Feature

by Curtis Dowling

The Rent Board reports that in San Francisco the number of withdrawals of rental units due to the Ellis Act (California Government Code §§ 7600 et seq. [sometimes hereafter “Ellis”]) are noticeably down from its 1999 and 2000 level highs. This fact is not surprising in light of the overall state of the economy, since Ellis was and is primarily used in San Francisco to facilitate owner-occupancy by multiple owners in the same building, especially as co-owners with undivided tenancy-in-common interests in title (TICs). The passage of local ordinances such as Supervisor Jake McGoldrick’s so-called “McTIC” ordinance only further discourages the use of Ellis. Of course, this is the very purpose of housing laws such as McTIC.

Despite the present decrease in Ellis Act withdrawals, there were numerous withdrawals over the past few years. San Francisco property owners apparently withdrew well in excess of 1,000 units from the rental market in the past three years. Many withdrawn units have been sold and will again be sold as TICs. Yet, there are still common misunderstandings about how Ellis works. This failure to understand can lead to serious adverse consequences if it influences or directs decision-making concerning the sale or use of withdrawn units. Most egregiously, many people mistakenly believe that the Ellis Act’s penalties and restrictions are only effective for 10 years following the date of withdrawal, after which the property owner is then free to rent the units to anyone at any rent, with impunity. As discussed below, nothing could be further from the truth.

The law has referred to “property” as being a “bundle of rights” with related burdens. This is basically the way to think about the Ellis Act and the powerful right it affords property owners. The benefit of Ellis is well known. It allows a landlord to take an entire building out of the rental market and terminate all residential tenancies and evict all tenants when local eviction control ordinances, such as San Francisco’s rent ordinance, otherwise forbid such a practice. However, the exercise of this right comes with a price, as discussed below.

When Proposition G was passed, it instantly limited the number of owner move-in evictions to one per building. As a result, Ellis became a “godsend” to co-owners who needed to evict tenants from multiple units in one building in order to allow multiple co-owners to live in those units. At the same time, speculators made handsome profits by purchasing, at fire sale prices, fully rented buildings that had substantially below-market rents. Upon acquisition of title, such speculators would evict all tenants under Ellis and then sell vacant units as TICs to the highest bidders. TICs became very attractive to middle-income people who could afford to purchase an interest in title (and a place to live) for $250,000 but could not afford to purchase their own single-family residences at $500,000. In addition to the fact that McTiC (currently under constitutional attack in the San Francisco Superior Court) seeks to close the window of opportunity for home-ownership afforded by TICs, the California Department of Real Estate independently had already begun cracking down on the unregulated sale of TIC interests in the city. As a result, in San Francisco at least, there is a growing sense of dread about the sale, use, and ownership of TIC interests in general, and those in “Ellised” buildings in particular.

Now, let’s address the burdens of the Ellis Act. If you withdraw a building, terminate all residential tenancies and evict all residential tenants, certain restrictions and consequences follow regarding the lawful, subsequent uses of the building. The primary restrictions and penalties involve the re-renting of withdrawn units after the date of withdrawal. The important point is to remember that Ellis does not forever ban or forbid the renting of withdrawn apartments. Instead, if you own an “Ellised” building, you are free to rent the units for residential purposes after withdrawal, but only if you are willing to accept the consequences. Those consequences include the potentially severe re-imposition of rent control and liability for actual and punitive damages to displaced tenants and the government. The common misunderstandings about the Ellis Act concern these consequences. Each is separately discussed below

Re-Imposition of Rent Controls Upon Re-Rental
The rent that a landlord can charge for the first, Post-Withdrawal Tenancy (PWT) in any withdrawn unit will always be capped and controlled, regardless of when that tenancy was created. Whether that tenancy was created 10 days, 10 years, or 10 decades after withdrawal does not matter.

The bad news is that the cap is basically whatever rent you could have lawfully charged the displaced tenant had the unit never been withdrawn and the tenant had never been evicted. The good news is that Ellis does not impose any form of vacancy control as a penalty for a PWT, which means that a landlord would be free to charge market rent for any tenancies in the unit created after the first PWT in the unit ended.

San Francisco’s Rent Ordinance fits with this interpretation of Ellis. Rent Ordinance § 37.9A(a) clearly provides:

Any rental unit which a tenant vacates after receiving a notice to quit relying on Section 37.9(a)(13), withdrawal of rental units from rent or lease under the Ellis Act, California Government Code Sections 7600 et seq., if again offered for rent or lease at any time must be offered at a rent not greater than that which would have been allowed had the prior tenant or tenants remained in continuous occupancy during the entire period of the vacancy…

Of course, in computing what any such capped rent would be, the landlord is entitled to factor in rent increases that could have been lawfully imposed on the displaced tenant under the rent ordinance had she or he never been evicted. Such annual increases, however, are very modest, as we all know.

In short, the restriction on the rent that a landlord can lawfully charge for the first PWT in any given withdrawn unit is a permanent, perpetual restriction—one that lies dormant, waiting to be triggered by the PWT, only to vanish after that PWT has terminated. The restriction runs with the title, and will bind successive owners. If market rents are comparatively astronomical 11 years after the date of withdrawal, you will not legally be allowed to share in the wealth just because 10 years have gone by.

Basically, you use Ellis to get out of the rental business. If you decide later to get back into the rental business, Ellis effectively unwinds the clock and sets you back to square one, at least as far as initial rents are concerned. The only way to avoid this control, or one like it, is to demolish the “Ellised” building, build a new structure and then make sure that no new units in the new building are offered for rent or lease any sooner than five years after the date the demolished building was withdrawn.

Even if many years have elapsed since the withdrawal, do not charge an illegal rent—i.e., a rent higher than the capped amount for the first PWT in a withdrawn unit. If you do, the tenant charged that illegal rent could file an action against you to “disgorge” the illegal profits you made from that tenant, and could force you to refund the excess paid over and above the lawful, capped amount, which could be substantial, if an illegal rent was paid for a considerable period of time. You could be forced to pay that money back.

If you own an “Ellised” building or are considering purchasing one (or an interest in one), make sure you know the technical date of withdrawal of the building. The date will vary depending on when you started the withdrawal process (i.e., before or after the 2000 amendments to the Ellis Act went into effect).

Punitive Damages (and Actual Damages)
As bad as the re-rental restriction seems, it might not be the worst one. In addition to the re-rental restriction, any PWT in a withdrawn unit will entail liability in some amount for punitive damages to the displaced tenant. Depending on when the re-rental occurs, liability to the displaced tenant for actual damages may also exist. Ellis nowhere provides for a shifting of liabilities between co-owners of “Ellised” buildings. In light of this fact, anyone purchasing a TIC interest in an “Ellised” property should be particularly careful because a co-owner who decides to rent could possibly get all other co-owners into serious trouble.

Re-Rental Within Two Years of Withdrawal
The best advice probably is to simply make sure you do not, under any circumstances, rent a withdrawn unit within two years of withdrawal. If you do, however, you “shall be liable to any tenant or lessee who is displaced from the property by that action for actual and exemplary damages.” As for actual damages, they could be substantial, especially if the displaced tenant suffered a dramatic increase in the cost of housing as a result of the withdrawal; or, for example, if the tenant suffered some acute form of emotional distress from the displacement.

In terms of punitive damages, these would presumably be measured as a percentage of your net worth. They would be taken from you in order to punish you and to make sure you do not repeat the same wrong again. This is the standard measure for punitive damages, and the amount could be devastating depending on the finder-of-fact and the circumstances of the case.

Moreover, Ellis provides that “nothing in this paragraph precludes a tenant from pursuing any alternative remedy available under the law” (Govt. Code § 7060.2(a)(2)). This means that a tenant can conceivably obtain relief and remedies based on other statutes and laws. For example, there could be a restitution award in an unfair business practices suit filed under the Business and Professions Code (§ 17200), or a wrongful eviction suit filed under the San Francisco Rent Ordinance (§ 37.9[f]).

The risk here is too great, and the exposure unknown and potentially enormous. Bottom-line: do not re-rent withdrawn units within two years of the date of withdrawal, under any circumstances, if you can avoid it. For these kinds of claims, Ellis expressly provides its own statute of limitations. A displaced tenant must file his or her action within three years of the date of withdrawal.

Re-Rental After Two Years of Withdrawal
If you rent a withdrawn unit after two years of withdrawal, Ellis provides for liability for punitive damages to the displaced tenant. Also, unlike re-rental within two years of withdrawal, Ellis does not expressly provide for any liability for actual damages to any displaced tenant. Plus, as punitive damage liability for re-rental within two years is a quantitative unknown, Ellis expressly provides that liability for punitive damages for re-rental after two years of withdrawal shall be “an amount which does not exceed the contract rent for six months.” Hence under Ellis, from the standpoint of liability to a displaced tenant for damages for a PWT, there is considerably more certainty about the level of exposure.

In addition, in the provision governing liability for damages to displaced tenants for re-rental within two years of withdrawal, Ellis specifically provides in that context that “nothing in this paragraph precludes a tenant from pursuing any alternative remedy available under the law.” No such language, however, appears in the provision governing damages liability for re-rental after two years. This suggests that the most that a displaced tenant could recover from a landlord for re-rental of a withdrawn unit after two years of withdrawal is six months of contract rent. Moreover, as discussed below, there is no published precedent in California that interprets or sheds light on the meaning of these provisions. Despite the fact that a strong argument could be made that six months of contract rent is the maximum and exclusive remedy for re-rental after two years, a court might possibly interpret the provisions differently and allow even greater recovery on a different theory of liability. Unlike tenant claims based on re-rental within two years, Ellis provides no express statute of limitation for these claims, so general law controls.

Initial Re-Offer to Displaced Tenants
The common myth that Ellis’ restrictions and penalties only operate for ten years after withdrawal derives from a misreading of a provision in the Act concerning re-rental to displaced tenants. This feature of Ellis is more an administrative headache, than a restriction or penalty. Basically, if a landlord decides to re-rent a withdrawn unit within ten years of the date of withdrawal, and if the City and County of San Francisco has decided to so require (and it has), then the landlord must first offer the unit to the tenant displaced by the withdrawal, provided that the tenant gave notice at the time of the initial eviction that she or he wanted to receive an offer upon re-rental. This is all that the 10-year feature of the Ellis Act means. If you re-rent within 10 years of withdrawal, you may be required first to offer the unit to the displaced tenant. If you decide to re-rent after 10 years, you are not so required, and can first offer the unit to anyone. In either scenario, as discussed above, the rent that the landlord can charge for that first PWT will always be capped. What this feature of Ellis means is that you might be required to offer a unit with a capped rent to a former tenant, years after you (or a predecessor owner) initially evicted that tenant from the building.

Punitive Damages Action Brought by the City Attorney
If you re-rent a withdrawn unit within two years of withdrawal, then Ellis further provides that the local municipality (in our case, the City and County of San Francisco) can “institute a civil proceeding against any owner” who re-rented the withdrawn unit “for exemplary (punitive) damages for displacement of tenants or lessees.” Ellis further requires that any such action must be filed within three years of the date of withdrawal, thereby creating its own internal statute of limitations.

As is the case with liability for punitive damages directly to the displaced tenant for re-rental within two years, there is no express cap on the amount of exemplary/punitive damages that the city attorney can obtain from a property owner in a suit filed by the government. This exposure potentially could prove both enormous and devastating. This is yet again another reason to make sure you do not, under any circumstances, re-rent a withdrawn unit within two years of withdrawal if you can avoid it.

The Future of Ellis, and Uncertainty in Case Law
There is no guidance from the California courts on issues related to restrictions and penalties for a PWT. There are a few cases on the books that interpret the meaning of, and resolve issues arising under, the Ellis Act. Of those cases, almost all of them concern issues relating to whether or not local municipalities can impose conditions on the exercise of the right to withdraw. The courts have clearly ruled over the years that local governments cannot.

A few other cases concern the scope and extent of the government’s ability to control and regulate subsequent uses of withdrawn units after withdrawal. In those decisions, the courts effectively stated that, while the government may naturally regulate subsequent uses of withdrawn properties given its general police powers to regulate all properties in general, land-use decisions concerning subsequent uses of “Ellised” buildings must be based on housing-neutral concerns and cannot be based on any intentions to preserve rental housing. I successfully used these cases a few years ago to persuade Judge David A. Garcia of the San Francisco Superior Court to completely invalidate San Francisco Planning Code § 209.10 (requiring a conditional use permit for conversion of rental units to “non-rental” uses), as it related to “Ellised” buildings.

However, the penalties and restrictions discussed in this article do not relate to general land use and zoning law but rather belong to the province of landlord/tenant law. Not until earlier this year did any published precedent ever surface concerning the mechanics of an Ellis Act eviction. When the use of the Ellis Act exploded in San Francisco in late 1998, there were many unresolved, complicated questions involving the procedures and mechanics of an Ellis Act eviction. In the first published Ellis Act eviction case, Drouet v. Superior Court, the Court of Appeal ruled that retaliation is not a defense to an Ellis Act eviction. Unfortunately for property owners, the California Supreme Court accepted that case for review, wiping out the favorable precedent for the landlords. The court will issue a decision on that issue at some point in the future. Hence, until there is a decision in the Drouet case, or another California court issues another published decision in a different case, there is presently no published case on the books dealing with Ellis Act evictions.

The penalties and restrictions discussed in this article involve the last phase of the Ellis Act process (i.e., what happens when you get back into the rental business). There are no published decisions of the California courts concerning the validity, nature, extent or fairness of any of the penalties and restrictions discussed in this article. This lack of guidance from the courts only heightens and enhances the continual sense of uncertainty and concern about Ellis.

Hopefully, equipped with solid information about the benefits and burdens of the Ellis Act, you can make the best business decision whether Ellis can work for you.

(The author would like to thank Jak S. Marquez, Esq. of MacDonald Beckman, LLP for his thoughts and comments.)

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Curtis F. Dowling is a senior associate attorney at Dillingham & Murphy, LLP, in San Francisco. He specializes in real property, constitutional, land use, and landlord-tenant litigation, primarily involving real estate in San Francisco which is subject to the Rent Ordinance. He can be reached at 415-397-2700. © Copyright 2002.