The Property Management Shop

The True Cost of Revolving Roommates as Tenants

by Marc Wilson

Q. I originally rented one of my two-bedroom apartments to a couple of roommates, Tenant 1 and Tenant 2. As you know, item 15 of the PPMA Residential Tenancy Agreement deals with “assignment and subletting.” This agreement gives one the option of checking boxes A or B. I always check box A, which, in essence, is an absolute prohibition against subletting at anytime for any reason. I recently received a call from Tenant 2 indicating that she planned to vacate. Tenant 1 now wants to replace Tenant 2 with Tenant 3. What should I do? What are my rights? What box do you typically check on the rental agreement?

A. Box A of item 15 in the PPMA Lease is currently contrary to the San Francisco Rent Ordinance and totally unenforceable. Not withstanding this fact, I usually check box A, the absolute prohibition against any kind of assignment or subletting. The fact is that Tenant 1 has the right to replace Tenant 2 with Tenant 3. You simply do not have the right to deny unreasonably your tenant’s request to find a replacement roommate. You do not, however, have an obligation to facilitate your tenant’s understanding of the Rent Ordinance. I check box A, because I want to establish and maintain an antisubletting tone and tenor at the property. I do not want new tenants to take possession of apartments with the expectation that subletting is a common and acceptable practice. Also, you never know when the current law might be altered—the law could change next month—and above all your paperwork should always preserve your rights.

When Tenant 2 calls you, tell her to send you a written notice to vacate. You must always remember to request and obtain written confirmation whenever a tenant is vacating. When Tenant 1 calls you with a request for a replacement roommate, ask her to put her request in writing; also remind her to indicate the name of the replacement roommate. When you get Tenant 1’s written request and the name of the replacement roommate, you should send a 6.14 Notice to the new roommate and request that she, Tenant 3, and the original occupant, Tenant 2, sign the 6.14 Notice and return it to you. Upon receipt of the ratified 6.14 Notice, mail the original occupant (Tenant 2) and the subsequent occupant (Tenant 3) a letter acknowledging your receipt of the 6.14 Notice. You should clearly state in your acknowledgement letter that Tenant 3 is a subsequent occupant and that you will not accept rent payments, nonemergency phone calls and/or repair requests from Tenant 3. I have a form letter that I use for this purpose—just call if you want a copy. Tenant 3 simply does not enjoy original occupant status, and you should conduct your affairs in a manner consistent with this fact. I do not request or receive personal information, and/or I do not have Tenant 3 submit an application for a couple of reasons. First, I do not want to act like I am approving Tenant 3 as an original occupant. If you request personal information and applicant information from a tenant, this could be construed to mean that you are somehow approving the tenant or otherwise granting rights that you do not want to grant. Second, I really do not care to know anything about Tenant 3. I am not living with Tenant 3. Tenant 1 is the person living with Tenant 3. If Tenant 3 is good enough for Tenant 1, then Tenant 3 is good enough for me. I simply do not have the time or the inclination to involve myself personally with every revolving roommate situation that comes my way. My job is to obtain written acknowledgement that someone has vacated, to get the new Tenant 3 to sign a 6.14 Notice and, above all, to preserve my rights relative to the rental agreement.

This is not to say that you should act like a jerk every time you deal with a replacement roommate situation. When you rent a two-bedroom apartment to two single, young people, you resign yourself to the reality that you will be dealing with revolving roommates. In all likelihood, one of these tenants will get transferred, fired or married; or otherwise vacate the unit sometime during the tenancy. When one of these things happens, there is at least a 50 percent chance that the remaining roommate will want to stay in the apartment and replace the vacating tenant. You should deal with the remaining tenant professionally and with the utmost courtesy. In most cases, you made the conscious decision to market and rent your unit to roommates. You could have positioned your apartment to appeal to married couples or single people and receive less rent, but instead, your decision was based upon receiving more rent. The extra rent is, in effect, compensation for dealing with revolving tenant situations. Sometimes my prospective roommate tenants squawk when they read box A at the time they sign the rental agreement. They are justifiably concerned because they realize, just as I do, that replacement roommates are inevitable. In this event, I will either agree to check box B, or I will give the tenant my verbal assurance that I will allow replacement roommates when and if they make a written request. I acknowledge that my verbal representations are in conflict with the rental agreement, but I ask the tenant to trust me, and they always do. I tell the tenant that someone is going to have to trust somebody and it might as well be “you trusting me.”

What happens when Tenant 1 finally decides to vacate, and Tenant 3 wants to stay in the apartment and replace Tenant 1 with Tenant 4. In this real estate environment, the current rent will most likely be at or above market. You have the right to gain possession of the apartment or to raise the rent to market. If the rent is at market, I usually create a new tenancy and a new rental agreement with Tenants 3 and 4 as original occupants at the old rent. When you do this, you conduct your affairs just like you would at the inception of any tenancy. You request and receive the applicants’ information, run credit checks, create and ratify rental agreements and do anything else associated with a new tenancy. If you are a fee-based management company, you should also take this opportunity to charge your owner a leasing commission. If the rent is below market, you should do the same as above but stipulate the higher, market rent in the rental agreement. Whenever you raise the rent or seek possession of an apartment, pursuant to the Costa-Hawkins Act and a 6.14 Notice, you should run your paperwork by an attorney to make sure that you are in conformance with the Rent Ordinance and that you are utilizing the proper documents, service and any other relevant documents. Significant rental increases and/or seeking possession of an apartment are big deals in San Francisco and should be done with the utmost caution.

One should be mindful of the costs and benefits associated with renting multiple-bedroom units to three, four and even five single adults. You do not have to rent your unit to four or five single adults just because the unit has three or four bedrooms. You can rent the unit to a young couple with a child or a couple of single people with a home business. In this challenging rental market, I often see owners of large flats packing multiple single people into a unit. I presume that the owners do this because they get more rent than they would if they rented the unit to a tenant with a different profile or to fewer total occupants. Like all things in life, there is a trade off—there are real costs associated with placing multiple single people in a rental unit. First, you will be forced to deal with the inevitable revolving roommate scenarios mentioned earlier. Do not underestimate the amount of time and energy you will expend policing and documenting revolving tenancies. Second, you will run the real risk of never getting possession of your unit again. Remember, multiple occupants are legally entitled to replace their vacating roommates as long as the unit continues to be occupied by at least one original occupant. If you have four original occupants when the rental market starts to heat up, you will have a dramatically lower probability of getting tenant turnover and, therefore, market rent in the future. One of your four original tenants might very well decide to grow old in your unit. You should not blame rent control if this happens to you. You made the conscious decision to rent to multiple occupants, for you decided that more rent today is worth the revolving roommate issues and a reduced probability of tenant turnover in the future. I personally do not think that the extra rent is worth the cost.

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. Marc Wilson has been managing and selling San Francisco apartment buildings for over 15 years. Please send your questions concerning property management issues to Marc Wilson at 1699 Van Ness Avenue, San Francisco, CA 94109. He can be reached at 415-229-1275. Copyright © 2004 by San Francisco Apartment Magazine. All Rights Reserved.