Should owners exchange decreased rent for reduced services?
Q. A tenant who originally rented a unit with a parking space has decided they no longer want the parking space and is asking for a rent reduction. Is this recommended?
A. Well, first, you haven’t mentioned the amount of the proposed rent reduction, which is important, because you’ll want to consider the impact of the lower income on your cap rate and whether your deed of trust has an assignment of rents, which secures your lender’s security interest . . . just kidding. The answer is “yes.”
As you know, San Francisco residential rents are controlled by regulation, and they only increase at legislative minimums. (You get 1.8% this year.) San Francisco also has eviction controls, which exist to protect rent controls (so landlords can’t avoid price regulations by simply ending the tenancy and starting over). Since 2006, San Francisco has extended eviction controls to “housing services,” meaning that landlords can’t sever things like storage units or parking spaces that were always a part of the tenancy. (Taking away services would either work like an inverse rent increase or potentially coerce a tenant to vacate, if the service was essential to them.)
This also applies to later-in-time housing services. The landlord can initially charge market rate to an existing tenant renting a new, on-site parking space. But once they do, the parking becomes a part of the tenant's lease, subject to price and eviction controls.
The Rent Ordinance contemplates the “severing” of housing services, but the city has never articulated any “just causes” that would allow a landlord to actually do it. This can limit your use of the garage in a number of ways. For instance, the city encourages landlords to build accessory dwelling units in previously unused spaces (like garages), but building an ADU is not a just cause to sever. You’re also held to an unusually high standard of care to maintain this housing service, merely because it’s being rented by a rent-controlled tenant. (Unintentional obstruction could be actionable tenant harassment, and you limit your exposure by reducing the number of things you need to maintain for your sub-market-rate tenant.)
However, you don’t need to worry about any of this, because your tenant is approaching you to sell back their parking space. This will temporarily reduce your rental income, but you can charge market rate to the next tenant who needs it (or potentially lease to a non-residential tenant or commercial ride-share service. These uses are not subject to rent-control).
How you do this is a bit more complicated. You’ll want something more than a handshake deal to navigate the anti-waiver language in the Rent Ordinance. Full compliance with the buyout ordinance might be a bit over the top (although the tenant is technically “vacating” the parking space, so it wouldn’t be the worst idea). The Rent Board does have a formal hearing procedure to adjudicate an appropriate reduction. But it would probably be enough to negotiate the amount privately, serve a formal notice changing the terms, and have your tenant accept the change in writing, along with notice that they need not accept it as part of their agreement. (See Rules and Regs., §12.20.)
Q. The last original occupant has moved out. Do I just serve a rent increase notice to the subtenants? Or is there a new application process? If the subtenants don’t meet the credit score requirements, do I have to enter a new lease agreement with them?
A. My response analyzes your obligations under AB 1482 and under Costa Hawkins Rent Control Act. My analysis assumes the following: (1) This is a tenancy in a multi-unit property, subject to the SF Rent Ordinance with a certificate of occupancy issued prior to June 13,1979; (2) The “last original occupant” is the person who was named in the written lease document and/or from whom you received rent – i.e. your Tenant. (3) The Tenant has confirmed in writing that she has permanently relinquished possession and has confirmed she will not be moving back in or retaining the right to move back in. (4)Your interaction with the subtenants was only via the Tenant and that you did not accept rent from the subtenants and/or establish any particular direct obligations, duty or what we call “privity” by treating the subtenants as if they were your Tenant. That is, if the subtenants had any concerns with their occupancy at the property, you were clear in directing them to the Tenant.
So with these assumptions established, since the Tenant vacated and did not have her roommates vacate simultaneously, under SF County law, you may not ask the subtenants to vacate along with the Tenant: You may only increase the rent and establish a new tenancy. The Rent Increase is pursuant to the Costa Hawkins Rental Housing Act. You may increase the rent pursuant to a 60- day written notice if in an amount less than 10% of the vacating Tenant’s rent amount or with a 90-day notice if at an amount at or more than 10% of the vacating Tenant’s rent amount. It is advisable to obtain an Application from all subtenants. And while you “don’t have to” execute a new lease, I strongly advise that you do enter into a written rental agreement with the subtenants—as they are now your direct tenants—utilizing the SFAA form of lease. Note, however, that while you may not be able to terminate their occupancy based on legitimate concerns regarding the application process, you may be able to terminate their occupancy due to their failure to execute a new lease and/or (once the tenants sign the new SFAA lease form which you may impose with a Notice) due to a violation of the lease provisions in the SFAA form lease and as allowed by just cause requirements of the law. (Various facts/circumstances must exist to terminate a tenancy and hiring a lawyer is advised.)
The laws are very complicated, especially with the new state law AB 1482 provisions in the mix of analysis. I highly advise you to work with any attorney familiar with the intricacies of the local and state law provisions to best protect your valuable asset.
The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Justin A. Goodman is with Zacks, Freedman & Patterson, P.C. and can be reached at 415-956-8100. Denise A. Leadbetter is with The Offices of Denise A. Leadbetter and can be reached at 415-572-5015.