2710 Sutter Ventures, LLC v. Millis: Tough Fall for the Ellis Act

The Ellis Act is often described as allowing property owners in rent-controlled jurisdictions to “go out of business.” It allows landlords the right to exit the residential rental market. In that respect, it commands public entities not to compel property owners to offer or continue to offer residential units for rent. To achieve this purpose, the Ellis Act contains explicit boundaries, leaving areas for local control only insofar as they are consistent with its terms. For instance, the Ellis Act does not “diminish or enlarge” the authority of cities to “mitigate the adverse impacts of displacement.” Courts have interpreted this to mean that local jurisdictions can require a “reasonable” relocation assistance payment upon invoking the Act, but not one that imposes a “prohibitive price” on the exercise of the right.

This past August, the Court of Appeal filed an opinion that represents a major setback for Ellis Act jurisprudence on the way out of business. Originating out of San Francisco, the Court of Appeal in 2710 Sutter Ventures, LLC v. Millis reviewed the sustaining of a demurer to an unlawful detainer complaint without leave to amend. The landlord had complied with all procedures dictated in the Ellis Act (as implemented by the San Francisco Rent Ordinance). The landlord had also paid all relocation assistance due to “tenants,” as provided in the landlord’s notice.

Previous case law reversed a trial court decision finding a violation where the landlord paid relocation assistance only to adult “tenants” of a dwelling, instead of also paying a minor child. After all, the ordinance in effect at that time required payment to “tenants” and a minor was not a “tenant,” either as defined by the ordinance or as understood under the common law. San Francisco responded to the decision by expanding the scope of recipients to all “eligible tenants,” defined as “any authorized occupant regardless of age.” The Court of Appeal in 2710 Sutter Ventures, LLC held that the failure of the landlord was not that it failed to pay any “eligible tenant,” but that its notice of termination only stated that “tenants” were entitled to receive the payment, rather than “eligible tenants” as set forth in the San Francisco Rent Ordinance. Thus, the Court held that the Landlord’s notice was defective.

The ability of a city to require the payment itself is quite different than the ability to require notification of that payment as a condition of terminating a tenancy. Previous case law has not supported this authority. For instance, in Johnson v. City and County of San Francisco, the Court held a landlord could not be required to include the amount of notice they believed to be due, as this guesswork put a prohibitive price on the ability to exit the rental market. 2710 Sutter Ventures, LLC, however, suggests that a city can adopt an ordinance that conditions successful withdrawal on compliance with notification of this ordinance regardless of whether it is valid.

2710 Sutter Ventures, LLC did not analyze whether expanding the payment standard to an undefinable class of “authorized occupants” would impose a prohibitive price, and thus its determination about the notification requirement was, at best, missing a step. But whether or not that payment requirement was valid, it upends Ellis Act preemption to give to a city the authority to condition the withdrawal from the rental market upon requirements not found in the Ellis Act itself. After all, the Act is primarily meant to limit cities, not property owners, in the process of exiting the market. As of this post, 2710 Sutter Ventures, LLC has petitioned for review with the Supreme Court.

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This Ellis Act information is provided by Real Estate Attorney Justin Goodman. Justin is one of San Francisco’s leading authorities on the use of the Ellis Act. If you are curious about learning more about, or using, the Ellis Act, you should Contact the experienced real estate attorneys of Zacks & Freedman, PC for guidance.