tenant vacates. Throughout most of the 1980s and 1990s, the industry adopted and utilized the "6.14 Notice" procedure to place master tenants and subtenants on formal notice that once the last original, or master, tenant vacated, rent could be adjusted to market levels.
In the mid-1990s, the state of California passed a law known as the Costa-Hawkins Rental Housing Act. In 2000, Costa-Hawkins became fully implemented in the state, and it applies to every California jurisdiction, including San Francisco. Under Costa-Hawkins, a landlord could reset the rent once the last original tenant no longer permanently resided in the unit as long as there was no “waiver” by the owner of the right to increase rent. Waiver could be found to exist where the owner accepted a rent check from the subtenant after receiving written notice that the last original tenant had left. In addition, various cases expanded the definition of waiver to include such actions as placing the subtenant onto the original lease agreement, naming subtenants on notices of rent increases or other communication, and generally treating the subtenant as a cotenant. Under Costa-Hawkins, no notice needs to be given to a subtenant.
About 10 years ago, Section 6.14 was amended by the Rent Board Commissioners to conform this regulation to Costa-Hawkins. However, Section 6.14 contains requirements not mandated by the state law. It also seems to permit imposition of rent increases at a later time after the last original tenant vacates, which recent court cases seem to expressly prohibit. Consequently, owners were receiving questionable guidance by the Rent Board and industry groups with regard to use of 6.14 notices.
Several years ago, alarms began sounding over the continued use of the 6.14 notice procedure. First, Costa-Hawkins did not require service of a 6.14 notice, and an owner who incorrectly served this document and then sought a 6.14 rental increase could be denied this right. Second, the Rent Board began rejecting the owner’s ability to raise rent under another Rent Board regulation, Section 1.21 (which permits a rent increase when the last original tenant no longer uses the rental unit as a principal place of residence), if the last original tenant no longer principally resided in a unit but an approved subtenant resided there. A tenant who had been given a 6.14 notice is, according to the Rent Board, an approved subtenant. Third, under existing Rent Board policy, the standard for imposing a 6.14 rental increase is different from the trigger or standard for a Costa-Hawkins rent increase. Based upon existing Rent Board policy, a 6.14 rent increase is authorized only when a tenant physically and “legally” vacates a unit. “Legally vacate” seems to mean that the original tenant formally disclaims occupancy rights and stops paying the rent. Costa-Hawkins has no such requirement; as such, a 6.14 rent increase could be denied where the master tenant still submits the rent check but no longer permanently resides in the unit.
Last year, the SFAA published a “Notice of Objection to Occupancy of Unapproved Occupants” form to replace the 6.14 Notice. Use of this form created some confusion, as it could be interpreted to voice an owner’s disapproval of any subtenancy, even those that are allowed by law. In addition, the Notice of Objection, like 6.14, had no impact on an owner’s right to increase rent under Costa-Hawkins. Indeed, even if the objection notice was served, an owner could still waive the right to increase rent.
After many meetings and discussions with industry leaders, SFAA’s volunteer legal advisors have decided to discontinue the publication of both the 6.14 notice and the Notice of Objection. Instead, SFAA recognizes that Costa-Hawkins is the prevailing law, which requires that no notice be given to tenants and subtenants when a subtenant moves into a unit. As such, what becomes relevant is the owner’s conduct towards the subtenant.
For example, the subtenant should not be added to the lease, no rent should be accepted from the subtenant, and notices generally should not be addressed to any subtenant. (Please note that it may be necessary or desirable to include a subtenant in a 3-Day Notice to Pay Rent or Quit to meet certain legal requirements involving these notices only, but whether or not to include them, and what qualifying language, if any, should also be included, may be a subject for you to address with a qualified attorney.) When the last original tenant vacates, the rent increase under Costa-Hawkins should be served immediately. In sum, the noticing procedures mean very little compared to how the subtenant is treated by the ownership.
Many owners have questions about Costa-Hawkins and concerns about dropping the 6.14 procedure. To further complicate matters, the Rent Board has adopted a regulation, Section 6.15, which permits owners to essentially interview and approve new subtenants, and to preserve the right to increase rent under the Section 6.14 procedure. Yet because 6.14 has significantly different, and arguably more stringent, requirements than Costa-Hawkins, use of the 6.14 and 6.15 guidelines may waive the owner’s rights under Costa-Hawkins and relegate the owner’s ability to raise rent to the Rent Board’s discretion under 6.14. Obviously, this is not the preferred route for most owners, as the current state law affords much greater latitude.
SFAA will be teaching classes to assist owners with subtenancy issues. We encourage you to attend. The purpose of the course will be to educate owners of their rights under Costa-Hawkins, and to promote use of this more streamlined and cleaner approach to subtenancy issues.
To register for the subtenancy class, being taught by David Wasserman of Wasserman-Stern and Curtis Dowling of Beckman, Marquez and Dowling, LLP, contact Maria Shea at maria@sfaa.org or call the SFAA office at 415-255-2288.
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. Copyright © 2010 by Black Point Press. All rights reserved.