Procedures for Subtenants

I know that I should not have any communication with my tenant’s subtenant, but the tenant gave the subtenant my email address and she has been emailing me to fix things in the unit, as per the original tenant’s request. What should I do? 

Three years ago, in response to divergent opinions about subtenancies, SFAA engaged industry professionals to study and analyze treatment of subtenants. The committee, consisting of attorneys, property managers, and SFAA staff members, held a series of meetings, consulted with senior Rent Board staff, and interviewed some of the Rent Board Commissioners. At the end of this long process, the committee voted to recommend that SFAA members not communicate with subtenants in any way outside of an emergency situation. In addition, members are now advised to no longer issue the “6.14” or other objection notices, or to process subtenant applications.

The committee’s findings have been published in this magazine on numerous occasions but deserved to be summarized in response to this important question. The Costa-Hawkins Rental Housing Act, passed in the mid-1990s by the state legislature, became fully effective in 2000. This law generally permits owners to raise rent beyond rent control limitations when the last original occupant no longer permanently resides in the unit, and any subtenant in possession took occupancy after December 31, 1995. Costa-Hawkins does not require service of any notice.

Some industry professionals still believe that service of a notice recognizing the subtenancy, and informing the occupants of the right to raise rent when the last original tenant vacates, is better practice. Indeed, service of notice may allow landlords to accept rent from the subtenant, to name them on a lease, to process their application (and, in some instances, to deny the master tenant’s request to move in a particular subtenant), and to otherwise communicate with subtenants about “fixing things in the unit.” However, the committee found pitfalls associated with this practice that is briefly summarized below.

First, recognition and approval of a subtenancy prevents the landlord from evicting the subtenant when the last original tenant vacates. If no relationship is established with the subtenant, the landlord may make the argument that the subtenant is an unapproved holdover occupant, and thereby seek to recover possession of the rental unit when the last approved tenant leaves under the applicable provisions of state and local law permitting these types of evictions.

Second, recognition and approval of a subtenant destroys the landlord’s right to decontrol a unit under Rent Board Rules and Regulations Section 1.21. Section 1.21 allows an owner to impose an unlimited rent increase when the last original tenant no longer uses the rental unit as his or her principal, or primary, place of residence, provided that there is no lawful subtenant in possession. A subtenant who has been served a notice or otherwise recognized by the landlord is deemed to be a subtenant in lawful possession, so even if the master tenant lives in Florida but continues to pay rent on the unit, decontrol under Section 1.21 will be denied.

Third, recognition of a subtenant may lead to making that subtenant a co-tenant, meaning the landlord accepts rent from the subs, places them on the lease, and otherwise treats them in the same vein as the master tenants. These actions often lead to an inability to decontrol the unit under Costa Hawkins when the last original occupant vacates. The Rent Board, when hearing a challenge to Costa Hawkins rent increases, will consider whether the landlord placed the subtenant on the lease, ran a credit check on the subtenant, accepted repair requests from the subtenant, or otherwise maintained a relationship with the subtenant. If the answer is “yes, a relationship existed,” then the likelihood of succeeding with the rent increase is seriously diminished.

Fourth, if the landlord cannot raise rent under Costa Hawkins because a relationship with the subtenant was established, the only avenue remaining is a Rent Board Rules and Regulations Section 6.14 increase. Under current Rent Board policy, as adopted in early 2009 by senior Rent Board staff, an owner seeking to impose an unlimited rent increase under Section 6.14 must show both that the master tenant has physically vacated and that he has also “legally” vacated. The “legally vacate” standard is defined as severing all meaningful ties with the rental unit and essentially foregoing the ability to return. Costa Hawkins imposes no such mandate, and instead only requires that the master to have physically vacated. If the master still pays rent from Florida, or has his furniture in the unit (referred to amongst Rent Board junkies as the “plant in the living room”), then a 6.14 rent increase will most likely be denied.

Moreover, in order to succeed with a Section 6.14 increase, the landlord must show that notice was served on both the master tenant and any affected subtenants within a reasonable period of time (usually a 60-day period) after the subtenancy began. In addition to establishing proper and timely service, the owner must demonstrate that an appropriate Section 6.14 notice, in terms of content and disclosure to the occupants, was used. (Since 2001, there has been no Section 6.14 notice officially recognized by the Rent Board, so no one can represent with certainty how such a notice could be framed.) Tenants may, and often do, defeat Section 6.14 increases by arguing that the landlord waited too long after she knew, or should have known, that the subtenant moved into the unit. Another problem arises when one subtenant was served, but not a subsequent one. Finally, the Rent Board will not define how these notices should be “served,” so the entire process is ill-defined.

Fifth, creating a relationship with your subtenant and jeopardizing your rights under Costa Hawkins subjects you to the jurisdiction of the Rent Board. Many legal practitioners prefer to adjudicate subtenancy matters in superior court, where there is subpoena power and the ability to gather evidence in support of a position, as opposed to the Rent Board where no pretrial discovery is permitted. Thus, by availing yourself of the Section 6.14 process, and establishing a relationship with your subtenants through the notice procedure, you may become beholden to the Rent Board’s adjudicatory process, as a state superior court will usually defer decision-making authority to this agency to enforce its subtenancy rent regulation. Costa Hawkins, on the other hand, is a state law, and landlords can file an action in superior court to determine whether it applies to a particular circumstance.

Sixth, the very notion of restricting and prohibiting subletting is questionable. Two local laws generally permit subletting: (1) the one-for-one replacement statute allows a master tenant to replace a departing co-tenant with a new roommate; and (2) tenants may move in certain family members subject to certain overall occupancy restrictions. The Rent Board’s processes for accepting or denying a subtenant application do not give much discretion to the landlord, and provide almost no discretion if the master tenant represents that the subtenant will not be rent responsible. As such, creating a relationship with the subtenant by engaging in the application and selection process really has no upside, but, as noted above, is fraught with downside.

Seventh, the Rent Board subtenancy regulations state that a landlord may reserve the right to raise rent at a later time after the last original occupant vacates by serving notice to this effect. Under Costa Hawkins, an owner must serve the rent increase promptly after learning of the last original tenant’s departure. The California appellate courts have refuted the Rent Board’s regulation allowing landlords to reserve this right, stating that an owner cannot sit on the sidelines and wait for the market to improve before serving the rent increase notice. In other words, the strictures of Costa Hawkins have been adopted whereas the Rent Board’s rule of permitting a delayed response has been rejected.

In sum, we generally ignore subtenants because of a desire to refrain from elevating the subtenant to a co-tenant status, which could adversely affect the owner’s rights under Costa Hawkins. Serving notice, and thereafter communicating with the subtenant about repair issues and other aspects of the tenancy, invites the Rent Board into the subtenancy arena. In the opinion of the SFAA, the state legislature now permits us to treat the Rent Board’s subtenancy rules like the annoying neighbor who constantly shows up uninvited: just don’t answer the door!

DW

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