Feature
by Jeffery P. Woo
It would seem like the simplest thing in the world—a property owner and a tenant agree that a tenant will vacate his/her apartment in exchange for an agreed upon sum of money. But in San Francisco, this is not so. The subject of tenant buyouts is one that has engendered fear of lawsuits, inspired local legislation, and created confusion among property owners and tenants alike. In order to clarify the role of buyouts for you as a property owner, you need to fully grasp the legality of buyouts, the risks associated with trying to do a buyout, and the modern mechanics of a buyout agreement.
What is a Buyout?
In its simplest form, a buyout is an agreement between a property owner and a tenant. The tenant agrees to voluntarily vacate a rental unit in exchange for something (usually money, and often lots of it). For the purpose of this article, I am assuming that there is no breach of the tenancy by the tenant. A buy-out agreement should also contain a waiver of claims against the property owner for anything that arises from the tenant’s occupation of the premises, including claims of wrongful eviction. In addition, the buy-out agreement may also provide for the disposition of a security deposit, a reference for the tenant, a schedule for payments and an enforcement mechanism, among other things.
Buy-out offers generally come in two general forms. First, there is the offer of a buyout without any threat of eviction. For example, “If I give you a million dollars, would you consider vacating your apartment? If you’re not interested, enjoy your tenancy.” Second, there is the offer of a buyout with a good-faith threat of eviction. For example, “Hi, I’m your new landlord and a first-time home owner. I want to let you know that I plan on living in your apartment. I would prefer to work something out with you if possible. Would you consider discussing a voluntary buyout?”
Is a Buyout Legal?
The question of whether an attempt to buy out a tenant is an act of wrongful eviction arises out of a single sentence in the San Francisco Rent Ordinance that states, “It shall be unlawful for a landlord or any other person who willfully assists the landlord to endeavor to recover possession or to evict a tenant except as provided in Section 37.9(a) and (b).”
Some have taken the conservative view that approaching your tenant with a buyout offer is an act to “endeavor to recover possession” in violation of the Rent Ordinance. Under this view, a buyout can only be commenced with a tenant who makes the first offer.
I am of the view that the phrase “endeavor to recover possession” must be read to include a requirement that any effort to recover possession must be unilateral. I am aware of no decision, published or otherwise, that has found that such offers constitute acts of wrongful eviction. Furthermore, the conservative view would have the absurd result that offering a buyout without threat of eviction is illegal while offering a buyout with a good-faith threat of eviction is legal.
I believe that as long as there is either no threat of eviction, or a good-faith threat of eviction, a property owner may make an offer to buy out a tenant’s rights. A good-faith threat of eviction is one in which you factually have grounds to pursue under the Rent Ordinance, and you will pursue if the tenant refuses to negotiate a buyout. Thus, if you tell a tenant that you are going to Ellis Act a building if they fail to agree to a buyout, you must proceed with that Ellis Act eviction if the tenant refuses to negotiate. Your failure to do so will be evidence that you did not have a good-faith intent to do the Ellis Act eviction when you threatened to do so and, therefore, subject you to a claim of wrongful eviction.
Why Do a Buyout?
There are several reasons why property owners desire to enter into voluntary buyout agreements with tenants. First, if you do not have a lawful, just-cause reason to evict a tenant, the buyout is the only way you will be able to get a tenant to move if he agrees. For instance, if you own a 20-unit apartment building, but you do not live in any of the units, there will be no way for you to evict a tenant in order to allow your daughter to move in.
But even if you have viable and good-faith grounds for eviction, there are important reasons why you would hope to buy out the tenant. The most common types of evictions that are threatened as a part of buyout negotiations are Ellis Act evictions and Owner Move-In (OMI) evictions. Under the Daly amendments of 2002, if a Notice of Termination of Tenancy is served on the tenant under the Ellis Act or OMI, the Rent Board must be served with a copy of that notice. Upon receipt, the Rent Board will record restrictions on the title to the property as required by the grounds for eviction. For instance, if an OMI notice is served, the Rent Board will record a Notice of Title identifying a particular unit as the owner’s unit, and you will be required to live in the unit as your principal place of residence for three years, even if you subsequently work out a deal with the tenant. To avoid this problem, buying out a tenant before a notice of termination is served is often desirable.
Furthermore, the recent amendments to the condo-conversion ordinance sponsored by Supervisor Daly make buyouts of certain classes of tenants before a notice of termination is served very important. Under this amendment, if a property owner evicts a tenant who is either (1) 60-years old or older and living in the building for ten years or more or (2) disabled under the meaning of a very broad federal statute, that property owner is said to have done a “dirty eviction” and will be prevented from doing the fast-track condo conversion of his two-unit building. Fast-track condo conversion allows a two-unit building that has been fully owner occupied for at least one year to avoid the condo lottery and immediately qualify for condominium conversion. By buying out a tenant who would otherwise require a property owner to perform a “dirty eviction,” a two-unit property owner will preserve the right to do a fast-track condo conversion and, therefore, preserve a substantial part of the market value of his property.
Also, a “dirty eviction” also affects your ability to get through the condo lottery. The lottery has been split into 175 spaces and 25 spaces. Under the new rules, you must first win one of the 175 slots for conversion. If you’ve won one of those 175 slots, but you’ve done a “dirty eviction,” you get placed into the pool of 25. If at the time you are placed into the pool of 25, that pool has already been taken up by others who have done “dirty evictions,” you go right back into the lottery and have to hope that lightening strikes twice next year. Last, the price of a buyout will sometimes be less expensive than the amount of legal fees and required relocation expenses (if any) necessary to do a lawful, just-cause eviction.
How Much Does a Buyout Cost?
There is no fixed cost for a buyout, partly because there is no open, competing market for buyouts. While you may become aware that a tenant in a similar size apartment, paying a similar rent, was willing to be bought out for $10,000, this means virtually nothing when trying to determine what would be acceptable to your tenant. What will seem fair to a tenant will depend on the amount of rent he/she pays versus the current fair-market rental value of the unit. The greater the disparity is, the greater the amount of money that will be needed to buy out the tenant. For that reason, long-term tenants will cost more.
A tenant's financial resources will also be a critical factor not only in terms of the amount of the buyout but whether the tenant will be open to a buyout at all. A tenant who pays extremely low rent and has no savings and little income will often be completely unresponsive to buy-out inquiries because no amount of money will adequately cushion the perceived financial blow and suffering when he/she must move.
In addition, inertia and expectations will also greatly affect a tenant’s willingness to bargain. With long-term tenants, the inability to picture themselves living somewhere else will make negotiations difficult. If the tenant also is a pack rat, the inertia will be more pronounced.
On the opposite end of the spectrum from inertia are those tenants who want to sell their rights but have unreasonably high expectations about the amount of money they hope to receive in order to move out. At best, getting a tenant grounded in economic reality will be a challenge. However, often unreasonable expectations will force you to abandon the idea of a buyout.
From a property owner's perspective, the value of a buyout will first depend on what you plan to do with the property. Do you want to live in it or do you want to clear the building so that the units may be sold off as TICs? You will need to discuss with your real-estate agent the value of your property if it is sold empty versus subject to tenant rights. You will need to take into account any relocation expenses and attorney’s fees you will incur in performing the eviction versus the amount you will pay a tenant for the buyout. You will also need to put a price on the value of avoiding a use restriction on your building that an OMI or Ellis-Act eviction would bring.
Ultimately, a reasonable buyout price depends on how badly you want the tenant out versus how badly the tenant wants your money. As with any negotiation, the party that wants it more than the other usually ends up paying more or taking less, as the case may be.
How Does the Buyout Work?
The buyout agreement itself is relatively simple, but the mechanism for enforcement is not. What property owners have been rightly concerned about is having the tenant breach the agreement by not moving out when agreed. Because the Rent Ordinance does not provide grounds for eviction in the case of a tenant who breaches a buyout agreement, there has not been any way to force the tenant to physically move out in compliance with the agreement.
Common techniques used in the past to encourage compliance with such agreements have focused on either avoiding the payment of any money until the tenant handed over the keys and/or including a substantial liquidated-damages clause that held the tenant liable for a large sum of money if he/she breached the agreement. While helpful for encouraging compliance, these methods were not foolproof. Tenants would often balk about not getting any money upfront, which they were sure they needed in order to move. The liquidated-damages clause often provided little incentive because a tenant was judgment proof anyway.
What has developed out of this experience and is used by knowledgeable attorneys is a “John Doe“ complaint and stipulation. When an agreement is reached, the attorney files an unlawful detainer lawsuit against Jane/John Does 1 through 10. The complaint does not name the tenants and is probably defective in many ways. An agreement is also prepared that is known as a Stipulation for Settlement and Entry of Judgment. This stipulation provides the basic terms of how much the tenant is to be paid, the date of this payment, when the tenant is to vacate the premises, and a mutual waiver of liabilities. More important, the stipulation also provides that the tenant agrees he/she is Jane/John Doe; and should he/she fail to comply with the stipulation, then a judgment may be entered against the tenant, which will result in bringing the sheriff out to force the physical eviction of the tenant. Thus far, our office has had no difficulty in enforcing these types of stipulation when a tenant breaches.
Treason or Reason?
There are those whose philosophical beliefs prevent them from considering a buyout of a tenant’s rights (See “The Folly of Daly’s Buyout Amendments” by Marc Wilson in the February 2005 issue of this magazine). For most of us, property ownership is a business in which few can afford the luxury of allowing philosophy to factor into our business decisions. If you recognize that the city, for right or wrong, has bestowed on tenants a property right of sorts, then it makes infinite sense for property owners to seek to buy that right when there is value to be gained. My advice is not to wait for the day when our Board of Supervisors has a property-rights epiphany and to act in your own best interest, even if that means negotiating a tenant buyout.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. The information in this article is general in nature. Jeffery P. Woo is the principal of Woo & Associates. He can be reached at 415-705-6470 or woo@mypropertyrights.com. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.