San Francisco “Tenant Buyout Agreements”

San Francisco now regulates “Buyout Agreements”, which it defines as “an agreement wherein the landlord pays the tenant money or other consideration to vacate the rental unit”. The most recent annual data on registered buyout agreements for 2016 is available here.

Required Forms:

Background and Purpose:

According to the regulation itself, “Anecdotal evidence indicates that many buyout negotiations are not conducted at arms-length, and landlords sometimes employ high-pressure tactics and intimidation to induce tenants to sign the agreements. Some landlords threaten tenants with eviction if they do not accept the terms of the buyout… These tactics sometimes result in tenants entering into buyout agreements without a full understanding of their rights and without consulting a tenants’ rights counselor”.

In an effort to increase fairness in these discussions, the City has not only mandated comprehensive disclosure and format requirements for Buyout Agreements, but it has also expanded the substantive rights of tenants to change their minds or even to sue their landlords for non-compliance.

Prerequisites to Negotiation:

Prior to engaging in any Buyout Agreement negotiations, a landlord must first provide the tenant with a Pre-Buyout Negotiation Disclosure form. The disclosure form apprises tenants of the their rights under the Buyout Ordinance, including their right not to enter an agreement, their right to rescind an agreement for up to 45 days after entering one, and their ability to consult a number of tenants’ rights organizations. It also lets the tenant know who has decision-making authority for the landlord and who will be conducting the negotiation.

After providing the disclosure to the tenant, but before actually commencing negotiations, the landlord must also complete and file a Declaration of Landlord Regarding Service of Pre-Buyout Negotiations Disclosure Form, letting the Rent Board know that the Landlord has notified tenants of their rights.

Case law has upheld landlords’ rights to communicate offers to pay for possession of rental units, against previous content-based restrictions by the City. However, while the San Francisco Apartment Association sued the City and County of San Francisco over the Buyout Ordinance in 2015 (alleging, among other things, that it constitutes prior restraint on speech and gives tenants “veto power” over landlords communicating an offer), the U.S. District Court (N.D. Cal.) determined that the Buyout Ordinance did not “preclude or limit any speech after the minimal disclosure/certification requirement has been met”.

This disclosure process is therefore crucial, because the Buyout Ordinance gives tenants the ability to sue landlords for noncompliance.

Negotiating for Possession:

Once a landlord has served tenant disclosures and filed the declaration with the Rent Board, the negotiations can begin. The Buyout Ordinance charges the Rent Board with the task of cataloging Buyout Agreements by dollar amounts and neighborhoods (akin to a multiple listing service for real estate sales).

However, while Buyout Agreement have many formalities, they do not mention the number of bedrooms or the existing, rent-controlled rental rate (let along any other extrinsic circumstances of the negotiation, like threats of a lawsuit), rendering the data relatively worthless as a metric.

The course of these discussion therefore tends to track the old adage that “something is worth what a person is willing to pay for it”. Some negotiators (on both the landlord’s and tenant’s side) refer to the statutory relocation assistance payment for non-fault evictions as a baseline. Of course, there can sometimes be significant upside in not having to invoke a “just cause for eviction” to regain possession. For instance,

  • Compared to an owner move-in eviction, a landlord would not be obligated to live in the property.
  • A “Buyout Agreement” is a “voluntary vacate”, so the rental unit may be immediately re-rented at market value.
  • Under certain circumstances, and where only a single tenancy with no elderly, disabled or catastrophically ill tenants entered a Buyout Agreement, a landlord may preserve the ability to convert the property to condominiums.

This potential upside and flexibility will often justify a landlord paying some premium over the standard, statutory relocation assistance payment for non-fault evictions.

Formalities of the Buyout Agreement:

The formalities of a Buyout Agreement are spelled out in lengthy detail in the Rent Ordinance itself. They include the meticulous disclosure of tenants’ rights, including the right not to enter a buyout agreement in the first place and the right to rescind one after the fact. The tenants must also specifically initial sections of the Buyout Agreement acknowledging their “status” (as elderly, disabled or catastrophically ill), which is a bargaining chip in the context of condominium conversion rights. The Buyout Agreement must then be filed after the tenant’s right to rescind has expired.

Rescission by Tenants:

Perhaps the most severe component of the Buyout Ordinance is that a tenant has the unilateral right to rescind a Buyout Agreement (i.e., return any funds received and walk away from the deal) for 45 days after signing. This creates a number of complications. Can tenants vacate earlier? What happens if they vacate earlier than 45 days and then rescind? What do landlords do if they pay some or all of the consideration and the tenant rescinds without returning the money?

And these are the problems that result when a landlord does everything right. A Buyout Agreement that does not satisfy all the required formalities may be rescinded by the tenant at any time! A tenant has four years to sue a landlord for violations of the Buyout Ordinance, even after they have vacated and received everything they bargained for.

Special Problems with the Buyout Ordinance:

The Buyout Ordinance is still young, but similar regulations have already come online in Santa Monica, Berkeley and Los Angeles. New problems are emerging in the practice area all the time, so until the law of San Francisco Buyout Agreements begins to settle, landlords should be particularly cautious of having these discussions or entering agreements without the advice of counsel.

For instance, while tenants may provide notice of terminating their tenancies, can landlords grant any concessions (like returning the deposit without deductions), or is that consideration in exchange for vacating? The Buyout Ordinance specifically exempts “the settlement of an unlawful detainer” from the ambit of the regulation (as possession is the object of that lawsuit). But can a landlord settle other kinds of disputes (like a tenant’s lawsuit for habitability defects) without complying with the formalities of the Buyout Ordinance? What happens when a tenant approaches their landlord with an offer first? And what happens when the tenant misconstrues a response from the landlord and insists there’s a contract – one that isn’t in writing and therefore doesn’t comply with the Buyout Ordinance?

How Do I Negotiate for Possession While Complying with the Law?:
Landlord-tenant law in San Francisco changes all the time. Landlords with the best intentions can incur liability for honest mistakes in complying with the formalities of the Buyout Ordinance. Further, not all of a landlord’s goals will necessarily be achieved by “checking all the boxes” in a Buyout Agreement.

At Zacks, Freedman & Patterson, PC, we have the experience, and we use it to solve problems. The content on this website is provided for general information and is not intended to constitute legal advice. If we can be of any assistance with your buyout negotiations, please call 415.956.8100 or email Justin A. Goodman at justin@zfplaw.com to ask about a consultation.

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