SF Apartment : February 2016
More Isn’t Merrier
by Ed Singer
On September 9, 2015, the San Francisco Board of Supervisors passed sweeping amendments to the Rent Ordinance. Originally referred to as the Kim Legislation after Supervisor Jane Kim, the legislation’s expansion of tenant rights has led to the more apt title “Rent Ordinance 2.0.”
This article provides a basic overview of the amendments and highlights issues to consider when entering new leases, responding to requests to add additional roommates and serving notices to terminate tenancies. Many questions regarding the legality and practical application of this new legislation remain unresolved. More detailed discussions of these topics will follow as the rent board and the courts provide their interpretations.
The History of Occupancy Limits
The most dramatic change in Rent Ordinance 2.0 severely limits a landlord’s ability to control the number of occupants in a rental unit. The reasons landlords would seek to control the number of occupants are obvious and numerous. Every tenant increases the expense to the landlord through use of utilities, wear and tear on the rental unit and wear and tear on common areas and equipment, such as elevators and hot water heaters.
Prior to 2005, a San Francisco landlord could negotiate a binding adult occupancy limitation with a prospective tenant. This arm’s length negotiation resulted in an initial rental rate that was fair in light of the number of adults expected to occupy the unit.
That balance of fairness was altered in 2005 with the passage of the Domestic Partner and Family Protection Amendment to the Rent Ordinance. The legislation, commonly known as the “Gonzalez Amendment,” prohibited landlords from terminating a tenancy based on a violation of adult occupancy limits when new occupants qualified as family members and the maximum number of occupants (including children) did not exceed certain statutory limits based upon apartment size. In my experience, the Gonzalez Amendment was primarily used by couples getting married or registering as domestic partners. I rarely encountered large extended families occupying rental units. As a result, the Gonzalez Amendment had limited practical impact on landlords.
Rent Ordinance 2.0 changes that. Now, a tenant can add additional roommates without regard to familial relations. Under Rent Ordinance 2.0, a landlord cannot terminate a tenancy for violating an occupancy limitation if the total number of occupants does not exceed the lesser of: 1) two persons for a studio, three persons for a one bedroom, four persons for a two bedroom, six persons for a three bedroom, and eight persons for a four bedroom; or 2) the maximum number permitted by state or local codes. The latter restriction will have little practical effect, because those codes generously allow two people to sleep in a 70 square foot bedroom and only require 50 additional square feet for each additional person.
The most obvious effect of the new occupancy limit legislation is that all occupancy limitations in written leases are now meaningless. The San Francisco Apartment Association lobbied the rent board to limit application of the new law to leases signed after the operative date of the amendments—but the rent board refused. Accordingly, until a court rules otherwise, the new law applies to all leases regardless of their date of signing. While landlords have limited options to capture the additional costs associated with additional occupants added to existing tenancies, going forward, landlords should factor in the possibility of additional occupants when setting the initial rental rates for their units.
Responding to Requests to Add Additional Occupants
Another obvious effect of the new legislation will be an increase in the number of tenant requests to add additional occupants. The rent board has promulgated Section 6.15E of the Rent Board Rules and Regulations to provide procedures for responding to requests from tenants to add additional occupants.
Section 6.15E substantially mirrors the existing Section 6.15D, which provides the procedures for responding to requests to add family members. Similar to Section 6.15D, Section 6.15E provides a landlord with three options to respond to a request to add additional occupants. First, the landlord may provide no response, in which case the request to add additional occupants is deemed approved after 14 days.
Second, the landlord may request sufficient information regarding the proposed occupants to allow the landlord to run a background check. The landlord may not request credit information unless the landlord intends to require the additional occupant to pay some or all of the rent directly to the landlord. The landlord must make the request for additional information within five days of receipt of the tenant’s written request to add an additional occupant. For the purpose of calculating the landlord’s deadlines under Section 6.15E, receipt of the written request occurs either on the day the request is personally delivered to the landlord, two days after the written request is emailed to the landlord or five days after the written request is mailed to the landlord as measured by the postmark on the envelope. The tenant, in turn, then has five days after actual receipt of the landlord’s request for additional information to provide such requested information.
Finally, the landlord may expressly approve or deny the request to add additional occupants. If the landlord approves the request, the landlord can require the additional occupants to agree in writing to be bound by the current rental agreement between landlord and tenant.
The landlord’s denial will be deemed unreasonable if it is based upon an increase in the occupancy limits that do not exceed the statutory limits discussed above, unless: 1) the additional occupant is a tourist or transient user; 2) the landlord resides in the same rental unit as the tenant; 3) the additional occupant will be legally obligated to pay a portion of the rent and lacks creditworthiness; 4) the tenant has failed to timely respond to the landlord’s request for additional information regarding the proposed additional occupant; 5) the proposed additional occupant made material misrepresentations on the landlord’s application; 6) the proposed additional occupant presents a direct threat to the health, safety and security of other residents or the building; or 7) where an additional occupant would require the landlord to increase the electrical or hot water capacity of the building or adapt other building systems and amenities, and the cost to do so presents a financial hardship as determined by a rent board judge. In order to deny a request to add additional occupants, the landlord must respond in writing within 14 days of “receipt” of the written request from the tenant. The written response must state the grounds for denying the additional occupants.
The tenant may petition the rent board to determine whether the landlord’s denial was reasonable. The unreasonable denial of a request to add additional occupants constitutes a reduction of services, entitling a tenant to a rent reduction. An unreasonable denial can, in some circumstances, be deemed harassment, and subject a landlord to a lawsuit.
While Section 6.15E does provide a mechanism for seeking information regarding potential additional occupants in order to “approve” them, most landlord attorneys advise against screening potential additional occupants for fear that it will create a direct tenancy with the additional occupant and limit the landlord’s right to raise the rent or terminate the tenancy after the last original occupant vacates. Most landlord attorneys will advise landlords to either: 1) not respond, thereby creating approval by silence; or 2) serve a reservation of rights notice stating that the landlord does not approve of the additional occupants, but reserves all rights to take any action until after the last original occupant vacates. Each choice in responding to a request to add additional occupants comes with risks and benefits. I strongly advise a landlord to treat each request on case-by-case basis in consultation with an attorney or experienced property manager.
Advertising and Documenting Apartment Size
A less obvious effect of the new occupancy limitations legislation is that landlords must now consider how they both advertise and document the size of an apartment. The new 2016 SFAA lease form takes this into account. A complete discussion of the new lease can be found on page 38 of this magazine in an accompanying article by Clifford Fried.
In San Francisco, many apartments have formal dining rooms that are advertised and used as separate bedrooms. By law, they are not bedrooms unless they have a closet. As stated above, the number of “bedrooms” provides a limitation on the number of additional occupants a tenant may add. Accordingly, landlords must weigh the financial benefits of advertising a dining room as a bedroom against the costs of having to accept additional occupants in the future.
Five-Year Rent Increase Restrictions Following Owner Move-Ins
As a general rule, most vacant units, condominiums and single family homes are exempt from rent increase controls under the state law commonly referred to as Costa-Hawkins. Despite Costa-Hawkins, Rent Ordinance 2.0 limits rent increases in vacant units, condominiums and single family homes for five years following the termination of a tenancy for: 1) owner move-in; 2) condo conversion (except following sale to a good faith purchaser); 3) demolition; 4) capital improvement; and 5) lead remediation. Thus, the new legislation expands the restrictions on the re-rental of units recovered through owner move-ins from three to five years.
Additional Occupant Costs
Rent Ordinance 2.0 purports to allow landlords the right to petition the rent board for a rent increase for costs associated with being required to allow additional occupants in the rental unit. To date, the rent board has not created any forms or promulgated any rules to accommodate such petitions.
Terminating Tenancies: New Rules for Forms, Nuisance, Illegal Units, Breach of Covenant
Rent Ordinance 2.0 makes changes to both the substantive grounds and procedural requirements for terminating a tenancy. Procedurally, all notices to terminate a tenancy must include the rent board’s multi-language information form. The form can be found on the rent board’s website.
For terminations on the grounds of a nuisance, under the new legislation, the landlord must establish that the nuisance activities are “severe, continuing or recurring in nature.” This does not present a practical change because landlords should not risk pursuing a nuisance unless the nuisance is severe, continuing or recurring.
When terminating a tenancy in an illegal residential unit, under prior law, landlords had two options. The simplest option allowed a landlord to terminate the tenancy on three days’ notice by alleging illegal use. The second, more complicated option required the landlord to terminate the tenancy to demolish the illegal residential use and restore the unit to its former use as commercial or storage. This procedure requires notifying the tenant prior to applying for a demolition permit, successfully obtaining the demolition permit, the payment of relocation expenses and a 30 or 60-day notice.
Rent Ordinance 2.0 all but eliminates the simple option. Under the new law, a landlord cannot terminate a tenancy for illegal use solely on the grounds that residential occupancy is not authorized by the city. This would seem to apply to many illegal units, such as in-law units. This will require landlords in most situations to obtain permits and pay relocation expenses when attempting to terminate tenancies in illegal units. This limitation would not necessarily apply to those situations where a tenant has created the illegal residential use without the property owner’s knowledge.
Additionally, Rent Ordinance 2.0 makes changes to both the substantive and procedural requirements for terminating a tenancy for breach of covenant. First, a landlord must establish that the breach was “substantial.” Second, if the breach involves subletting or occupancy limits, the landlord must provide a ten-day opportunity to cure. Finally, if the breach involves occupancy limits, the opportunity to cure must include the tenant’s right to make a written request to add the additional occupants.
The Dust Has Yet to Settle
As embodied in its nickname, Rent Ordinance 2.0 is a game-changer. Familiar procedures for signing leases, reviewing tenant requests and serving notices are no longer applicable. Until the dust settles through court decisions and further rent board rules, landlords would be wise to consult with attorneys or experienced property managers in dealing with the issues discussed above.
The information contained in this column is general in nature. Consult the advice of an attorney for any specific problem. Serving seven years as in-house counsel for the Lembi Group, Ed Singer has focused his practice solely on the issues faced by one of the largest San Francisco real estate owners, winning numerous cases, including the landmark decision in 1100 Park Lane Associates v. Feldman, which protects landlords against retaliatory wrongful eviction cases. In private practice, Mr. Singer has continued to protect the rights of property owners and led the charge against tenants’ profiteering from illegal tourist rentals. Mr. Singer currently practices law in Burlingame, California and can be reached at 650-393-5862.