Let's talk about buyouts in San Francisco

"Cash for keys" is a term that was popularized during the subprime mortgage crisis that began in 2007. Paying a tenant to leave is a practice that exists to this day, but what many rental property owners do not recognize is that there can still be legal residue arising from the tenancy.

For instance, a tenant receives money to move out, six months go by, and they develop a respiratory illness from an alleged mold infestation in their former abode and sue the landlord.

In a properly prepared, compliant, and enforceable Tenant Surrender of Possession Agreement - known colloquially as a "tenant buyout agreement" - the tenant is not only agreeing to vacate voluntarily but also relinquishing any legal claims arising from the tenancy. So, when we ink a buyout agreement, owners are not just paying the tenant to get the keys, but paying for a complete release of claims.


What does a buyout go for?

We're often asked what the typical payout is required to entice a tenant to move out, and we can't give a straight answer because it is all across the board. It can range from as low as a rent waiver and the return of a security deposit, to as much as six figures.

Every case is different, but we can tell you what the San Francisco Rent Board says because legally reported buyout agreements are in the domain of public records.

In 2022, the average payout was $53,828.

While this number may seem astronomical, landlords can get this number down through proper counsel, savvy negotiation. and having a leveraged discussion with a tenant.


But wait. Before we even open our mouths and broach any discussion with the tenant about buying them out, we have to notify the San Francisco Rent Board that we are entertaining a buyout agreement.

When there is a meeting of the minds and parties agree to something, normally it is not put into scrutiny. Ordinarily, contract law applies because two parties agreed on the terms.

Not with tenant buyout agreements. Regulators want a bit more oversight to ensure that in these types of voluntary move-out arrangements, renters are not being taken advantage of and get a square deal when they are asked to be uprooted.

Of paramount concern is whether the tenant is apprised of their rights and are informed that they can decline to come to the negotiating table. Oftentimes when presented with the prospect of getting cash and/or other concessions, the tenant simply says, "no thanks. I'm happy to be here for the rest of my life." And, in fact, they are entitled to do so unless the landlord can find a just cause reason to legally terminate the tenancy under San Franciso's Rent Ordinance.


Different scenarios that give way for a tenant buyout discussion

A buyout when there are no other convenient or legal means to evict: Absent a just cause reason to evict under San Franciso's Rent Ordinance, owners have few other options to effectuate a vacancy.

Buyouts give owners more flexibility because they haven't taken their rental units off the market (Ellis Act) and they can avoid the statutory requirements of an owner move-in eviction, such as living in the unit for 36 continuous months and re-renting it at the original rent amount.

Compromise to avoid litigation: Perhaps the owner does have a legitimate reason to evict, say, the tenant is having parties at night or is engaging in some sort of other nuisance behavior, but the owner wants to avoid the time, expense, and aggravation of an unlawful detainer (eviction) action. This presents an opportunity to have a leveraged discussion with the problematic tenant about a chapter change in their housing.

Aided by no shortage of free legal representation by capable tenants' attorneys, litigation is proliferating throughout the Bay Area. In the unfortunate event a housing provider is sued for an alleged wrong, ironclad insurance coverage will ideally pay for the settlement, but the owner will likely have to pay out of pocket to escort the tenant out.

Also, when a tenant commences an affirmative lawsuit, the owner must be represented by proper counsel at any mediation or settlement conference to ensure that the deal includes a move-out.


When to make payments?

Our office likes to offer a small portion of money upfront to ensure the tenant finds another housing arrangement and gets psychologically locked into the deal, with the balance paid out once the tenant has vacated and there is a certainty that the unit is vacant and free of possessions.

This may defy conventional wisdom because many landlords would say, "I'm not paying a tenant until all of their stuff is out and they hand over the keys." Yet when a tenant gets tangible money in their hands on the front end of the deal, he or she generally becomes emotionally committed to complying with the terms.

So, for those of you worried that the tenant will take the initial payment and not move out, our hard-won experience has shown us that this concern is misplaced.

Of course, in the eventuality that the tenant takes the money and does not fulfill their agreed-upon move-out, the landlord can take legal action because there is a breach of contract. We find this to be exceedingly rare because once we get the tenant in the mindset of moving on with a first, small, and token installment of money and they anticipate a larger chunk of money once they move out, they follow through.

Remember that a tenant buyout agreement is voluntary and our strong preference is compliance, not enforcement.

How to broach the conversation

It's worth noting that before a San Francisco landlord even opens their mouth, they must first serve a disclosure on the tenants and file a declaration with the Rent Board. We won't get bogged down in the procedural details here but assuming that these rigors are met, the next question is how to come to an agreement.

We would much like the client to have our clients have a non-threatening dialogue with the tenant themselves, in a friendly environment like a coffee shop. Bornstein Law can engage with the tenant, but we frown on that because the tenant can become intimidated by an attorney.

It's more likely than not that the tenant, after hearing from a high-caliber attorney, will retain an attorney of their own to negotiate the buyout, and their legal counsel will come back with a number that is not economically feasible. We often field calls from tenants' attorneys that go something like, "Mr. Bornstein, I'm representing John Doe and we thank you for your offer to transition him out of the unit because the status quo is not acceptable. John would embrace your offer in exchange for a rent waiver and $180K.

So one of the downfalls of a tenant buyout agreement is that the numbers are totally unreasonable, especially when attorneys get involved. We prefer, then, for clients to have a solid agreement with the tenant remotely interested in hearing out a buyout agreement as Bornstein Law works behind the scenes in a coaching role.

Sometimes, we like clients to ask open-ended questions like, "What would it take for you to move out?" because the number floated may be less than what the landlord was willing to pay. This is the first rule of negotiation - know what the other side wants.


Some landlords cannot have a productive dialogue.

We understand that in some instances where there is so much acrimony in the rental relationship, it is difficult or impossible for the parties to have a constructive conversation about moving on. Some clients, candidly, are a bull in a china shop.

In these types of toxic relationships, an attorney can take charge in negotiating the buyout, but it will come at additional expense to the owner.


Are buyouts worth it, anyways?

Of course, the answer is determined on a case-by-case basis, but as a bit of real estate knowledge - not scientific - but generally speaking, an extra $1,000 in rent that can be commanded will result in a $100K appreciation of the building.

We understand that a voluntary vacancy can pay enormous dividends and so whenever our law office encounters a tenant who is willing to consider an offer to surrender possession of the premises and the dollar amount is within reason, we strongly recommend that our clients take it.

It may be more costly to hire an attorney to prosecute an eviction action than to simply part ways with some sort of compensation, return of the security deposit, or any mixture of incentives for the tenant to move out.


Buyer's remorse?

In certain locales like San Francisco, Berkeley, and Oakland, tenants are afforded some time to marinate on their decision to accept a buyout agreement or not, and even if they first accept the offer to voluntary vacate as part of a quid pro quo, they have the right to change their minds. In San Francisco, a tenant has an absolute right to rescind the buyout agreement within 45 days of signing it, and this right cannot be waived.

San Francisco's rules relating to buyout agreements have become particularly pernicious and have been fraught with litigation with regard to when a government body can interfere with a contract between two parties. Certainly, politicians and the Rent Board want transparency and control, but this impulse to meddle in private contracts has been challenged in the courts.

Housing has become very politicized throughout the Bay Area and so there is added scrutiny when buyout agreements are entered into. This is reflected in a host of procedural obligations for housing providers to follow.

Rest assured, there is a labyrinth of rules to follow. It's not just handing over cash for the return of the keys, but with proper counsel, owners can, in good faith, broker a win-win agreement to transition tenants out of the unit to both realize upside potential on the property while giving outgoing residents some support as they move on to different surroundings.


8 items we need to draft a proper tenant buyout agreement ›