What Goes Down,  Stays Down

SF Apartment : May 2018

LEGAL Q&A

What Goes Down, Stays Down

by Various Authors

Q. With rents coming down, I’d like to offer a short-term rent concession that I could modify if the market improves down the line. Is that possible? If so, what’s the best way to do it without giving my tenants a permanently lower rate?

A. The San Francisco Rent Ordinance (Chapter 37 of the San Francisco Administrative Code) defines base rent as “that rent which is charged a tenant upon initial occupancy plus any rent increase allowable and imposed under this chapter.” Arguably, a landlord could have a lease with a tenant whereby the tenant agrees to pay the stated leasehold rent. Thereafter, upon receipt of payment, the landlord may elect to send a gift of a portion of the rent back to the tenant. Of course, the landlord should state that the “gift” is not to be construed as a rent reduction or waiver of the landlord’s right to collect the base rent as reflected in the lease agreement from the tenant.

Such an action is risky due to the nature of the rent ordinance as a public protection statute. Should the landlord stop “gifting” a portion of the rent back to the tenant and demand full payment of the stated lease-hold rent, the tenant may allege an illegal rent increase based on a sham lease theory. Due to the housing shortage and disproportionate bargaining power, the tenant entered into the lease with a false rent based upon the promise that the rent was actually lower and the “gifts” reflect the actual agreed-upon rent.

Such arguments were made when the dot-com bust happened in the early 2000s and landlords would acknowledge “defects” to the premises in the lease with an agreed-upon reduction in services. When the housing market shored up, the landlord would “fix” the defect and reinstate the contractual rent. I know of at least one illegal rent increase petition that successfully argued the contracted rent was a sham as the recited defect never existed. Thus the base rent was, and should remain, the amount actually paid by the tenant.

Frankly, there are better ways to maintain higher rents where the rents are declining. Allowing pets or improving amenities to attract tenants willing to pay higher rents are but a few. I cannot recommend entering into any lease agreement where the amount stated in the lease is anything but the rent you expect to receive from the tenant for the duration of the tenancy.

—Kevin P. Greenquist

Q. A tenant with a child recently approached me about making the building “smoke free.” I’d love to do it, but my understanding is that I can’t require that tenants stop smoking in the building if that wasn’t part of their original lease agreement. Is that correct, or are their special circumstances surrounding smoking?

A. This is correct. There are no “special circumstances” for changing the terms for smoking, and in fact, a 2012 change in state law prohibiting smoking also led to today’s version of San Francisco Rent Board rule 12.20, dictating stricter rules against this kind of unilateral change to existing leases.

Back in the fall of 2011, California approved SB 332, which allowed and encouraged residential landlords to prohibit cigarette smoking. While it contemplated that existing leases might already permit smoking, it directed landlords to serve a notice of change to terms of tenancy if they wanted to impose the new restriction.

At that time, rule 12.20 (which prohibits “breach of lease” evictions based on new terms added to existing leases) allowed changes “to protect the health, safety and quiet enjoyment” of other occupants. With SB 332 set to be effective January 1, 2012, the San Francisco Rent Board rushed to amend rule 12.20 to protect existing tenants who smoked. (In 2015, the Court of Appeal later found rule 12.20 to be a valid exercise in substantive eviction controls that resisted these kinds of changes under state law. If the rent board was hasty, it was also prescient.)

During months of debate and public hearings, the rent board considered and adopted an amendment to rule 12.20 to remove the above exception. Tenant advocates supported the change. Without it, they argued, state law would allow landlords to evict long-term (smoking) tenants. Landlord advocates insisted this was an overreach that would indulge bad behavior, enshrine “past mistakes” in informal, oral leases, and frustrate uniform “house rules,” with different rules for different tenants, depending on when they moved in.

Urgency carried the day. The rent board amended rule 12.20, and SB 332 (now codified in Civil Code Section 1947.5) ended up solidifying existing tenants’ right to smoke, rather than phasing it out. At the local level, Article 19F of the San Francisco Health Code actually does prohibit smoking in “enclosed common areas of multi-unit housing complexes,” by allowing/requiring you to create “smoke free” (sort of) apartment buildings, as long as you post “no smoking” signs in the “common building lobby, common mailbox area, or common elevator” and order any tenants who violate the rules to behave in “non-smoking” areas.

However, while Article 19F protects you from other tenants seeking a rent reduction because their neighbor is smoking, the regulation is explicitly not a basis for eviction of the smoker who violates the rules. If you meet your obligations, but current or prospective tenants are offended by common area smoke/odor, you may have other remedies (nuisance/breach lawsuit for money damages). And even today, rule 12.20 invites bilateral changes. If your smoking tenant has been waiting for a push to live healthier and would consider quitting in exchange for a reduction in rent, the San Francisco Department of Public Health has resources available to help.

—Justin A. Goodman

Q. Where does the condo-conversion lottery currently stand? Are two units still allowed to convert even during the moratorium? If I live in one unit and the other is vacant, can we still convert? What if the second unit is tenant occupied?

A. The Expedited Conversion Program (ECP) pursuant to San Francisco Subdivision Code Section 1396.4 has two years remaining for qualifying properties, with the program ending on January 24, 2020. Under the legislation, 3-, 4-, 5- and 6-unit buildings with a written tenancy-in-common agreement in place since at least April 15, 2013; and meeting occupancy requirements (six years of continuous occupancy by at least one owner in the case of 3- and 4-unit properties, and at least three owners in the case of 5- and 6-unit properties) have the ability to convert under the ECP legislation.

The moratorium on the condo lottery, which was San Francisco County’s previous process to allow conversions, will continue until at least January 1, 2024, and will only resume when the formula for introduction of affordable housing units is met. The “formula” is determined by the Mayor’s Office of Housing and set forth in San Francisco Subdivision Code Section 1396.5. When and if the lottery does resume, 5- and 6-unit buildings will no longer be eligible. San Francisco Subdivision Code Section 1396 increases the occupancy requirements for 3- and 4-unit buildings as follows: two owner-occupied units for 3-unit buildings and three owner-occupied units for 4-unit buildings.

Two-unit buildings remain eligible for conversion, provided both units are owner-occupied by two separate owners, each having at least 25 percent interest recorded on title and residing in each separate unit of the property for a minimum of one year prior to submittal of an application (and continuing such occupancy post-submittal). Both units must be owner-occupied and the building cannot, on or after May 1, 2005, have more than one no-fault eviction/no-fault termination of tenancy or one buyout agreement and may not, under either scenario, have any no-fault evictions/no-fault termination of protected tenants. A no-fault eviction/termination is a termination pursuant to Section 37.9(a) (8), 10, 11, 12, 13, 14, 15, or 16 of the San Francisco Rent Ordinance.

Assuming you desire to proceed to convert your building pursuant to the ECP program, the next period opens April 15, 2018, and closes January 25, 2019, and the final year opens April 15, 2019, and closes January 24, 2020. Please note that there is a pending appeal on a lawsuit filed challenging the lifetime lease provisions of the ECP program, which precludes any buildings having tenant-occupied units from submitting applications. At present, only wholly owner-occupied properties (or having a mix of owner occupied and vacant units) can submit applications.

Now for some practical advice: compiling the documentation required for submittal, whether pursuant to the ECP program or for a two-unit owner-occupied property, including hiring of the surveyor, the attorney, and the title company, requires time and coordination of efforts with other owners. How quickly the process can proceed is up to you and your co-owners. We suggest spreading the tasks between co-owners so as not to overwhelm one person. We also suggest being very attentive and cooperative with one another in order to keep your eyes on the prize of conversion.

I liken the process to preparing your taxes: gathering information and necessary laborious completion of different forms, from sometimes as many different co-owners, is a significant task. It can be a long, slow process. However, with patience and in some instances a long-term hold of your investment, the financial benefits of competitive interest rates for future financing, and the ability to (possibly?) one day be without the constraints of rent-control for certain qualifying condo-converted properties could be worth every frustrating moment of the process.

—Lyssa Kaye Paul and Denise Leadbetter

The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Kevin Greenquist is of counsel to Zanghi Torres Arshawsky LLP and can be reached at 415-977-0444. Justin A. Goodman is with Zacks, Freedman & Patterson, P.C. and can be reached at 415-956-8100. Lyssa Kaye Paul is with the Paul Law Group. Denise Leadbetter is with the Law Offices of Denise A. Leadbetter and can be reached at 415-713-8680.