Last but Not Lease
While rent can be increased to market rate when the last original occupant vacates, there are a few new things to consider with COVID regulations.
Q. The last original occupant of a three-bedroom unit gave notice. He noted that the remaining occupants (with whom I've never had contact) are neither interested in leaving nor signing a new lease. What should I do?
A. This is an important question in any era, but it has some additional layers in context of the pandemic. Of course, it is of vital importance that you’re monitoring your “last original occupant,” as their departure prompts your right to vacancy decontrol. Alive and well after the defeat of Proposition 21, the Costa-Hawkins Rental Housing Act allows a market rate increase in this circumstance, unless the other occupants find a way to frustrate your right to reset the rental rate.
And you need to be vigilant here. Pandemic law notwithstanding, landlords justifiably expect to receive rent in exchange for occupancy. But there are “waiver traps” here. A month-to-month tenancy is essentially a “contract by conduct,” which renews every month a tenant tenders (and a landlord accepts) a rent payment. Even if you could increase the rent, your acceptance of the rent-controlled rate from a subsequent occupant in the meantime arguably creates a “new” tenancy at the older rate.
At common law, the landlord gets to choose who he has a contractual relationship with. (This is all the more important where rent control is a personal, non-transferrable right.) But rent control overlays an uncommon regulatory scheme on top of the traditional landlord-tenant contract. Unless they are truly unknown and unapproved, the subsequent occupants have a bona fide right to possession whether or not their master tenant remains.
Hopefully, you have not accepted rent from the remaining occupants while asking them to sign a new lease. The better practice, when an opportunity for decontrol emerges, is to serve a statutory, 90-day notice of rent increase, and refuse to accept anything other than the new rental rate until your notice expires. You don’t actually need a new lease agreement with the subsequent occupants anyway; they inherit the original terms.
But you should be mindful of some other perils. First, California’s anti-price-gouging laws prohibit rental rate increases above 10% for 30 days following the declaration of a state of emergency. (And this year, we’ve seen declarations for the pandemic and for the devastating Northern California fires.) Second, San Francisco currently prohibits using rent increases to “coerce a tenant to vacate.” (Presumably, a market rate increase would be tenable, but the standard is uncertain and SFAA is currently challenging this vague expansion of the tenant harassment ordinance.)
A more practical approach: Your original occupant is still on the lease. He’s rent-liable unless and until you create a new relationship with the subsequent occupants he left behind and release him of liability. So... don’t. You’ll find an effective bargaining position in stressing that he’s on the hook for the increased rent that his former roommates will have to pay. This dialogue might broker a buyout agreement where he urges his friends to move out. Or it might result in a compromise on a rent increase where all parties stipulate to a lower-than-market increase in exchange for a waiver of claims and an agreement not to dispute the increase. This may keep you safe from the perils of exercising your rights while reducing your vacancy rate in a declining market.
Q. As a San Francisco rental property owner, what do I need to know about the unit registration legislation?
A. In December of 2020, the San Francisco Board of Supervisors passed a rent ordinance amendment that will require unit registration and licensing for all rental units in the city, including those that are owner-occupied. The Rent Board will be developing a form to use for this mandatory reporting, although the new 2021 SFAA Residential Tenancy Agreement will include a registration form template as an addendum. This is major legislation that will impact the industry in many ways. In particular, we will now have an accurate measurement of citywide vacancy rates and rent prices. Moreover, should vacancy control ever pass, the City will now have an infrastructure in place to determine future rents for vacated units.
Owners shall report the following information under penalty of perjury for each rental unit that is rented: (i) the name and business contact information (address, phone number, email address) of the owner or property manager; (ii) the business registration number for the unit; (iii) the approximate square footage of the unit, as well as the number of bedrooms and bathrooms in the unit; (iv) whether the unit is vacant or occupied, and the date when the last vacancy occurred or the current occupancy commenced; (v) the start and end dates of any other vacancies or occupancies that have occurred in the previous 12 months; (vi) the base rent for the unit in $250 increments, and whether the base rent includes utilities (water/sewer, refuse/recycling, natural gas, electricity, etc.); and (vii) “any other information” that the Rent Board deems appropriate. For owner-occupied units, you must report that it is owner-occupied but need not report anything further.
The timing for compliance is as follows: (1) For units in buildings with 10 units or more, this information must initially be reported to the Rent Board by July 1, 2022, updated by March 1, 2023, and further updated each year thereafter by March 1; and (2) in buildings with fewer than 10 units, including condominiums, the initial information must be reported by March 1, 2023 and updated by March 1 of each successive year. The Rent Board will create a database with this information and shall regularly generate reports analyzing citywide rents and vacancies.
Only owners who have substantially complied with these reporting laws shall receive a license and business registration number. Without a license, a landlord may not impose rent increases. The Rent Board annual fee assessed against every rental unit shall be appropriately increased to include the costs associated with administering this new program. The Rent Board Commission will begin meeting early in 2021 to discuss what “other information” should be required, so stay tuned for more excitement!
SFAA will be offering classes in 2021 on how to comply with this new law, and you will receive announcements about upcoming Rent Board meetings where the public may voice input concerning what additional information ought to be included in the annual reporting.
Q. How can I prepare for the possibility of a tenant testing positive for COVID-19 in my building? Is it my responsibility to inform the other tenants?
A. The coronavirus has thrust our community into unprecedent times. It has caused landlords to come up with solutions to novel issues. As anxiety over COVID-19 continues to grow, landlords have had to come up with practical solutions to protect themselves and the residents in their buildings. There are things a landlord should do when a tenant in a multi-unit dwelling tests positive for COVID-19.
It is important to communicate to all residents in the building when a tenant has been diagnosed with COVID-19. The coronavirus spreads quickly and is highly contagious. The other tenants should be informed of this as soon as possible so they can take necessary precautions.
Shortly after being notified of a tenant’s positive results, the landlord should clean and disinfect common areas of the building. This can be done by following recommended cleaning and disinfecting protocols as outlined by the Center for Disease Control (CDC).
When communicating this information to residents, be mindful of legal and privacy concerns. Do not disclose the identity of the tenant who has been diagnosed. Instead, send a general letter to all residents saying:
“[O]ne of the residents in this building has tested positive for COVID-19. Recommended cleaning and disinfecting protocol will be done to common areas. Please engage in appropriate safety practices recommended by the Center for Disease Control’s (CDC) website (cdc.gov) and from the San Francisco Department of Public Health’s website (sfcdcp.org/covid19).”
Even before a tenant notifies a landlord that they have been diagnosed, a general letter can be sent to all tenants to remind everyone to practice safety protocols as recommended by the CDC.
Some landlords have increased cleaning in areas such as lobbies, stairwells, laundry rooms, mailrooms, and reception areas. Such cleaning includes wiping down surfaces with disinfectant that are frequently touched such as door handles, mailboxes, and elevator buttons. Landlords can also choose to provide hand sanitizer in common areas of the property, implement policies and practices for social distancing such as no more than two persons from different households permitted in an elevator at a time, shut down common use rooms to minimize public gathering, and post signage in frequently used areas (like a laundry room) to encourage and ensure social distancing.
Informing tenants that you are taking active precautions could help reduce anxiety. The San Francisco’s Department of Public Health has created guidelines for multifamily residential buildings that could be used as a good resource.
The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Justin A. Goodman is with Zacks, Freedman & Patterson, P.C. and can be reached at 415-956-8100. Dave Wasserman is with Wasserman-Stern Law Offices and can be reached at 415-567-9600. Angelica Sandoval is with Fried & Williams and can be reached at 415-421-0100.