Legal Corner Q & A

Security Deposit Increases, Accepting Rents & Buying Rentals

by Various Authors

Q. I noticed the new PPMA lease allows the owner to increase a tenant’s security deposit. If my current lease does not include that language, can I still ask to increase the security deposit?

A. You can still give the tenant a 30-Day Notice of Change of Terms of Tenancy to increase the security deposit, but you will find the problem is enforcement. In the past, some attorneys expressed concern that the Rent Board might view an increase in the security deposit as an increase in rent, but that really is not the case. The security deposit is intended for specified purposes, such as safeguarding the landlord against the tenant’s failure to perform some obligation, repairing damage to the apartment and cleaning it after the tenant leaves. This is much different than rent. The problem is that under Section 12.20 of the Rent Board’s Rules and Regulations, you may not evict a tenant for failure to perform a covenant or condition of the tenancy that you unilaterally impose, unless the change (1) is not material (what court will permit eviction for a non-material breach?); (2) is required by law or compelled by reasons such as protecting the health, safety or quiet enjoyment of the occupants of the building or adjoining properties; (3) is subject to a corresponding reduction in rent for a reduction in service; or (4) is a rent increase or other charge authorized by the ordinance or Rules and Regulations. The question arises, how do you enforce this type of unilaterally imposed condition?

Perhaps you should cross that bridge when you come to it. You have the legal right to impose the condition, and many tenants will not question it or refuse to comply with it. For those tenants who do, you can choose to enforce it or just forget about it. You could sue in small claims court to recover the extra security deposit. . I am not sure you would be successful because the goal of the Small Claims Court is to provide for the recovery of "damages," or money unconditionally owed by one party to another which belongs to the other. This court may refuse to allow for the collection of a deposit, which, in the absence of the occurrence of some uncertain event, is due back to the party from when it is demanded, with interest no less. Relief in any other court, if available at all, would be prohibitively expensive.

Do go ahead and serve the Notice of Change of Terms of Tenancy. Be prepared, of course, to respond to the tenant who argues that Section 12.20 of the Rules and Regulations prohibits any unilateral change by pointing out that it simply prohibits eviction for such change, and then hope for the best. You have nothing to lose.
– Saul M. Ferster

Q. May an owner accept rent from a subsequent occupant who has been served with a Section 6.14 Notice without this occupant obtaining the same rights of an original occupant who signed the rental agreement?

A. The short answer is no. We generally advise our clients against accepting rent from any individual who is not an original occupant holding an original rental agreement made with the landlord. Arguably the landlord’s acceptance of rent from a subsequent occupant, even after serving a 6.14 Notice, is evidence of an oral rental agreement for the premises in the amount of the payment received. The result is that this same landlord cannot then evict an otherwise unapproved subtenant when all the original tenants have gone. However, if rent is accepted directly from the subtenant after a 6.14 Notice is served, a landlord may still raise the rent to market rate on all subsequent tenants when all the original tenants have gone.

The long answer is more complex. Section 6.14 draws a distinction between three different types of occupants: (1) an “original occupant” who took possession with the express consent of the owner at the time the base rent for the unit was first established; (2) a “subsequent occupant” who became an occupant while the unit was occupied by at least one original occupant; and (3) a “co-occupant” who is a subsequent occupant with a rental agreement directly with the owner. Section 6.14(b) provides that when all original occupants no longer reside permanently in the rental unit, the landlord may raise the rent of any co-occupant without regard to the limitations set forth in the Rent Ordinance, provided the landlord served the 6.14 Notice on the co-occupant within a reasonable time of actually knowing about the occupancy. The failure to serve the notice within 60 days of any actual knowledge of the occupancy creates a rebuttable presumption that the notice was not served within a reasonable time. Even if the acceptance of rent from a subsequent occupant is considered sufficient evidence of a rental agreement, thus transforming the subsequent occupant into a co-occupant, the service of a timely 6.14 Notice preserves the landlord’s right to create a new tenancy for the purposes of determining rent under the Rent Ordinance.

The downside in accepting rent directly from a subsequent occupant is that the owner has arguably waived the basis for eviction contained in Section 37.9(a)(7). This section allows eviction in the case of a tenant holding at the end of the term who is not a subtenant approved by the landlord. Civil Code Section 1954.53(d)(4) provides that the acceptance of rent by the owner shall not operate as a waiver or otherwise prevent enforcement of a covenant prohibiting sublease or assignment or as a waiver of an owner’s rights to establish the initial rental rate unless the owner has received written notice from the tenant who is party to the agreement and the owner thereafter accepted rent. Our firm’s 6.14 Notice, in addition to the required language, includes a provision that states all individuals other than the specifically named original occupants are unapproved subtenants and, pursuant to Section 37.9(a)(7), the owner may recover possession of the premises if the remaining occupants are unapproved subtenants. Even with such a provision, a subsequent occupant could argue that the acceptance of rent constitutes such approval. Obviously the potential foreclosure of such a right by an owner would rarely be worth any benefit of accepting the rent directly from a subsequent occupant.
– Stephen Sherman

Q. What can I do to protect myself from tenant/rent control problems when I buy a rental property?

A. You must act with due diligence during the escrow period by obtaining important information/documentation from the seller and tenant before you become obligated to complete the purchase. Make your offer using an effective form such as the updated Greater San Francisco Association of Realtors form, which contains provisions tailored to the city’s Rent Ordinance. You should review the documentation provided with an experienced attorney. The documents from the seller should include: (1) all leases and rental agreements; (you may find that the seller, instead of using the PPMA form used a bad one-page form he bought at a drugstore 20 years ago); (2) all notices to the current tenants and previous tenants including 6.14 notices (you want to know, e.g., whether the prior owners have reserved their rights as against non-original occupants to raise the rent to market when the last original occupant has left); and (3) a written statement from the seller.

This written statement should include seven basic points. First, all oral agreements with tenants must be described (sometimes deals are made between the seller and tenants concerning, for example, parking, storage and pets that conflict with the lease). You also want to compare this statement with the tenants’ responses to Tenant Questionnaires.

Second, you want to know about uncured defaults by the seller or tenants.

Third, the statement should reflect all claims made by the seller or tenants in court proceedings or before the Rent Board. You can obtain a copy of the appropriate Rent Board files at their office at 25 Van Ness, Suite 320, and you can also review court files at the San Francisco County Clerk’s office at 400 McAllister. You need to know whether you will be acquiring the “tenant from hell” from the movie Pacific Heights.

Fourth, all deposits held by the seller should be listed, including any claimed offsets against these deposits, including any unpaid interest.

Fifth, any passthroughs that constitute part of the existing rent must be described, including the nature of the passthrough and the amount. Owners and managers can be sloppy and records are often incomplete. You need to know that the rent the seller is charging (and the rent you can charge) is legal. If the seller has made a mistake—for example, in the anniversary date, calculating the allowable increase, or including a capital improvements passthrough in the base rent, the rent for the tenant may be illegal. A tenant could petition the Rent Board, claiming illegal rent and seek a refund from you as the new owner, at least for illegal rents paid after closing. While the issue has not been resolved by the appellate courts, the Rent Board has taken the position that it can even order a refund of illegal rents occurring before the buyer becomes the owner.

Sixth, recent amendments to the Rent Ordinance require that the seller, prior to entering into the contract for the sale of two or more units, disclose the grounds for termination of the tenancy of each residential unit to be delivered vacant at the time of closing. A form for that purpose is available from the San Francisco Association of Realtors.

If you and/or a relative intend to occupy one of the units of a building as your principal residence, make sure you know all the requirements for such an eviction. You also want to know if a prior owner has given an OMI notice since November 1998. If yes, that unit would be marked as the "owner" unit and, in order for you to change it, you would need to claim hardship and obtain permission from the Rent Board.

The Rent Ordinance and the Rules and Regulations are complex and all the information/documentation you receive could affect your rights. Even if your rental property is a single-family house or condo, your rights under the state Costa-Hawkins Act to raise the rent to market for tenancies after January 1, 1996, is affected by how the previous tenants were terminated as well as the existence of serious health, safety, fire or building code violations.

The document to obtain from the tenant (through the seller) is the Rental Information Questionnaire or “Estoppel Certificate,” which will disclose if the tenant claims to be protected under the moratorium against OMI and relative evictions. These tenants include seniors and disabled living in the premises for at least 10 years, and persons with catastrophic illnesses living in the premises for at least five years. The Questionnaire will also reveal if any tenants have any outstanding complaints or claim any rights that are inconsistent with the rental agreement or information from the seller. Finally, you should carefully review the 3R Report from the city and transfer disclosure statement from the seller in order to determine if any of the rental units lack a certificate of occupancy, because this omission is illegal and can have serious consequences for the landlord-tenant relationship.

– Lawrence Scancarelli

The opinions expressed in this article are those of the authors and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Saul M. Ferster can be reached at 863-2678. Stephen Sherman is with Woo & Associates, 706-1644. Lawrence Scancarellican be reached at 398-1644. Copyright © 2002.