Prop M

With the legal decision on Prop. M, what is the status of tenant buy-outs?

Our industry attorneys, John Baba and Clifford Fried, successfully sued the City over Proposition M, the Tenant Harassment Law, after its passage by the voters in November 2008. The Court’s decision, which may or may not be appealed, strikes the words “ulterior motive” and “without honest intent” from the statute’s preamble. Most importantly, we were able to invalidate the tenant attorney fee provision, which would have allowed tenants who successfully defended an eviction action from collecting their lawyer fees from the owner. This victory, while a pleasant surprise, did not eliminate the “anti-harassment” provisions.

Consequently, the rent law currently prohibits about 15 categories of activities that have been defined as unlawful harassment. Three of these grounds pertain to tenant buy-outs. Specifically, a landlord (or the agent, contractor, or subcontractor of the owner) may not: (1) influence, or attempt to influence, a tenant to vacate through fraud, intimidation or coercion; (2) attempt to coerce the tenant to vacate with offers of payments which are accompanied with threats or intimidation; and (3) continue to make buy-out offers after the tenant has notified the landlord in writing that no further offers are desired.

Taken together, these restrictions seek to dissuade owners from pursuing buy-outs by widening the scope of landlord liability should the buy-out transaction fail to materialize. Traditionally, buy-outs have been widely used by owners and willing tenants as a means for each side to gain a significant benefit. On the landlord’s end, a buy-out means no eviction history against the building, no expensive litigation, and a certain result. For tenants, ever increasing buy-out payments paved the way to first-time home ownership.

However, politicians and interest groups who rely on the tenant vote see buy-outs as a threat to their constituency. About six years ago, Supervisor Chris Daly attempted to restrict buy-outs, but our industry obtained a court ruling that gutted this legislation. During the past several years, an unofficial understanding existed between our side and the tenant communities that, if “sufficient consideration changed hands,” meaning the tenant was paid just compensation to vacate, there was no violation of the law notwithstanding a provision in the rent ordinance stating a tenant cannot waive rent control rights.

While not an exact science, factors that determine the sufficiency of consideration include the length of the tenancy (the longer one is in occupancy, the bigger the difference between market rent and what the tenant is paying), the age of the tenant, whether the tenant is disabled or vulnerable, and the benefit conferred upon the owner as a result of the buy-out. For example, a buy-out of a two-year tenancy in a 20-unit building may be valued less than the buy-out of a 30-year tenancy involving an elderly tenant with profound disabilities in a two-unit building where two new owners wish to bypass the condominium conversion lottery.

With Prop M on the books, buy-outs are still actively pursued and consummated. The difference today is that owners must exercise greater caution. If the tenant approaches you, the door is open and you can pursue talks. If you approach the tenant, do so only once or twice. If the tenant says no or does not respond, you may want to end the endeavor. Likewise, you should never threaten the buy-out candidate with imminent eviction should your final offer be rejected. Sometimes, if the tenant is represented by counsel, the attorneys can debate the tenability of eviction as a last resort, but owners should not utilize any means which could be interpreted as intimidation, coercion, or fraud. Thus, telling a tenant that he must accept your offer or you will issue an eviction notice is a terrible tact. Making the tenant believe that she will ultimately be forced out through some other process is likewise unacceptable. In sum, buy-outs are still attainable, but you must employ a strategy that is neither overly aggressive nor laden with ultimatums and animosity. So please, use common sense!

DW

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