SF Apartment : January 2016

COURT TALK

All About Buyouts

by Clifford E. Fried & Jonathan D. Kaplan

In March of 2015, a new San Francisco law went into effect that regulates residential tenant buyouts. This publication ran a comprehensive article about the purpose of the law and how it works. This current article will focus on how the new law has been working since its implementation, and presents some interesting early data.

The claimed purpose of the Tenant Buyout Ordinance (TBO) is to solve the rental housing crisis in the city. This is the same crisis that the San Francisco Board of Supervisors has tried to fix with rent and eviction controls over the past 35 years. Landlords and tenants are waiting with bated breath to see if the law has solved or even helped the crisis.

Prior to the law being passed, the board of supervisors believed that landlords were applying high-pressure intimidation tactics to tenants who didn’t know their rights. The TBO imposed new notice and reporting requirements designed to stop any perceived buyouts that were unfair to tenants, and to fully inform tenants of their rights to stay in place and not be bought out.

By requiring disclosures to tenants, notice to the San Francisco Rent Board and full reporting of the terms of settlements to the rent board, the TBO is supposed to have the desired effect of curbing unfair buyouts by landlords.

Required Disclosures
The TBO requires that a landlord make certain written disclosures to a tenant prior to commencing buyout negotiations. The disclosures include statements that the tenant may:

• exercise the right not to enter negotiations or a buyout agreement
• choose to consult with an attorney
• rescind the agreement for up to 45 days
• visit the rent board for information on other buyouts in the tenant’s neighborhood
• The landlord must also disclose a list of tenants’ rights organizations and a statement that information is available from the rent board.

Required Notice
Prior to commencing tenant negotiations, a landlord is required to notify the rent board (via a form the board developed) of the following:

• landlord’s name and business address, email and telephone number
• name of each tenant with whom the landlord intends to enter into negotiations
• address of the rental unit
• statement under penalty of perjury that tenant disclosures were made before negotiating
• Filing the Agreement
• Once the rent board has been notified, and the tenant has received the required disclosures, negotiations may begin. In most cases, the buyout agreement is reduced to writing. The TBO requires these agreements to be filed with the rent board between 46 and 59 days after the agreement has been signed by all parties. After the agreement is signed there is a 45-day period in which the tenant can rescind.

The Rent Board Annual Report
The TBO requires the rent board to maintain a searchable database of all agreements filed by landlords. By January 31st of each year, the rent board will provide an annual report to the board of supervisors regarding the TBO. The report must include a list of all units that have been the subject of buyout agreements, and will be posted on the rent board website.

The authors of this article didn’t want to wait until next year to review the report from the rent board. We took a look at the agreements that have been filed so far this year and summarized the data collected from those agreements in order to provide our comments on how the TBO is working so far.

Number of Buyouts
Ever since the 2004 Court of Appeal decision in Baba v. Board of Supervisors, which confirmed a landlord’s right to speak freely with a tenant, landlords paying tenants to leave their rent controlled apartments has become fairly commonplace. A cottage industry has emerged for negotiating buyouts and drafting buyout agreements.

But we still don’t know the number of buyouts before and after the TBO. After all, the TBO only counts buyouts that are voluntarily reported by landlords. Some landlords don’t report their agreements to the rent board either because they don’t know about the TBO, they don’t believe the law applies to them, or they don’t think the penalties are strict enough to warrant compliance. And we will never know how many buyouts were taking place before the TBO.

What we do know is that between the period of March 7, 2015 (the start date of the TBO), and October 31, 2015, 137 fully executed buyout agreements have been filed with the San Francisco Rent Board, totaling $4,672,902 in payments to tenants. On an annualized basis, payments to tenants will be approximately $7 million.

Because the passage of the TBO probably had a chilling effect on landlords offering buyouts, it is possible that the number of buyouts will increase in the months to come as more landlords become familiar with the law. More landlords and their attorneys will come to see that the benefits of a buyout far outweigh the loss of privacy when their agreements are posted at the rent board for the entire world to see.

Also, the continuing strong economy will have an impact on the number of tenant buyouts. So long as the economy remains strong and rents remain stable or continue to rise, buyouts will continue. It is also possible that should the economy in the Bay Area start to falter and rents begin to decline, there will be a rush of buyouts initiated by tenants who want a piece of the action while the offerings are still good.

Separate from what happens with the rental housing economy, as tenancies age and tenants remain in possession longer and longer, the pressure to engage in buyouts will remain strong. Unless banned by future legislation, buyouts are here to stay.

Buyout Amounts
The amount of money being paid out under the agreements filed at the rent board range from $1,750 to $310,000 per unit, with an average buyout amount of $34,688.16 per rental unit. Both the high and low payouts are statistical anomalies. The $1,750 may reflect a special relationship between the landlord and tenant. And the $310,000 payment was made in connection with an eviction of disabled tenants.

The buyout amounts don’t necessarily reflect waived rent. For example, a landlord may or may not waive rent as it becomes due between the time the agreement is signed and the day the tenant vacates. It isn’t always clear from the language of the agreements whether or not rent was being waived. The amount of rent waived could be substantial depending on the monthly rental rate for a particular tenancy. But in situations where the tenant moved in decades ago, and the rent remains low, the amount of rent being waived is insignificant compared to the amount paid for the buyout.

The larger buyout amounts most likely include compensation to the tenant for an alleged wrongdoing by the landlord. Some buyouts are conducted as the result of a tenant claim for a breach of the warranty of habitability, wrongful eviction, discrimination, harassment or retaliation. These claims, if backed by real facts, may warrant a larger payout to the tenant.

Other buyouts might reflect a contemplated eviction by the landlord. Rather than serving an eviction notice for an owner move-in, or pursuing an Ellis Act eviction or even an eviction for nonpayment of rent, a landlord might propose a buyout to the tenant. In these cases, the buyout amount is an opportunity cost paid to avoid paying for an eviction lawsuit and the uncertainties of going to court.

Neighborhoods Affected
The most popular zip code for buyouts is 94110, which includes the Mission District and Bernal Heights neighborhoods. Housing advocates and economists all have different theories as to why this one part of the city is most heavily impacted 
by buyouts.

A tenant advocate would say that the most vulnerable and uninformed tenants are located in the Mission District and Bernal Heights. A landlord advocate would say that these neighborhoods have become highly desirable because of weather, size of units and the geographical proximity to tech offices; all of these factors increase the demand for housing and increased rents.

Realtors and lawyers might say that tenants in other parts of the city had their tenancies bought out long ago, and the Mission District and Bernal Heights neighborhoods are just catching up.

Other Data of Interest
Tenants who entered into buyout agreements were given between zero and 206 days to vacate the premises, with the average being 44 days. This statistic is interesting, because as previously stated, the TBO gives tenants a 45-day right to rescind the agreement and remain in possession. It would appear that many landlords are having tenants vacate before the rescission right matures! After all, what tenant wants to move out, exercise the right to rescind and then move back in?

By and large tenants are being paid once they fully vacate the premises and turn the keys over. It also appears that landlords are including provisions for returning security deposits where such a deposit exists.

While the data collected suggests tenants who employ legal representation do on average obtain higher buyout amounts, it is unclear whether these two pieces of information can be definitively correlated. The TBO does not require legal representation for tenants or landlords, nor does the ordinance require the parties to state whether they actually had legal representation.

Roughly half of the agreements filed with the rent board were silent as to whether the parties had legal representation, and the agreements frequently only stated the name of the landlord’s attorney, as they would be the ones drafting the agreement. Seemingly tenant attorneys were only written into the agreement in cases where the monies would be placed into the attorney’s trust fund for later disbursement. Of the 137 agreements filed during the relevant period reviewed, 79 named landlords’ attorneys, while only 31 named tenants’ attorneys.

Buyout agreements stating the tenant had legal representation averaged buyout amounts of $62,947, as opposed to a $26,265 average where no tenant legal representation was stated. Keep in mind that the tenant attorney needs to be paid for his or her time, and so a higher buyout amount would be reflected where a tenant attorney is involved.

Effect on Condo Conversions
Under the TBO, a buyout of a tenant could have adverse consequences on a future condominium conversion. If after October 31, 2014, an owner enters into a buyout agreement with a senior, disabled or catastrophically ill tenant, the building will not qualify for conversion.

Additionally, in buildings where two or more tenants enter into buyout agreements within a ten-year period, the building will not qualify for conversion. The ten-year period is defined as the time span beginning ten years prior to the date of the application and ending on the date of the final or parcel map approval. This provision will have a serious chilling effect on buyout activity and condo conversions.

It is unclear whether the TBO has had any effect on condo conversions. More time must pass before we feel the effects on conversions. And further study of data available from sources other than the rent board will be required.

The information contained in this column is general in nature. Consult the advice of an attorney for any specific problem. Clifford E. Fried is with Fried & Williams, LLP and can be contacted at 415-421-0100. Jonathan D. Kaplan is a third-year law student at USF School of Law and a law clerk at Fried & Williams. ©2016, Fried & Williams, LLP. All rights reserved.