Reading Legislative Intent into Costa-Hawkins: Burien, LLC v. Wiley, Cal. Court of Appeal, 2nd Appellate Dist., 5th Div. 2014

“[T]he court is not prohibited from determining whether the literal meaning of a statute comports with its purpose or whether such a construction of one provision is consistent with other provisions of the statute.”

In Burien, LLC, the Court of Appeals of California, for the Second District, dealt with the Costa-Hawkins exemption from rent control for dwelling units with new certificates of occupancy.

As followers of Costa-Hawkins.com know, the general rule for periodic (“ongoing”) tenancies in California is that the landlord can increase the rental rate to market rate on (usually) 60 days’ notice. A dozen cities in California provide an exception in the form of rent ordinances. In those cities, “covered units” have rent increase limitations that generally key rent increases to increases in cost of living.

In 1996, California enacted the Costa-Hawkins Rental Housing Act, which established exemptions for certain categories of units that local rent control laws would not inhibit. Specifically, Costa-Hawkins exempts units from rent control that have a certificate of occupancy issued after February 1, 1995, that were already exempted under local rent control when Costa-Hawkins came into effect, or where the dwelling unit is “alienable separate from the title to any other dwelling unit”. (The latter was amended in 2001, to impose further restrictions on condominium units.)

The court in Burien, LLC addressed a novel issue where an apartment building, protected against rent increase limitations under the Los Angeles Rent Stabilization Ordinance, was later converted into condominium, with a new “certificate of occupancy” based on a “change in use”, in 2009

Of course, the apartments already had a certificate of occupancy. The defendant in Burien, LLC had been living in the building since 1981. However, when the landlord purchased the building, converted it into condominiums, and obtained a new certificate of occupancy in 2009, it asserted that the newly issued certificate fell within the Costa-Hawkins exemption for dwelling units with “a certificate of occupancy issued after February 1, 1995”. (Cal. Civ., §1954.52(a)(1).)

The landlord’s argument sought to assert the exemption’s semantics over its substance. It was, of course, technically accurate that, while the apartment in question was previously rent-controlled from 1981 through 2008, as the landlord obtained a new “certificate of occupancy” in 2009, the new certificate was clearly issued after 1995. However, after acknowledging that it was authorized to disregard plain language in favor of harmonizing the exemption with its broader purpose, the court considered that, e.g., the rent ordinances of Los Angeles, Oakland and San Francisco specifically extend the exemption only to new certificates of occupancy, and concluded that it was reasonable to apply the exemption only to the first certificate of occupancy that created new residential units. In other words, the California Legislature meant for the §1954.52(a)(1) exemption to apply to either new construction or repurposed buildings. In either case, the landlord is increasing the supply of residential dwelling units, and she should be rewarded for doing so. But a mere “change” in use – from one kind of residential unit to another – does not achieve the goal of the exemption.

And this legislative intent was reaffirmed by the 2002 Amendment to Costa-Hawkins. Prior to 2002, wily landlords were using the third exemption from rent control in Costa-Hawkins – for separately alienable units – to obtain all the permits for conversion of rent-controlled apartment buildings to condominiums, availing themselves of the “separately alienable” exemption, but never actually alienating – i.e., never actually selling the condominiums to owner-occupiers, as an affordable housing alternative. They achieved the best of both worlds – multi-unit dwellings, occupied entirely by renters, but without rent increase limitations.

The California Legislature closed this “loophole” in a 2002 amendment to Costa-Hawkins, by withholding the exemption from condominiums, unless the condominium unit was sold separately to a “bona fide purchaser for value” or else the subdivider sold every other unit except one, and she lived in that unit for at least a year.

The court in Burien, LLC stressed that the 2002 amendment would have no purpose if a landlord merely had to obtain a pretextual “certificate of occupancy” based on a condo-conversion: if a landlord received a new certificate of occupancy, based on a change in use, she would necessarily meet the exemption under the landlord’s interpretation of §1954.52(a)(1), without either the bona fide purchaser requirement or the one-year-residence requirement of §1954.52(a)(3)(B)(ii).

Costa-Hawkins is not a model of clarity; but the Court of Appeals elucidated the first exemption, by holding that a certificate of occupancy must be the first certificate of occupancy that approves a building for its first residential use.

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Burien, LLC V. Wiley (2014) 230 CAL. APP. 4TH 1039

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San Francisco’s Proposition G: “Anti-Speculator” Transfer Tax on Multi-Unit Property

San Francisco’s Proposition G would impose a five-year descending transfer tax rate on multi-unit residential property in an effort to deter speculation. Tenants cannot be evicted merely because building is sold, so the aim of this measure is to stop the use of the Ellis Act to terminate tenancies and sell owner-occupied Tenancy-in-Common units. Proposition G follows San Francisco’s recent effort to frustrate use of the Ellis Act by significantly increasing the statutory relocation assistance payment. San Francisco has also attempted to undermine TIC sales directly by eliminating contractual exclusive rights of occupancy.

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Federal District Court Overturns Enhanced Ellis Act Relocation Payments

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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.

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San Francisco Eviction Assistance Unit Allows Sheriff’s Department To Assist the Community

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The SF Examiner explores the work of the “Eviction Assistance Unit”, which allows the Sheriff’s Department to interact with tenants to be displaced, to provide them with housing resources. As the Examiner explains, the unit was created by former Sheriff Michael Hennessey, following a tradition of San Francisco Sheriffs who look for alternatives to mechanically carrying out their duty to evict tenants. (The famous example was the refusal of former Sheriff Richard Hongisto to evict a large number of occupants from the International Hotel in the 1970s. This resulted in his going to jail for contempt, and it generated pro-tenant sentiment that led to the adoption of eviction control protections in the Rent Ordinance.)

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San Francisco Legislative Update (Archives): Daly Amendment to the Rent Ordinance

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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.

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Residential Rent and Eviction Control Resources