How to get around the tenant welfare of rent control
We are all familiar with the follies of tenant welfare, also known as rent control. Unlike social welfare, where applicants must meet specific criteria, there is no distinction made between individuals with substantial means and those who are less well-off.
Whether the tenant is living hand to mouth or they have $5 million in their bank account and a shiny new Tesla in the driveway, everyone enjoys the benefits of rent control. We know of one well-to-do tenant’s attorney we won’t name here who has a thriving law practice and calls a rent-controlled apartment his home.
And unlike social welfare, where the entire universe of taxpayers pays for benefits, the cost of tenant welfare falls squarely on the shoulders of property owners. This creates a situation where the longer the tenant resides in the unit, the cheaper the rent becomes for that tenant. This means that you do not have the fluid nature of people moving on to find new housing, which allows for additional opportunities to arise.
To our knowledge, the rental housing industry is the only industry that is not allowed, in many cases, to receive the fair market value for goods and services and is compelled to support people individually. A classic example is eviction moratoriums during the pandemic that forced landlords to provide free housing to tenants regardless of their ability to pay. The reasoning was that housing is essential.
Imagine walking into a Safeway, filling up your shopping cart with groceries, and telling the teller or manager that, since groceries are essential, you are going to walk out of the store without paying, and maybe you will pay for milk and eggs later on.
Another example is the movement for vacancy taxes. It is argued that if a property is vacant and not used for the greater public good, the owner should be saddled with a punitive tax. Encouragingly, San Francisco’s ‘Empty Homes’ Tax has officially been put on ice thanks to litigation brought forth by our industry partners.
Read our earlier article: Public policy around housing looks like a modern-day Robin Hood
Despite this unfairness, housing providers do have some strategies to beat rent control. There is a right way and a wrong way for landlords to change this balance of power and optimize their rental business.
First and foremost, take advantage of allowable rent increases
Some housing providers do not bother with increasing rents because the allowable amount is minuscule. Our response: Take what you can get. Whether it is the statewide rent cap (AB 1482) or less generous local jurisdictions with lower rent caps, avail the opportunity to raise rents when legally able to do so.
We have to be aware that in order to raise rents, landlords must be in good graces with the city in certain jurisdictions. In San Francisco, for example, landlords must obtain a license to raise rents by registering units. In Oakland, the consequences are even more severe. Failure to pay business taxes and comply with the rent registry requirement can lead not only to the inability to raise rents, but even have a seat at the table when petitions to the Rent Board are filed. We need to get with the program, folks.
Strategies that don’t work
We are aware of some landlords who raise rents above and beyond what is allowed by law, and the tenant acquiesces to these illegal rent increases because they want to remain in their surroundings. Even if the tenant agrees to pay more rent, this is a cardinal sin and may lead to a lawsuit down the road with treble damages. Much like renting out an illegal in-law unit, when things are going good, they are going great, but when things are bad, they are awful. Whenever there is an illegal rent increase, it can lead to significant liability.
Landlords renting to Section 8 tenants are particularly prone to making the mistake of accepting extra money “on the side” that exceeds rent increase limitations. Don’t do it.
Another strategy housing providers use in an attempt to evade rent control is an Owner Move-In or Relative Move-In eviction (OMI), expecting that once the owner or their close relative regains possession of the unit, they can re-rent it at market value.
What we need to understand is that there are certain statutory obligations. In San Francisco, for example, the owner or relative must use the unit as their principal residence for at least 36 months. Landlords may have to re-rent the unit to the previous tenant under the same terms. So, an OMI/RMI eviction does not escape rent control.
Another misperception is that a new owner can raise the rents to whatever amount they’d like. Not true. The tenant remains protected, regardless of who the new owner is. Whenever ownership of the building exchanges hands, the tenant should be served a Notice of Change or Ownership and/or Management, per California Civil Code Section 1962. This does not give the new owner the license to raise rents.
Let’s talk about strategies that do work
If there is a “just cause” reason to evict, the landlord can raise the rent to market value.
When the tenant has done something wrong, the law rewards property owners for identifying lease violations. The main one, of course, is nonpayment of rent. When the rent is in arrears, they can serve a 3-Day Notice to Pay Rent or Quit, and if the rent remains unpaid within 3 days (excluding weekends and judicial holidays), the landlord has perfected their right to evict.
Let’s pretend for a moment that the tenant is paying market rent in a rent-controlled jurisdiction. We have always been adamant about having a blanket policy of serving 3-Day notices whenever a tenant is late on rent, but some housing providers will give some latitude to a tenant paying market rate because the renter is worth their weight in gold. Yet if a tenant is paying well under market-rate rent, landlords are urged to immediately serve a notice. Any delays can equate to months of lost rental income.
A couple of points on that.
When a 3-Day Notice to Pay Rent or Quit expires, the landlord is not required to accept rental payments. 3 days means just that - it is not 3 days PLUS whenever the tenant feels like paying.
Just keep in mind that once the notice to demand rent has expired and an eviction action has commenced, not a penny in rent can be accepted because when there is an exchange of money, the tenancy has begun anew.
This may be a hard pill to swallow for landlords who want to get cash flowing again, but we have to remind them that once the decision is made to evict someone for nonpayment of rent, they cannot proceed with an eviction. Once a rental payment is accepted, we have to start the process over again.
Maybe the tenant is paying rent, but is creating a nuisance
It’s a bit ironic. Bornstein Law has sometimes suffered a black eye in the press because we help housing providers evict tenants. Yet we receive praise from neighboring residents when we remove bad actors from the rental housing community.
Their response goes something like, “Daniel, thank you for removing this problematic tenant; my quality of life has improved so much since they were removed.” And that’s what we are looking to do. Create a safe, secure, healthy environment for all residents so that tenants can enjoy the quiet use of their living quarters.
Nuisances can run the gamut, and we’ll have to look at the optics of the eviction and whether the lease violation is curable or not. Bringing in an additional family member, for example, may or may not be an attractive ground for eviction, because even if there is an extra person in the unit, a judge or jury can perhaps frown on the landlord’s attempt to displace a family. Yet if we believe that there is an unauthorized occupant, we can prove that they are there with our own eyes by seeing the shadowy resident coming and going, or perhaps, parking their car overnight. This is not a tall order to prove from an evidentiary standpoint. Video is helpful, but not necessary.
Unauthorized pets are another lease violation that is easy to prove. Dogs bark, and owners are likely to take them for walks. Of course, the owner has to be cognizant of the possibility that the tenant’s furry friend is a service animal or an emotional support animal, if the tenant has a pre-existing relationship with a medical provider who certifies the need.
We also encounter disheveled rental units when there’s excessive clutter, it is not sanitary, attracts unwanted creatures, or otherwise looks like an eyesore. Oftentimes, the filth and clutter spill into adjacent units. This is another reason to evict, but be aware of fair housing laws that may afford unique protections to hoarders because this is considered a mental illness that requires “reasonable accommodations” under the law.
The alteration of the premises is another theory to evict, as well as inoperational cars, tenants yelling and threatening other tenants, etc. Owners are advised to consult an attorney to gauge the seriousness of the underlying nuisance and whether it is curable or not. If the tenant is playing loud music at night or too early in the morning, for instance, this behavior can likely be corrected. Contrast this with violence, threats of violence, arson, drug dealing, and other egregious behavior that cannot be remedied because the conduct poses a foreseeable risk to safety.
It may be a viable option for housing providers to transition tenants out by way of a substantial renovation under specific, strict conditions. Note that relocation payments will be required when the household is uprooted, and that the work to be performed must render the unit inhabitable.
One of the last resorts to beat rent control is a properly negotiated, enforceable tenant surrender of possession agreement, also known as a tenant buyout agreement. While this is commonly known as “cash for keys,” the owner is not paying for the return of the keys. They are paying for a full release of claims that may arise from the tenancy - the tenant agrees not to sue the landlord for any residual issues.
While it may be emotionally painful for landlords to part with money by paying for a voluntary vacancy (especially if the tenant is problematic), it may be prudent to do so when considering the upside potential of raising rents and/or selling a building that is not tenant-occupied. Let’s say a tenant is renting a unit for $700 a month, well below the market rate of $3,000. Would it make economic sense to dangle some money to entice the tenant to move out?
The money can be made back quickly, and as a general rule of thumb, every $1,000 in extra rental income can lead to an extra $100,000 in value to the property. At Bornstein Law, we want owners to think strategically about their real estate investments. Our office is happy to have a dialogue with you about the numbers and the legal steps necessary to effectuate a buyout.
Parting thought
Although rent control is an albatross around the necks of rental property owners, there are ways around it by discussing your options with proper counsel. For informed advice, call 415-409-7611 or request a 30-minute consultation.