Last week, the United States District Court for the Northern District of California invalidated an amendment to the San Francisco Rent Ordinance requiring an increase to the existing relocation payments owed to tenants in non-fault evictions pursuant to the Ellis Act. The new, enhanced payments were calculated based on market rate differentials – the difference between the tenant’s rent-controlled rental rate and the cost of a comparable unit on the open market. In some cases, this number reached six figures per unit.
Finding that the new law constituted a monetary exaction, prohibited under the Takings Clause without the payment of “just compensation”, Judge Breyer found that there was no “essential nexus” between the right to change the use of property (i.e., to no longer allow rentals) and there was no “rough proportionality” between the costs a displaced tenant faced on the open market and the direct consequences of a decision by the landlord to go out of the rental business. (By contrast, challenges to the previous relocation payment scheme, requiring a payment based on the cost of first months’ rent, last months’ rent, and security deposit at a new rental unit, have been upheld as comporting with the Ellis Act.) The City is expected to appeal the decision to the 9th Circuit.
Ordinance 57-02, also known as the Daly Amendment to the Rent Ordinance, was an effort to conform landlord-tenant interactions with the price ceiling and eviction control regulations of the Rent Ordinance. Among other things, it required that a landlord needed to have a present intent to evict before entering any buyout agreement. (The goal was to avoid the “Ellis bluff” – or the threat of evicting pursuant to the Ellis Act to urge a tenant to enter a buyout, where the landlord received the benefits of a vacated unit without the statutory constraints against re-renting that come with the Ellis Act.) It voided any waiver of tenants’ rights under the Rent Ordinance, unless the tenant had independent counsel and the waiver was approved by a court or a retired judge. And it imposed misdemeanor penalties for violations of these provisions.
The Daly Amendment was approved on May 2, 2002 and challenged shortly after by a group of landlords, tenants, and San Francisco real estate attorneys, as seen in the case Baba v. Bd. of Sup’rs of City & Cty. of San Francisco (2004) 124 Cal. App. 4th 504.
In Baba, Division Two of the First District Court of Appeal determined that the Daly Amendment violated several rights of both landlords and tenants. The prohibition against negotiating a buyout without a present intent to evict violated landlords’ speech rights for communications that, even if they were inherently commercial in nature, were not inherently false or misleading, and therefore deserved certain minimal protection. It determined that the requirement that tenants have independent counsel in entering court-approved settlement agreements violated their rights to self-representation in civil proceedings. Finally, it determined that the conduct that was the focus of criminal liability was speech – the regulations constituted content-based speech regulation.