It’s in the Mail
While most San Franciscans have kept up with rent during the pandemic (more than 90%), what should owners do when the checks stop coming?
Q. Our tenant has not paid rent since March, claiming COVID-19 hardships. We believe he is still working. What are our options?
A. The COVID-19 crisis has forced us as an industry to instantly reevaluate how we do business. Once the pandemic became pronounced in early March, both the city and state governments issued moratoriums on almost all commercial and residential evictions. The state’s Judicial Council, the policymaking body of the California court system, also implemented an emergency order that prevented court clerks from issuing summons for eviction actions, or UDs, unless the tenant was committing violence or otherwise posing a threat to public health and safety. Thus, from March through August, and likely beyond, California property owners have not had the ability to utilize the UD laws to remove tenants. This is unprecedented and substantially alters the property management business model.
Suddenly, without the eviction courts open for business, we have had to step up and work with tenants that may not be able to pay rent as a result of the national economy contracting by over 30%. With UD mills shuttered, property owners were quickly thrust into the arena of having to negotiate payment plans and rent forbearance agreements. Yet after more than five months of threatened Armageddon, something very strange began to emerge from the wreckage of our eviction industry: More than 90% of residential tenants remained current on their rent. Yes, the vacancy rate has exploded, and rents are being reduced to adjust to more supply than demand in this now deepening recession, but the feared mass rent strikes and gross tenant abuses for the most part never materialized. Not surprisingly, though, there are some renters that are living each month with a total disregard as to their obligation to pay rent. As this question insinuates, perhaps a few in this group enjoy full employment and are taking advantage of a worldwide crisis for their selfish benefit. What can be done?
For starters, no one knows when evictions will once again occupy our legal lexicon. With the layers of local, state, and judicially imposed moratoriums in place, “UDs as normal” may not commence until well into 2021. In addition, this time in history might just compel lawmakers to reconsider the idea of ejecting tenants via the quick and streamlined UD processes. Remember, UDs are not a constitutional right but rather a creation of statute that could be taken away or redefined by our legislators. For almost 100 years, we have been able to bring UDs into court and have them decided within a few short months, whereas other civil disputes usually take well over a year from start to finish.
Without the ability to pursue UDs, we are left with the following choices:
Use every effort to negotiate with the tenant. We should have favored this route prior to COVID, but our UD infrastructure was such that it was oftentimes easier to call an attorney and have the legal paperwork served. With the UD courts closed, try to work out a forbearance agreement or some other resolution shy of litigation.
If the tenant is nonresponsive or unreasonable, you may file suit for breach of contract (the lease agreement) now. Many in social media have wrongly characterized local and state rent moratorium edicts as rent forgiveness. That is grossly incorrect. Rent is still contractually due each month, and owners are able to—and many have already—filed breach of contract claims. Unlike UDs, these actions take well over a year to litigate, but the losing tenant could face a judgment for back rent and attorney fees. Thus, in this case where the tenant is employed, a money judgment, which will not result in eviction, could nonetheless yield wage garnishment and bank account levies. Moreover, sometimes the filing and service of these lawsuits will convince tenants acting in bad faith to produce meaningful repayment plans especially when they have to hire a lawyer and are apprised of the credit risks associated with running up a large rent tab.
In addition to a breach of contract claim, you may sue the tenant for “ejectment.” Ejectment is also an eviction action, and believe it or not, you may also pursue it now. However, unlike the fast-paced UD, ejectments follow the same slow path as the breach of contract claim, meaning you will be waiting in line for at least a year before your tenant is removed by the Sheriff. Ejectment and breach of contract lawsuits can be combined into one proceeding, and, incidentally, California also permits you to add a UD action into this litigation so in the event UDs are once again permitted you might be able to drop the ejectment and breach of contract claims in order to speed along as a UD.
So, these are the basic options, but like all major historical events that promote social change, view the UD hiatus as a harbinger of things to come. Consider a California where there may not be UDs, or the use of UDs might just be more restrictive. For decades, housing rights activists have highlighted the socioeconomic costs of tenant displacements. The legislature even passed statewide eviction control last October to combat evictions. Thus, maybe now is the moment to adjust the property management business model by exploring alternatives to the fast-tracked UDs. Just a thought for these challenging times.
Q. Exterior security footage leads me to believe that a long-time tenant has moved out of a studio apartment, and multiple subtenants have moved in. I’d prefer to start a new lease or to at least know what’s going on. Is the guideline still to turn a blind eye?
A. Different practitioners have different opinions on the “blind eye” approach. The strategy emerged after the adoption of the Rent Ordinance (in 1979) but before the Costa-Hawkins Rental Housing Act (in 1995). Before Costa-Hawkins, San Francisco imposed “moderate” vacancy control, which otherwise allowed landlords to set market prices for vacant units and “partially vacant units” (where the last rent-controlled tenant vacated). But it also cautioned several examples of when a landlord waived their vacancy decontrol rights.
Many in our industry are familiar with the titular “6.14 notice” (named for rent board rule 6.14), which identifies subsequent occupants and reserves the right to increase their rent when their master tenant vacates. These days, a waiver of rent increase rights under rule 6.14 requires either an express waiver by the landlord or the failure to timely reserve rights to a later increase once the master tenant reveals the sublessee to the landlord.
However, waiver used to be much more insidious. A subtenant was deemed a “tenant” if they resided in a rental unit with the “permission, toleration, or passive consent” of the landlord. And if that standard weren’t relaxed enough, former rule 6.14 imputed acceptance if a landlord merely “acquired knowledge” of the occupant after they made a request for repairs. (This put a landlord in a precarious position, given their obligation to provide repairs, and their dwindling ability to preserve their vacancy decontrol rights by evicting for violation of a subletting provision. The 1999 Leno Amendment guaranteed the right of master tenants to make one-for-one roommate replacements, and the 2015 Jane Kim Amendment allowed an increase in occupancy up to an arbitrary person-per-bedroom minimum.)
Costa-Hawkins preserved certain existing rights of pre-1996 subtenants, but otherwise dictated market rate increases when the last original occupant no longer permanently resided in the rental unit. The “blind eye” approach was no longer necessary, provided the landlord did not create a direct contractual relationship with the subtenant.
That said, even if you may not be punished down the road, merely because you have well-founded suspicions, your basis for an increase exists now, given the vacating of the rent-controlled master tenant. In other words, it is the absence of the master tenant, not the presence of the subsequent occupant, that justifies the increase, and your delay alone may constitute a waiver of your vacancy decontrol rights.
Nonetheless, the exercise of those rights is complicated these days. The COVID-19 pandemic may compel landlords to settle for lesser rents in lieu of vacancy. Further, SFAA members have been following the Association’s challenge to a regulation that finds tenant harassment if a Costa-Hawkins increase “coerces” a tenant to vacate. SFAA sued the City of San Francisco in February of 2019 to overturn this regulation, but the hearing has been continued half a dozen times. While the hearing is currently set for August 20, we quickly approach the November election, where Proposition 21 seeks to repeal Costa-Hawkins. In other words, if the last original occupant is really gone, you should exercise your opportunity to increase the rent yesterday.
The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. David Wasserman is with Wasserman-Stern Law Offices and can be reached at 415-567-9600. Justin A. Goodman is with Zacks, Freedman & Patterson, P.C. and can be reached at 415-956-8100.