How Does the Recent Amendment to the Ellis Act Affect Property Owners’ Re-Rental Rights in San Francisco?

On July 18, 2022, Section 37.9A of the San Francisco Administrative Code was amended to impose more restrictions on owners’ rights to re-rent a withdrawn unit.

Background:

The Ellis Act (codified in Section 7060, et seq. of the California Government Code and implemented locally in San Francisco under Sections 37.9(a)(13) and 37.9A of the San Francisco Administrative Code) allows property owners to exit the residential rental market. However, this also creates limitations on an owner’s ability to re-rent withdrawn units. First, owners may not re-rent any unit for two years after the withdrawal of that unit. Second, owners must give the displaced tenants a right of first refusal if the tenants’ unit is re-offered for rent within 10 years following the Ellis Act withdrawal. Third, the amount of rent that can be charged during the first 5 years following the withdrawal of the unit may not exceed the rent in effect at the time of the filing of the Ellis Act Notice of Intent to Withdraw (plus any increase authorized by the Rent Ordinance). Owners who do not comply with these rules face punitive damages equal to six months of the contract rent, as well as actual damages.

New Law:

On January 1, 2020, the Legislature passed AB1399, amending the Ellis Act. One part of that amendment provides that an owner may not “decline to make a written re-rental offer to any tenant or lessee who occupied a unit at the time when the owner” filed the Notice of Intent to Withdraw (owner-occupied units excepted). The amendment provides that the date of withdrawal for the entire property as a whole is the latest termination date of any unit at that property. This means that a claim by any one tenant to extend his/her termination date will extend the date of withdrawal for every unit at the property. These rules had not been implemented locally in San Francisco until the July 18, 2022 amendment to Section 37.9A.

San Francisco’s local implementation provides that if any unit is reoffered for rent during the 10 year-period following the withdrawal of the units, the entire property must be returned to the rental market. The two exceptions to that rule are: (i) a unit that was the principal place of residence of any owner or owner’s family member at the time of withdrawal, provided that it continues to be that person’s principal place of residence when the units are re-rented; or (ii) a unit that is the principal place of residence of an owner when the units are returned to the rental market, if it is the owner’s principal place of residence at the time of re-rental. In addition, if the owner vacates the unit within 10 years from the date of withdrawal, the owner shall, within 30 days of vacating the unit, offer to re-rent the unit if the foregoing exceptions do not apply.

This amendment is likely to generate disputes among owners of buildings owned as Tenancy-in-Common (“TIC”). Certain TIC owners keep their San Francisco property as a “pied-a-terre” or for the use of guests and family members. It is not unusual for owners to live abroad for extended periods of time while keeping their San Francisco property vacant based on their intention to return to San Francisco. Put simply, some owners do not want to be landlords. These owners may now be compelled to re-rent their unit if any owner in their TIC building decides to return their unit to the rental market during the ten year-period following an Ellis Act eviction. Therefore, TIC Agreements should be carefully drafted to address any agreed-upon limitation on re-rental rights following an Ellis Act eviction. TIC buyers should carefully review the TIC Agreement before buying a TIC unit that was withdrawn from the rental market to confirm that the unit will meet their intended use.

Ironically, this new amendment will also likely further limit the number of rental units in the City. California added the amendment in response to the decision City of W. Hollywood v. Kihagi (2017) 16 Cal.App.5th 739, where a withdrawing landlord began offering withdrawn units for market rate rents as soon as the individual constraints expired. Certain legislators regarded the landlord as exploiting a loophole, but the effect of the amendment is that more units will stay off of the market longer. Well-meaning though it may have been, the effect of this amendment will likely be contrary to the goal of its proponents.

This Ellis Act information is provided by Real Estate Attorney Gael Bizel-Bizellot. Gael is one of San Francisco’s leading authorities on the use of the Ellis Act. If you are curious about learning more about the Ellis Act, or about the application of Section 37.9A of the San Francisco Administrative Code on your property, you should Contact the experienced real estate attorneys of Zacks & Freedman, PC for guidance.