Rent rebates or reductions may only be lawfully rescinded, canceled, or withdrawn if the rebate or reduction is given because of a tenant’s particular need or hardship.
Q. My longtime tenant recently discovered that a newly placed tenant across the hall is paying $200 less than him in monthly rent, so he asked for a rent reduction. May I agree to a temporary rent reduction? What about offering him a rebate instead?
A. The law is very clear on this subject and has recently been circulated by the Rent Board in light of the COVID-19 crisis: A landlord who grants a rent reduction due to market conditions makes that reduction permanent. This means that future rent increases must be based off of the lowered amount, which becomes the new base rent. In addition, the property owner is likely precluded from withdrawing or canceling the reduction at a later time.
A rent reduction may only be rescinded or canceled if the tenant has requested a temporary adjustment based upon an economic hardship specific to that tenant’s personal or household situation. For example, the tenant is laid off or is ill (i.e., due to COVID-19), or encounters unexpected expenses to care for a member of the tenant’s home. In those instances, the landlord and tenant should clearly document the hardship and should spell out, in a signed writing, the amount of the reduction, why the reduction is being granted, and the length of time for the reduction. The SFAA COVID-19 Forbearance Agreements may be tailored to accomplish this objective.
Rebates and incentives are also very dangerous when given to dissuade tenants from leaving in a declining market or to entice new tenants to sign up at an unattractive rent. About 20 years ago, a large apartment operator in San Francisco offered incoming tenants “rent coupons” for use each month to lessen their rental obligations. For instance, Tenant A’s lease states that rent is $1,200 per month, although similar apartments were not renting at that level. To induce Tenant A to sign the lease at this amount, the landlord offered $1,200 worth of coupons for the first year of the tenancy. Consequently, Tenant A could submit a $100 coupon with each monthly rental payment, thereby only paying $1,100 out-of-pocket during Year 1. This landlord subsequently discontinued the coupon program when the rental market improved. Hundreds of affected tenants then pursued massive litigation in protest. The Rent Board held that, using this example of Tenant A, initial base rent was legally $1,100 per month for every year of the tenancy because the discount afforded by the coupon incentive was to be permanently built into the rental obligation and could not be legally withdrawn.
Other property owners have been held liable when they offer a free month of rent or engage in other gimmicks to effectively lower the tenant’s initial rent obligation, only to later take away the incentive once market conditions pick up. Indeed, if you offer a month’s free rent for a one-year term, the Rent Board will say that the value of that month is then amortized over the 12-month period of the initial term and then lowers the base rent for all future months by that amount. As one judge put it, you cannot evade rent control by setting up a lease with a starting rent higher than what the current market would justify in order to entice tenants to sign the lease. Other incentives like handing out a substantial gift certificate may also draw a similar ire.
The Rent Board policy is therefore quite clear. Rent rebates or reductions may only be lawfully rescinded, canceled, or withdrawn if the rebate or reduction is given because of a tenant’s particular need or hardship. A soft rental market is never a justification for a temporary reduction in rent. So if you do grant a reduction or offer an incentive in order to attract new tenants or to keep an existing tenant from moving due to a change in the marketplace, you risk making that reduction or the value of the incentive a permanent component of base rent.
Q. A unit had two original occupants. One moved out a couple of years ago, and the remaining original occupant has had a couple different roommates who I’ve never interacted with. The last original roommate gave notice, but mentioned that the other original occupant is moving back in. Can I raise the rent to market? Or does he retain original occupant status?
A. A lease is both a contract and an estate in land. The rights overlap, but they’ve historically been distinct and well-established. Introduce San Francisco rent control law and the Costa-Hawkins Rental Housing Act, and the distinctions blur. Today, there are no clear answers, but there are best practices and strategies to protect and promote your rights.
You rented to two co-tenants. They shared a contract and a lease. Each of them had a shared “right to possession” (the estate in land). This means that they can both exclude the entire world from their own apartment, except for each other (and subject to your right of entry as a landlord). They were also both bound to the lease (their contract), equally enjoying its benefits, while jointly suffering its burdens.
One moves out, and some unknown subtenants move in. The subtenants are not parties to your contract. They do not “replace” the departed tenant on your contract (without their request and your consent). Yet they have a right to possession. Initially, that right is derivative of the remaining tenant’s right to possession. In the rare case, the master tenant vacates, leaving them behind, while you battle over possession; more often, the landlord concedes the right to possession of the subtenants, but battles over the right to maintain rent control.
However, you’re asking about the rights of the once-departed, now-returned co-tenant. The dispute here is not whether this person is entitled to rent control or not, but whether he maintained that right after physically vacating the unit. This is a fact-specific question, and you’ll have created those facts along the way.
For instance, the departing tenant may have asked for “his half of the deposit” when he moved out. It’s generally wise not to participate in piecemeal distributions for several reasons: you aren’t receiving the unit, so no deposit is owed, you should not receive “replacement deposit” from a new subtenant, who you want no legal relationship with, you aren’t in a position to evaluate damage and appropriately deduct, etc. However, if you had, and if no remaining subtenants paid you deposit directly, your former tenant is now simply a stranger to the contract.
Sometimes departing tenants will actually ask to be removed from the lease (to avoid being rent-liable on a contract they no longer benefit from). Unless the lease says otherwise, you’re under no obligation to let co-tenants “off the hook,” and you may have wanted the additional security (similar to having a co-signer), but then the former tenant is still party to the contract despite being out of possession.
Even with murky facts, you might take an aggressive approach. The departing master tenant is trying to hand off the rent control baton to his former co-tenant, but again, you don’t have to let him off the contract either. The threat of a market-rate rent increase (where he will be liable for his former roommates default) may inspire all parties to start fresh with their own leases.
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.