Daily Journal Features Zacks, Freedman & Patterson Takings Case

The Daily Journal featured a Zacks, Freedman & Patterson, PC case – San Francisco SRO Hotel Coalition v. City and County of San Francisco (2018) – making an argument for publication of the Court of Appeal case about the application of an injunction against a change-in-use regulation that appeared likely to effect a taking without just compensation.

The Plaintiffs in SRO Hotel Coalition operate buildings with residential units offered for tourist or transient use. Plaintiffs were permitted by existing law to run their hotel businesses, offering tourist/transient rentals of these “SRO units” (i.e., small hotel rooms that typically lack a private kitchen or bathroom, similar to a college dormitory room) for an amount of time greater than 7 days but fewer than 32 days. At 32 days or more, the occupant would become a “tenant” under the Rent Ordinance, and the nature of the business would fundamentally change from “hotel business” to “regulated residential landlord”.

The trial court denied the plaintiffs’ request for a preliminary injunction against the operation of this 2017 amendment to the Hotel Conversion Ordinance, on the basis that it had not established a “vested right” and therefore had not demonstrated a likelihood of prevailing on the merits.

The Court of Appeal reversed, with instructions to evaluate a balancing of harms (the next prong in a preliminary injunction analysis), as it had found a vested right to continue operating the existing business (tourist/transient rental). After all, while local governments may change existing uses, under controlling case law, “the local government was required to either pay compensation or provide a reasonable amortization period for the business owners. The 2017 Amendments do neither. True, they do not require plaintiffs to shut their doors completely. But they do, on their face, require owners of SROs to forego more classically styled hotel rentals in favor of more traditional tenancies. This changes the fundamental nature of their business, by making them landlords rather than hotel operators”.

The Court of Appeal noted that rent control laws have traditionally survived takings claims. However, “the issue here is not the application of rent control to an existing landlord-tenant business; it is a forced change in the nature of the business without compensation or a reasonable amortization period”. (While the Court of Appeal was silent on this issue, it may also be worth noting that SROs are the one kind of “accommodation” that the Ellis Act does not allow landlords to withdraw from leasing, such that compelled residential rental to permanent occupants is also tantamount to forcing someone into a business they could not escape.)