Feature
By Andrew J. Wiegel
The Ellis Act has become a familiar name in the apartment industry. The act preempts local laws that try to force property owners to continue renting their buildings to residential tenants. It trumps rent control laws. And, it also can be used to invalidate other laws that a city may pass trying to deter owners from invoking the power of the act or trying to force owners to continue renting.
Last year, the Ellis Act was amended to make it less onerous to property owners; and the courts have continued to support the power this act has given to owners. In this article, I add to my earlier Ellis Act explanations published in this magazine in 1998 and 1999, an overview and update on how the Ellis Act has evolved and what it means to apartment owners. There is still a lot of misinformation circulating in the housing industry about the Ellis Act and how it works. So, I will begin by reviewing some highlights of what the Ellis Act does and does not do.
The Ellis Act guarantees the right to stop renting a building without regard to any local laws to the contrary. If a building has four units or more, it can be removed from rent under the Ellis Act even if the owner continues to rent other buildings on the same or other parcels. If a building contains three units or less, it can be removed from rent under the Ellis Act even if the owner continues to rent other buildings on other parcels, other buildings on the same parcel, however, must also be removed. The often stated requirement that the owner must be “going out of business” is not in the law. The owner is free to stay in business, renting other units in other buildings.
To employ the Ellis Act, all of the residential rental units in the building must be removed from rental housing use. Commercial rental units are not affected and may continue to be rented. The residential units cannot be rerented, but they do not need to be left vacant. They can be owner-occupied, even by an owner holding less than 25 percent ownership. They can also be used for family purposes, such as housing an owner’s family members without charging rent. They can even be used for a commercial purpose if a change in use is permitted by zoning restrictions. They may not be rented for residential use, regardless of how cleverly one tries to disguise the use.
Once a building has been removed from residential rental use under the provisions of the Ellis Act, it can be subject to restrictions on rerental under local rent control laws. This is the most widely misunderstood aspect of the statute, and it is also the subject of recent changes to the Act.
The Ellis Act itself does not impose any restriction on the rerental of units. It does, however, permit a local government to impose restrictions if it chooses. For example, both San Francisco and Oakland have imposed restrictions. The restrictions imposed by local governments are strictly limited to those expressly authorized in the state law. Attempts to impose additional restrictions have consistently been thrown out by the courts. The most significant recent change to the law has been restrictions on the rerental of units. The restrictions were amended to allow withdrawn units to again be offered for rent at market rates only five years after the effective date of withdrawal. This is a big change. Before this amendment, the San Francisco restrictions included a perpetual restriction on the amount for which such a unit could be initially rerented.
Before this change in the law, the San Francisco Rent Board consistently insisted that any unit that was ever rerented—5-, 10- and 20- or more years later—could only be rented at the rate last paid plus any allowed rent control increases. But now, the restriction on the initial rerental rate only applies for five years. After that, when a unit is first put back on the market, the city cannot restrict the rent that can be charged.
San Francisco also has a 10-year provision that permits the evicted tenant to reoccupy the unit when it is offered again for rent. Now, however, if this rerental were to occur after the five-year point, the tenant’s right would not include the old rent control protected rent. The law allows the owner to set the rent, so the tenant could be required to pay market rent, or arguably whatever rent the owner wishes to charge, even if it is well above market. The law does not specify that rerental must be market rate.
The trade-off for this change is a new period of vacancy control on any units that are rerented during the first five years. Under the old law, if an owner rerented the unit in compliance with the law, and the tenant thereafter voluntarily vacated or was evicted on a three-day notice, the vacating of the rerented unit would have given the owner the right to set a new rent. The unit would have been treated the same as any other vacant unit, and the Ellis Act would no longer have any effect on rent or the ability to rent.
Under the new law, there is a restriction on what the unit can be rented for during the first five years regardless of how many times it turns over. Even if a unit is properly rerented in compliance with the law and then voluntarily vacated, the rerental rate remains restricted during the first five years. The owner can only charge the rent paid at the time of withdrawal, plus rent control allowed increases. Please remember that in any case, once tenants are in—whether they are new or previous ones, and regardless of when they moved in—the rent they pay will then be protected from further increases under the rent control law. The right to charge market rent after five years only applies at the inception of a tenancy.
Meanwhile, an owner’s right to perform a bona fide Ellis Act eviction has been upheld in the courts, with the tenant unable to raise alleged retaliatory eviction as a defense. This is important, because primarily through the abuse of sham defenses, tenants and their advocates have delayed and increased the cost of Ellis Act evictions in an effort to deter owners from asserting this valuable legal right. Under the Ellis Act, San Francisco and Oakland require a 120-day notice to tenants to vacate. For disabled persons and those at least 62 years old who have lived in the unit more than one year, the act allows a full year for them to relocate following the Notice of Intent to Withdraw, if they so request. Tenants clearly have more than enough time to relocate without abusing the court process.
An owner who rerents any units within the first two years following withdrawal is liable to each evicted tenant for actual and punitive damages (San Francisco Administrative Code 37.9A(d); the old penalty equal to six months rent has been superseded). This Draconian provision seems to create a windfall suit for all former tenants, even if only one unit is rerented. But, after the first two years the restrictions place the landlord in a position little worse than he or she would have been had the eviction not been performed.
Rerental between two years and five years after withdrawal means going back to square one with the original tenant, or a new tenant re-occupying at the old rent, with the equivalent of banked rent increases. Rerental after five years means returning to the market with units that can be rented for full market rent.
The real estate market seems to have accepted the use of the Ellis Act. There is now a disclosure item on some local transfer-disclosure forms. But for owner-occupiers, the fact that the Ellis Act was used does not seem to create much stigma. In conjunction with tenancy-in-common cooperation, it remains the most reliable tool for the creation of the affordable home ownership, which the city so badly needs. With the elimination of vacancy control after five years, previously withdrawn properties can now be evaluated for their future rental potential in a more predictable way. There will be fewer unknown risks for buyers and real estate agents. The changes strike a fair balance by deterring sham Ellis Act withdrawals on the one hand and sparing owners from onerous perpetual restrictions on the other.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Andrew J. Wiegel is an attorney with Wiegel & Fried, LLP. He can be reached at 415-552-8230. Copyright © 2004 by Wiegel & Fried, LLP.