Two Sides, One Coin

Inlaw Outlaws

written by Daniel Wayne

Landlords who rent out illegal units are in a tough spot—caught between laws that protect tenant housing and those that require all rented units to be up to code.

What Is an Illegal Unit?
There is a misconception that an illegal unit is necessarily dangerous. In reality, an illegal unit is any residential dwelling unit that lacks a “certificate of final completion and occupancy.” A certificate of occupancy is essentially a guarantee that a house or unit is up to code and fit for habitation. These are issued by the San Francisco Department of Building Inspection. Therefore, even if the space is, for all intents and purposes, compliant with city code, it can still be illegal by virtue of its lack of approval from the city. Regardless of how “nice” the unit is, renting an illegal unit out to tenants can result in significant liability for landlords.

Most illegal units are of the classic in-law or mother-in-law variety: a studio or one-bedroom located on the ground floor of a single-family home. But illegal units also include industrial or commercial spaces that were converted without permits, or in violation of zoning ordinances.

While there is no official tally that I’m aware of, rumor has it that San Francisco has around 50,000 illegal units. Most of these units were installed decades ago by home owners who were looking to help pay their mortgages, but failed to get permits to build the units.

How Can I Tell If a Unit Is Illegal?
Ultimately this just boils down to whether or not there is a certificate of final completion and occupancy on file with the city or not. A short trip to the San Francisco Planning Department can clear this up more often than not. One short-form option is to look up the property in question on the San Francisco Planning Department’s website. But this isn’t always accurate, so I wouldn’t suggest relying on this alone.

What Is a Landlord’s Potential Liability for Renting an Illegal Unit?
Most, if not all, illegal units are subject to the San Francisco Rent Ordinance, and, in turn, subject to eviction laws and rent control (unless exempt for some other reason).

Landlords who have tenants in an illegal unit are in a tough spot. California law prohibits landlords from renting these units out at all or collecting rent. Tenants of illegal units have potential legal claims against any landlord who rents out an illegal unit (especially where the tenant didn’t know the unit was illegal, which could be considered fraud), and a right to return of all rents paid.

Additionally, landlords of illegal units face exposure to claims for breach of the implied warranty of habitability. Often, illegal units do not meet minimum housing standards. Whether the ceiling height is too low, or the unit lacks a proper source of heat, an appropriate fire exit, or adequate ventilation, there are plenty of ways a unit can come up short of code standards. If a tenant calls DBI to complain that his unit is not up to code, landlords may end up receiving a Notice of Violation and face potential fines and penalties from the city.

Can’t the Landlord Just Demolish the Unit?
Probably not. As stated above, tenants in illegal units generally are entitled to eviction protections. This means that a landlord can only evict a tenant for one of 16 just causes. While demolition is a just cause, demolitions in San Francisco are now highly disfavored, particularly where the unit is occupied by a tenant.

In recent years, the city has made it very difficult for landlords to demolish these units. Current San Francisco policy is to compel landlords to legalize these units, not demolish them. If a landlord does wish to demolish an illegal unit, they have to obtain a permit from the city. The permitting process involves a public hearing with the San Francisco Planning Commission, where the tenant is free to contest the demolition of his or her home. This can be a time-intensive process and often leads to a denial of the permit to demolish the unit. If the permit application is denied, the landlord is left with no other option but to legalize the unit.

Even if a landlord is able to obtain a permit to demolish the unit, the resulting eviction process can be costly and time intensive. Tenants have ways to appeal and slow down the demolition process, and the eviction process as well. As this type of eviction is through no fault of the tenant, all authorized occupants who have resided in the unit for more than one year are entitled to relocation benefits. The amount increases yearly, and the current amount of relocation benefits for this type of eviction is $6,627 per tenant, with a maximum due per unit of $19,88.

In addition, if anyone in the unit is over 60 years old or disabled, an additional $4,419 must be paid to each qualifying occupant, with the same amount provided for families with children under the age of 18. So, the cost of simply serving the notice of eviction, not including attorney’s fees, is almost $25,000 for a typical family of four with minor children, and can be significantly more if anyone in the household is disabled. This does not include the costs of the litigation if the tenant decides to try to fight the eviction, which can easily reach $20,000 or more. Of course, a landlord in this situation could also be sued by his or her tenant. For the most part, landlords are going to have a tough time getting rid of a tenant in an illegal unit, and even if they do succeed, this does nothing to prevent the landlord from being sued.

What Can a Landlord Do?
This is a question better answered by an attorney specializing in landlord representation. However, there are some things landlords can do that are helpful for both tenants and landlords alike. While I cannot encourage renting out illegal units, if you are already a landlord in this position, there are some things you may be able to do to reduce the risk of a messy conflict.

If you are going to rent out an illegal unit, it is paramount that you stay on top of repair and maintenance requests. When a landlord fails to respond to a repair request, or when other problems arise, tenants often call DBI or a law firm like mine. By keeping the place in great shape, you reduce the likelihood that your tenant gets upset and comes after you, or that the city gets involved. A large number of tenants call us because they feel like they have been treated poorly. It may seem like a no-brainer, but maintaining open communication and showing your tenants that you care about their complaints and will look into them can go a long way toward reducing the likelihood of a lawsuit.

Another crucial piece of protection is appropriate insurance. A simple homeowner’s policy will not suffice. Any landlord must make sure that the insurance policy he or she carries includes coverage for tenant issues, such as wrongful eviction. On the off chance that a tenant does file a suit, a good insurance policy can mean the difference between getting the case resolved with your insurance company footing the bill, or having to shell out thousands of dollars from your own pocket. Without appropriate insurance, you could even end up losing your property because of uncovered claims.

Remember, when it comes to illegal units, the best way for landlords to protect themselves is to not rent them out at all. Before you rent out that in-law unit, be sure you know whether it’s a legal unit or not. If it isn’t, do whatever you need to in order to get the unit certified and up to code before renting it out to tenants. If you’re already renting an illegal unit out, make sure to stay on top of repairs and tenant requests, and maintain a good relationship with your tenant, in order to minimize your exposure to a lawsuit. When in doubt, talking to an attorney about your situation is the safest way to avoid trouble down the road.

Daniel Wayne is the founder and managing attorney of the Law Offices of Daniel W. Wayne, one of the Bay Area’s premier tenant’s rights law firms. Wayne and his team have resolved hundreds of cases on behalf of Bay Area tenants and have helped his clients recover millions of dollars along the way.