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How Commercial & Residential Tenants Can Save Their Lease Post COVID-19

June 12, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

In a recent three-part blog article, Chris Evans discussed the moratorium on evictions and current rental obligations from a state, local, and judicial level. The blog article revealed that, among other things, San Diego tenants are protected from eviction until June 30, 2020. The article further clarified that landlords cannot initiate an unlawful detainer action until 90 days after Governor Newsom lifts the State of Emergency Declaration. These governmental actions have certainly provided some welcomed breathing room for tenants that have felt the immediate economic impacts of COVID-19 on their lease.

However, it is uncertain how much longer these orders will stay in place. As Governor Newsom recently announced, Californians have “arguably” flattened the curve, and we are in phase two of the State’s four-phase reopening plan. Additionally, San Diego County has begun permitting certain restaurants, retail businesses, and other parts of the economy to reopen. Given these new developments, commercial and residential tenants alike need to start questioning how they will protect their tenancy once the government lifts these tenant-friendly orders.

If commercial and residential tenants envision themselves on the losing side of an unlawful detainer action in the foreseeable future, they should look towards Sections 1179 and 3275 of the California Civil Code. Both statutes provide the court with broad authority to grant the tenant with “relief from forfeiture” of the lease agreement and reinstate the tenant to its former tenancy—even after the court has terminated the lease and issued a judgment in favor of the plaintiff-landlord. Indeed, tenants use both statutes as a “last hope” to save their tenancy. This article will discuss both statues in-depth and how tenants can utilize these statues in state and bankruptcy courts in a post COVID-19 world.

What Does “Forfeiture” Mean & When is a Lease Forfeited?

The term “forfeiture” simply means that the lease agreement is terminated, and the tenant has no further rights, obligations, or privileges under the contract. If the lease is “forfeited,” the tenant loses the benefits it expected to receive under the lease agreement, such as options to renew or extend its tenancy or its security deposit. A tenant forfeits a lease agreement in two ways.

First, the landlord declares a forfeiture of the lease agreement when the following four requirements have been satisfied:

The tenant breached the lease;

The landlord properly served the tenant with a notice to cure the breach within a reasonable time (i.e., a three-day notice to pay or quit);
The notice contains a provision that allows the landlord to declare a forfeiture of the lease if the tenant does not cure the breach; and
The tenant failed to cure the breach within the time permitted.[1]

Second, the lease agreement contains a clause that allows the landlord to declare a forfeiture if the other party breaches a covenant or condition of the contract. The landlord must show that the tenant’s breach was a “material breach” that affected the landlord. An unharmful or de minimis violation will not suffice.

For example, in Boston, LLC v. Juarez, the landlord was permitted to declare a forfeiture of the lease if the tenant violated any portion of the lease agreement. The court held that the tenant’s failure to obtain renter’s insurance, as required under the lease, did not amount to a “material breach” of the agreement. The court found that the condition to obtain renter’s insurance benefited the tenant, and its breach of this provision did not harm or impair the landlord’s rights under the lease agreement. As such, the landlord was estopped from declaring a forfeiture.[2]

A more common material breach is sub-leasing the property when the lease forbids sub-leasing or failing to pay rent. It is essential for tenants, primarily commercial tenants and landlords, to review their lease agreement to determine whether the contract contains a forfeiture clause.

Section 1179 of the Cal. Civ. Code

Section 1179 allows the court to grant “relief from forfeiture” if the tenant: (1) pays all past rent owed or cures its breach of the lease covenants; and (2) convinces the court that it will suffer a “hardship” if it is not restored to its prior tenancy.[1] Commercial and residential tenants often struggle to satisfy the second requirement, as courts find “hardship” in rare circumstances.

To determine whether granting relief is fair to both parties, courts engage in a three-factor test. The three factors are: (1) the nature and character of the tenant’s breach; (2) hardship of the parties if relief from forfeiture is/is not granted, and (3) whether the parties have acted in good and/or bad faith towards each other.[4] The three-factor test is certainly an extra hurdle that tenants must overcome when seeking relief. Nevertheless, courts have continuously granted relief from forfeiture when the circumstances are so dire that it would be unjust not to restore the tenant to their former tenancy.

For instance, in Hamid v. Janakus, the tenant, an 89-year-old man, fractured his hip and was placed in a nursing home for a month. The elderly tenant forgot to pay his rent while rehabbing his injury and did not have any family or friends to monitor his financial affairs. Moreover, the tenant resided at the property for over 35 years, and the property was under the city’s rent control laws.

The tenant argued that he would suffer undue hardship if he were required to move because he would be unable to find a residence at the same rental rate. The tenant further claimed that due to his poor health, it was nearly impossible for him to relocate to a new home. The court found the tenant’s argument convincing and granted the tenant relief from forfeiture, but on a conditional basis. Before retaking possession of the property, the tenant was required to pay all past rent owed and reimburse the landlord for his attorney fees.[5]

The holding in Hamid v. Janakus illustrates the classic “hardship” scenario where the tenant’s circumstances are so rare that relief from forfeiture is necessary to protect the tenant’s well-being. Fortunately, not every tenant has to make such a drastic showing to obtain relief under Section 1179. Courts will grant relief from forfeiture if the tenant has invested a substantial amount of money into the property and would lose their entire investment if evicted from the premises.

In Assi Super, Inc. v. Eight Oxfords Property Management, Inc., the tenant had invested over $1.8 million in upgrades to the property and recently signed a second loan to make further improvements to the property. The tenant secured the second loan with his residence. To make matters worse, the tenant had over 30 sub-lease agreements with small business owners that operated their business in a commercial unit within the property. Most of the small business owners resided in the U.S. under “Business Investment Visas” and were at risk of being deported if the lease was forfeited.

Given these unique circumstances, the court granted the tenant’s motion to be relieved from forfeiture. Had the court not granted relief, the tenant would have lost its entire $1.8 million investment in the property, and a majority of the sub-tenants would have been deported. Similar to the order in Hamid v. Janakus, the court granted relief from forfeiture on a conditional basis. Before the tenant could retake possession of the property, it was required to cure its breach and reimburse the landlord for its attorney fees and costs.[6]

The cases cited above provide commercial and residential tenants with two points to consider. First jand foremost, the examples show that courts will grant relief from forfeiture to protect the tenant’s overall well-being or prior investments. It is also clear that courts will consider the impact on third parties if relief from forfeiture is not granted. In Assi Super, Inc., the court’s ruling was based in part on the effects a forfeiture of the lease would have on the tenant’s sub-tenants.

Second, California courts have regularly granted relief from forfeiture on the condition that the tenant must reimburse the landlord for its attorney fees and court costs. Courts believe it is unfair to reinstate the tenant to their prior tenancy and leave the landlord without a remedy against the breaching tenant. In the court’s view, if the tenant is restored to their former tenancy, then, at the least, the landlord should be restored to its original financial position had the tenant not breached the lease agreement.

Seeking Relief Under Cal. Civ. Code § 3275

Section 3275 provides tenants with another path to seek relief from forfeiture of a lease agreement. Section 3275 serves the same overall purpose as Section 1179, however, there are two critical differences between the two statutes.

The most significant distinction is that Section 3275 applies to all types of contracts, whereas Section 1179 applies to strictly commercial and residential leases only.[7] As such, a contracting party can utilize Section 3275 in any contractual dispute where forfeiture is at issue. The other key difference is that Section 3275 requires the party to prove that their breach of the contract (or lease) was not “grossly negligent, willful, or fraudulent.”[8] A party seeking relief under Section 3275 must, in addition, show that it has satisfied the two requirements of Section 1179.[9]

Last, contracting parties can effectively waive both statutes in any given contract or lease agreement. The bankruptcy court in In re Art & Architecture Books of the 21st Century held that no California statute prohibits a party from waiving its right to relief from forfeiture under Sections 1179 and 3275. The court stated that parties to a “lease should generally be free to contract with each other upon such terms as they agree,” as long as the terms do not contravene public policy. In this case, the court found the right to seek relief from forfeiture benefited the party that waived such right and, thus, did not violate the court’s public policy concerns.[10]

Given this ruling, landlords and tenants must exercise diligence when drafting and reviewing a contract or lease agreement. Landlords that wish to include the waiver provision must add specific and unambiguous language that clearly states the tenant is voluntarily waiving its statutory rights under Sections 1179 and 3275. On the other hand, tenants must carefully review their residential or commercial lease agreements to ensure that the contract does not contain such a waiver.

Overall, Section 3275 provides the same relief as the previously discussed Section 1179. The critical difference is that Section 3275 requires the requesting party to prove that their breach was not “grossly negligent, willful, or fraudulent.” At first glance, this additional hurdle seems to act as an impediment for tenants (and contracting parties) seeking relief under Section 3275. However, no court has directly ruled on whether a tenant that breached its lease agreement for no fault of its own, did so willfully or with gross negligence. Given this uncertainty, wise real estate litigators seek relief from forfeiture by employing both Sections of 1179 and 3275. Bringing the motion on both grounds allows the court to grant relief under either section of the code.

Applying Sections 1179 and 3275 in Bankruptcy Court

Sections 1179 and 3275 are not strictly reserved for California State Courts and are applicable in a bankruptcy proceeding.[11] Section 365 of the Bankruptcy Code allows the Trustee to assume a residential or commercial lease of the debtor, as long as the lease did not terminate before the bankruptcy petition was filed. However, most debtor-tenants that file a bankruptcy petition do so after the termination of the lease agreement, which prevents the Trustee from assuming (and saving) the lease under Section 365.

Fortunately, the landmark case of In Re Windmill Farms addressed this deficiency.[12]In that case, the court held that if a two-factor test is satisfied, the bankruptcy court can grant relief from forfeiture under Sections 1179 or 3275 and reinstate the lease. If the bankruptcy court reinstates the lease, the Trustee can then assume the lease under Section 365 of the Bankruptcy Code, as the lease is no longer terminated. The holding in In Re Windmill Farms bridges the gap between the strict language of Section 365 and California’s anti-forfeiture statutes, allowing tenants to save their lease through a bankruptcy proceeding.

The first factor is determining when the lease agreement was terminated. If the lease was terminated before the bankruptcy petition was filed, then the debtor will have to proceed to the second factor. On the other hand, if the lease was terminated after the bankruptcy petition was filed, the Trustee can assume the lease under Section 365, provided the Trustee promptly cures the debtor-tenant’s default.

The second factor is applying Sections 1179 and 3275 and the case law that flows from those statutes to the case at hand. If the court determines that relief is proper, then the debtor-tenant must cure its default before retaking possession of the property. If the two factors are satisfied, then the lease is reinstated, and the Trustee may assume (and save) the lease under Section 365 of the Bankruptcy Code.

Finally, debtor-tenants and their counsel must be familiar with the basics of lease assumption in a bankruptcy proceeding. If the debtor wants to retain the lease, the debtor will move to assume it, and must do so within 120 days of filing the bankruptcy petition. The court can extend this time period without the landlord’s consent for 90 additional days, making a total of 210 days, but any further extensions require the landlord’s prior written consent.[13] If the lease is not assumed (or assumed and assigned) within this period, the lease automatically will be deemed rejected and the debtor-tenant will have to vacate the property.[14]

In order to assume the lease, the debtor must cure any defaults or provide assurance that it will promptly do so.[15] This is at least true with respect to monetary defaults. There is a split in the case law as to whether non-monetary defaults must be cured in order to assume a lease (or other executory contracts). The debtor-tenant must also compensate the landlord for “any actual pecuniary loss” resulting from the debtor’s breach.[16] And the debtor must “provide adequate assurance of future performance.”[17]

Any tenant that files a bankruptcy petition must understand that Sections 1179 and 3275 can save their tenancy in a bankruptcy proceeding. This is especially true during this time, as many small and large businesses seek bankruptcy protection.

Seeking Relief from Forfeiture in a Post COVID-19 World

The economic effects of COVID-19 have left one in every four San Diego residents unemployed and forced notable businesses to either wind up their operations or file for bankruptcy protection. These drastic results certainly provide a basis for commercial and residential tenants to seek relief from forfeiture under Sections 1179 and 3275, whether in state or bankruptcy courts. The only hurdle for tenants is showing the “hardship” they will suffer from if relief from forfeiture is not granted.

As mentioned above, hardship can be shown by the rental rate one currently pays compared to the market values, the past investments one has made into the property, or the effects forfeiture will have on third parties, such as employees. Given the uncertain economic times, along with the unique facts of each case, courts will undoubtedly broaden its definition of “hardship” and grant relief from forfeiture when necessary.

If you find that you are on the brink of eviction or may be served with an unlawful detainer action in the near future, contact a California attorney immediately.

[1] Cal. Civ. Code § 1174 (a)

[2] Bos. LLC v. Juarez, 245 Cal.App.4th 75, 82 (2016)

[3] Cal. Civ. Code § 1179

[4] See Thrifty Oil Co. v. Batarse, 174 Cal.App.3d 770, 777 (1985) See also Hignell v. Gebala, 90 Cal. App. 2d 61, 71 (1949)

[5] Hamid v. Janakus, No. BV 024000, 2003 WL 26128877, at *3 (Cal. App. Dep’t Super. Ct. May 13, 2003)

[6] See Assi Super, Inc. vs. Eight Oxfords Property Management, Inc., No. Bc319425, 2006 WL 4749574

[7] Cal. Civ. Code § 3275; see also Hignell v. Gebala, 90 Cal. App. 2d 61, 70 (1949) (holding that “section [1179] is special in its nature, applying only to unlawful detainer proceedings, while section 3275 is general”).

[8] Cal. Civ. Code § 3275

[9] Cal. Civ. Code § 3275; see also Am. Bankers Mortg. Corp. v. Fed. Home Loan Mortg. Corp., 75 F.3d 1401, 1413 (9th Cir. 1996) (finding that the requesting party must “must plead and prove facts entitling it to relief under the section [3275]”)

[10] In re Art & Architecture Books of the 21st Century, 518 BR 43 (Bankr. C.D. Cal. 2014)

[11] In re Burke, 76 F. Supp. 5, 8 (S.D. Cal. 1948) (“[t]he proposition that Section 1179, Cal. C.C.P., is applicable in and by the Bankruptcy Courts is so plain, that the point need not be further labored.”)

[12] In re Windmill Farms, Inc., 841 F.2d 1467, 1472 (9th Cir. 1988)

[13] 11 U.S.C. § 365 (d)(4)(A)

[14] Id.

[15] 11 U.S.C. § 365 (b)(1)(A-C)

[16] Id.

[17] Id.

Legal Real Estate Issues

April 20, 2020/in All Blog Posts, Real Estate/by Ajay Gupta

Real estate litigation commonly arises from “self-help issues”, or a situation where an individual attempts to resolve a dispute through their own unsanctioned action. This is never advisable, as it can easily lead to further escalation and potentially less civil confrontations. In the video below, Mr. Gupta discusses a situation where a disputed property line ran through one party’s driveway. In order to block this access point the other party erected a low cinderblock wall along the property line. This action only exacerbated the situation, as the erection was unsanctioned in first place, but even its removal would be grounds for further dispute.

One must weigh their options carefully in this or any similar scenario. Attempting to resolve the dispute on one’s own is unwise and possibly even dangerous. Additionally, litigation can be costly, protracted, and may not even produce a desirable outcome. In addressing a property line dispute it is always important to consult one’s title company. While they may not be able to directly intervene, they may be able to provide relief depending on one’s policy, property type, etc..
It is important to remember that, while these scenarios may seem uncommon, any property purchase is a major investment and significant legal process, so steps should be taken to guard against any eventualities. Mr. Sewing cites an enlightening statistic: of the top five legal issues in a recent study real estate disputes were the most common, with 21 percent of respondents reporting issues in that category. One should start by considering if they will need an attorney for their buying process, though some states mandate this regardless. This is, of course, a product of the very nature of real estate deals, wherein all parties have a vested financial interest in the deal closing. Thus, a neutral party can be invaluable in ensuring propriety and avoiding future issues.

Particularly for one’s first property acquisition, it is essential to recognize the moving parts that may cause problems. H.O.A.s are a major consideration. It is highly recommended that a potential buyer review their C.C.R. and even the association’s meeting minutes in order to ascertain exactly the standards that must be followed, the general attitude of the community, and potential issues inherent in neighboring properties. Joint purchasers should always protect themselves and each other through legal representation, as well as those purchasing commercial property (link to partition actions post). An attorney can also mitigate risk by helping draft a trust and examining one’s title policy and mortgage agreement to ensure all due propriety. It is well known that much trouble can come from signing unread contracts but it continues to be a problem for the average consumer who is not necessarily well-versed in the language of these documents.

Webinar: COVID-19 Impact and Options for Commercial and Residential Real Estate

April 17, 2020/in All Blog Posts, Real Estate, Webinars/by Chris Evans

The COVID-19 pandemic has had a dramatic impact on real estate issues and has prompted all levels of government to enact new legislation to mitigate the impact on landlords, tenants, and banks.

In an effort to help our clients and partners understand the impact of COVID-19 and the recent legislation on real estate matters, our office held a webinar April 15, 2020. Our panel composed of real estate professionals discussed the market for commercial and residential real estate as well as how recently enacted ordinances have impacted the local real estate market.

Our featured panelists:

Ajay Gupta, Founder of Gupta Evans and Associates. — Attorney Ajay Gupta is a certified bankruptcy specialist and has been working on real estate and bankruptcy matter since 2005. He represents both debtors and creditors in state and federal bankruptcy court on a host of matters from secured transactions, to landlord-tenant disputes, to complex bankruptcy matters.

Chris Evans, Partner at Gupta Evans and Associates. — Chris Evans is a litigation attorney, representing both businesses and individuals in an array of general civil litigation matters, primarily focused in the real estate and business context. Such matters include: lease disputes with respect to commercial and residential landlords and tenants; commercial and residential eviction proceedings.

Jon Hamby, Partner at Fortis Legacy. — Jon Hambyhas over $1 Billion in transactional experience and manages over $500 Million in real estate portfolio assets. He has a diverse commercial real estate background that encompasses the representation of both tenants and landlords in asset acquisition and disposition for lease and sale and runs a multi-family office for private real estate portfolios

Mark Kagan, Founder of Law Offices of Mark Kagan — Mark Kaganis a real estate attorney with 34 years of experience under his belt. He has worked on thousands of real estate contracts, negotiated legal terms, and drafted legal language for commercial and residential real estate transactions.

Henish Pulickal CEO of Cal Home Company. — Henish Pulickal is CEO and owner/operator of The California Home Company brokerage, as well as CalHomeCo Buys Houses. He is an investor, contractor, and a broker.

Please feel free to reach out to any of the panelists with questions or concerns.

Squatter’s Rights, Prescriptive Easements, and Adverse Possession

April 8, 2020/in All Blog Posts, Corporate Litigation, Real Estate/by Ajay Gupta

Though a property owner may prefer not to consider it, there are rights which an individual is entitled after using a property for a particular period of time despite the fact that they do not own said property. Legally, when an individual uses a property without the permission of the owner it is known as adverse possession. California has a variety of protections for both property owners and squatters that ensure that these circumstances can be litigated fairly and effectively.

For those engaged in adverse possession the law is highly specific. Depending on the type of property and the manner of its use, the failure of a property owner to take action against a squatter can eventually lead to the latter claiming legal ownership of the property. Though the requirements vary widely, they generally include paying property taxes continuously for 5 years.

Property owners have few means of recourse other than litigation, as the courts must establish conclusively that the squatter has no authentic claim to the property before eviction can be pursued. Such claims commonly include tenant’s rights, or a situation where the claimant can prove that they provided monetary compensation, goods or services to the property owner in exchange for use of the property. Even an implied oral or written contract with the owner could be valid. If this can be established any attempt at eviction would have to proceed in accordance with local landlord-tenant law.

Prescriptive easement is a commonly encountered relative of adverse possession. Generally it entails intermittent use of a section of a property for a particular purpose without the consent of the owner, such as an unpaved driveway to one’s property that runs across another property for some distance. Like adverse possession, the key to any claim is continuous unchecked use for a period of time, otherwise it is simply trespassing. However, the major difference is that the claimant does not have to pay property taxes and other parts of the property can be used and resided upon by the owner during the claimed period of continuity.

Granny Flats in No Time Flat

December 5, 2018/in All Blog Posts, Real Estate/by Michael Covington

As the California housing crisis continues to expand, more and more Californians are looking for ways to leverage their property into additional revenue streams. With popular options like Airbnbs and short term rentals generating controversy and uncertainty as of late, an alternative way for families to supplement their main sources of income is on the rise: the Accessory Dwelling Unit.

An Accessory Dwelling Unit, or “ADU” is a rentable secondary dwelling unit with complete living facilities for one or more persons. They are alternatively known as Granny Flats, In-Law Units, Backyard Cottages and Secondary Units. The ADU can be attached to the primary residence, detached, or even converted within the primary house itself, such as a garage or basement.

The concept of an ADU or Granny Flat is nothing new or ground breaking. ADUs have been around for a while, but, until recently, they were largely cost prohibitive due to the fees associated with zoning and administrative costs, in addition to the strict requirements to which ADUs were required to adhere. This changed in January of 2017 when Governor Jerry Brown signed a law (SB 1069) that aimed to help homeowners more easily build and rent out ADUs on their single family residential properties.

Prior to the new law, ADUs were regulated at the county and city level. Zoning laws at this level were extremely restrictive with respect to where ADUs could be built, their size and many other burdensome requirements. The new state law, on the other hand, is far laxer in its approach to ADUs. For example, under the former San Diego regulations related to ADUs, one of the biggest hurdles for homeowners was the requirement of an additional parking space. Not only was the additional parking space required, but further complicating matters were additional restrictions as to where the new space was required to be located with respect to the ADU. The new California ADU legislation makes it easier for any lot zoned with a single-family residence to add a secondary unit because it relaxes or eliminates many of these types of restrictions.

Moreover, as long as the ADU meets applicable zoning guidelines, the new ADU Legislation allows homeowners to expand their units without having to get a conditional use permit (a “CUP”). The CUP requirement alone was a significant barrier to entry into the ADU landscape for many homeowners due to the many restrictions that accompany it, in addition to the significant resources required to push the CUP through San Diego’s confounding bureaucratic process.

The new California law effectively cuts through much of the old red tape that was associated with San Diego’s prior ADU regulations, which in turn has led to a sharp reduction in the fees required to build ADUs. That is not to say that building an ADU is easy or cheap—the construction costs necessary to attach water, electricity and sewer systems will be more than enough to dissuade many people. However, for now, the only real financially limiting factor lies with construction costs. In the future, it is quite possible that the City of San Diego will create pre-approved design templates that will accelerate approvals and limit the architecture and construction costs associated with future ADUs.

This change to ADU legislation comes at a time when San Diego has become one of the most expensive housing markets in the United States. The mayor’s office reported that more than 70% of San Diegans cannot afford to buy a home at the county’s median home cost, which is around $575,000. Coupled with this is the reality that rent in San Diego has sky rocketed to reach more than $1,887 a month. Allowing more in San Diego to construct and use an ADU will help alleviate some of the financial strain that comes with homeownership or renting. With respect to homeownership, ADUs will obviously be a source of supplemental income to the homeowner and increase the home’s overall value. As for prospective renters, there should be an increase in the supply of rental units as a result of a boom in ADU construction, which should help match the strong demand.

However, there are negatives to consider as well. Adding an ADU to a property can come with a substantial increase to your utility bills depending on who moves in. Additionally, if you add an ADU to an existing investment property (i.e. a secondary home that one is renting out already), then you can typically expect longer vacancy periods in both properties if both are unoccupied. This is likely due to renter’s not wanting to move in unless they’re sure they’re going to get along with their not so distant neighbors. Finally, adding an ADU to an existing investment property will likely force you to lower the rent in the main house to accommodate for the loss in space. These issues are not insurmountable by any means, but they will be deal-breakers to some.

From a policy perspective, California’s decision to overrule city and county oversight on ADUs may present challenges for local municipalities. Widespread adoption of the ADU legislation will increase the densities in many urban areas in a manner that was not planned for by the municipality. As ADUs are adopted, many areas will experience overcrowding in schools, traffic, and increased crime unplanned by local governments. The hope is that the adoption of ADUs will be slow enough that cities will be able to build infrastructure to keep pace with increasing densities.

Another policy byproduct is that the ADU legislation has further made homeownership for non-investors more difficult. As mentioned above, housing units with ADUs will command higher prices. For non-investors who are not in the business of renting homes, an ADU is not necessary or desirable, let alone affordable. As the number of homes with ADUs increase, those homes are effectively removed from the market for the non-investor home buyer. By eliminating barriers for ADUs, California has ostensibly again made the decision to favor the investor homeowner over the primary residence homeowner.

Whether or not the new California ADU legislation will have a meaningful impact on housing and rental costs in San Diego remains to be seen. Though it’s not for everybody, as there are costs and potential problems to consider, it does remain an attractive opportunity for those looking to leverage their property to create an additional income stream.

For your reference here are the main new California requirements for ADUs:

The property must be zoned single family and there must be an existing single-family residence already built;
The ADU is not its own property such that the ADU can only be rented, but not sold, separate from the main residence;
Generally speaking (there are exceptions), the ADU’s square footage must be no more than 1,200 square feet and no less than 150 square feet. However, the ADU’s square footage cannot exceed 50% of the main residence’s living area;
The ADU can be attached, detached or converted within the existing residence;
No additional parking space(s) required if (1) the ADU is within a half mile to a transit stop; (2) the ADU is part of the existing permitted residence or structure; OR (3) the ADU is within a historic district.
If the ADU does not fall within one of the foregoing categories, the additional parking is limited to one per unit or per bedroom, and such parking space can be in existing driveway or tandem spaces.

Why Speak to an Attorney Before Buying a Home?

November 5, 2018/in All Blog Posts, Real Estate/by Ajay Gupta

The professionals that you surround yourself with when purchasing a home all have a vested interest in your “closing the deal.” All the parties, including the broker, the mortgage salesperson, and the title company each get paid through commission. If each party is purchased this way, who is there to push the brakes and first ask if this is a smart decision? Or if the title is clean? How about if the financials make sense, or if there is an issue with the inspection that needs to be examined? Let the crucial role of the unbiased advisor be your attorney.

WHAT HOME OWNERS NEED TO KNOW

If you are a home owner who decides to rent out to tenants, there are a few items you should know. Do not become overanxious if you face the issue of a non-payment rent situation. This is actually the ideal eviction scenario. Evictions happen very quickly in California and can be viewed as only a step above the common traffic ticket. There is a separate court (depending on the dollar amount at issue) that handles the case and it can be resolved in about 30 days.

The next aspect homeowners need to understand is having a good solid lease for every period of time the tenant occupies. You should be familiar with a three day notice and a 30 day notice. If non-payment occurs, first make sure there was no physical/emotional impediment to the tenant and you have good reason to evict. Make sure to pass a notice quickly, as it communicates your seriousness and familiarity with the law.

CHANGES IN CALIFORNIA REAL ESTATE LAW

While there are clear cut laws, it is important to remember that real estate law is continuously being interpreted and evolving, and thus can leave room for some ambiguity. A good example is of my brother who had called from DC complaining about a neighbor who smoked marijuana during the early hours of the morning. The case becomes complicated because the tenant may have a legitimate reason to smoke freely in the building. He or she may possess prescription or medical permit to smoke marijuana, and if they cannot smoke within their own apartment, where are they going to medicate? If you push towards litigation, you may be seen as discriminating against individuals with a disability. You may find yourself, the landlord, negotiating between this negative interpretation and a tenant who is threatening for nuisance violations.

Candidly, the law is not clear on this issue. While California recognizes medical marijuana as a right, and something that is necessary, the federal government does not. A lot of discrimination laws originate from the Fair Housing Act and the America Disabilities Act—federal law. Some states do have specific laws that allow medical marijuana and command that landlords write this within their lease. The courts remain undecided.

The Stadium Proposals: Sometimes, Nothing is Better than Something

November 5, 2018/in All Blog Posts, Real Estate/by Ajay Gupta

As part of this year’s midterm elections, San Diegans will be confronted with two competing ballot measures focusing on what to do with the land surrounding the iconic SDCCU Stadium (formerly, Jack Murphy Stadium and Qualcomm Stadium). The first ballot measure is Measure E, otherwise known as “SoccerCity.” Measure E is sponsored by FS Investors, a privately held investment firm with offices located in La Jolla and San Mateo. The second ballot measure is Measure G, otherwise known as “SDSU West.” SDSU West is headed by a steering committee calling themselves “Friends of SDSU.” Friends of SDSU is made up principally of local San Diegans, as well as SDSU Alumni.

At a glance, the Soccer City Proposal (Measure E) and the SDSU West Proposal (Measure G) might appear very similar. Both proposals offer to tear down the current decaying structure of SDCCU Stadium and replace it with a sprawling complex that includes not only a modern sports stadium, but would also accommodate entertainment, residential, retail and office space. Both proposals also aim to create generous park spaces along the San Diego River.

Each proposal has received glowing endorsement from various important individuals and organizations. The Soccer City Proposal has been endorsed by San Diego Mayor Kevin Faulconer, whereas the SDSU West Proposal has received the endorsement of former mayor and current Chamber of Commerce President, Jerry Sanders. The SDSU West Proposal has also received bi-partisan support from liberal organizations, such asThe Sierra Club, as well as conservative organizations, such as the Lincoln Society of San Diego.

Background:

SDCCU Stadium, was the home of the San Diego Chargers from 1967 until their return to Los Angeles in 2017. Previously known as Jack Murphy Stadium or “The Murph,” the site also played host to the San Diego Padres from their inaugural season in 1969 until the completion of Petco Park in 2004. In the 51 years of the stadium’s existence, it has become a known quantity in many San Diegan’s daily lives. This is partially because of its significance as the primary colosseum for sports in San Diego and partially due to its central location in the heart of Mission Valley.

SDCCU Stadium currently sits on 166 acres of land between the 8, 15 and 805 freeways, which effectively makes the stadium the crossroads of San Diego. From Chula Vista to Mira Mesa; from La Jolla to El Cajon, most of the city of San Diego is within 20 minutes from SDCCU Stadium. It should be no surprise, then, that two rival proposals for the site have sprung up hoping to earn the voter’s approval in this year’s midterm election.

Big Picture: What’s the Difference?

When looking at the two proposals, the first thing you’ll notice is the length. The SoccerCity Proposal is over 600 pages long including all the exhibits. By contrast, the SDSU West proposal is only 12 pages long. Whereas the SoccerCity Proposal attempts to be specific and nuanced about its plans, studies and timelines, the SDSU West Proposal is vague and ambiguous as to how and when they are going to achieve their proposed goals. The SoccerCity Proposal purports to identify what, when, how and where building will take place, but the SDSU West Proposal more or less leaves those specifics to be figured out after their measure passes.

The most apparent substantive difference between the two proposals is in how each project will be funded. Proponents of SoccerCity have proudly boasted that their plan would cost zero taxpayer dollars. Specifically, the initiative stipulates, “No public funds, subsidies, public bond issues, or public or municipal financing will be used to pay for any of the development or infrastructure on the Plan Area.” Instead, financing for construction of the complex would be left to the contractors and builders who, “may use a variety of financing methods”. The funding component has unsurprisingly become a central selling point for SoccerCity as proven through the hundreds of television commercials boasting that SDSU West will cost taxpayers millions of dollars in public funding.

A nuanced analysis of the SoccerCity Proposal, however, makes it clear that it is in fact the City of San Diego that will be financing a large part of their development. Under SoccerCity’s Measure E, FS Investors and their associates would lease the land under SDCCU Stadium and the surrounding area (233 acres) from the City to the financiers of FS Investors for 99 years for “fair market value,” as of February 2, 2017. The reality is that it is the City of San Diego that would be “carrying the paper” on this transaction while the investors maintain possession just as a residential landlord does with her own property.

Perhaps the bigger issue with the SoccerCity Proposal will be in determining the “fair market value” as of February 2, 2017. Similar to the Pontiac Silverdome in Michigan, there is a strong argument that, the value of the property in question–prior to a plan for redevelopment being in place — is de minimis. SDCCU Stadium is effectively a nuisance because the costs to maintain the stadium far exceed the revenue the stadium may be drawing in. Consequently, the “fair market value” at which SoccerCity would lease the property from the City is bound to drop accordingly.

By comparison, the SDSU West Proposal directs the City of San Diego to sell the land under the SDCCU Stadium (132 acres) to San Diego State University at a price “the City Council deems fair and equitable and in the public interest.” Details on how the construction of the stadium would be financed are unknown at the moment, but the expectation is that San Diego State University will “tap California State University bonding authority.”

Proponents of SDSU West posit that there is a legitimate need for SDSU to expand its campus. SDSU has been at its current location since 1931 and has expanded significantly within that nearly 90-year period. SDSU’s current campus sits at roughly 283 acres large with a student body approximately 35,000 strong, making it the second largest university in the county behind UCSD. However, despite SDSU’s relatively large size, it’s growth has been lacking for several years, partially due to a lack of land to expand upon. Despite the fact that applications to SDSU have skyrocketed in recent years, SDSU’s admission rates have remained largely stagnant from 2007 to 2016, whereas UCSD’s admission rates have risen by approximately 36% in the same timeframeA major benefit of Prop G is that it would not only provide a new sporting stadium, but it would also provide much needed room for SDSU to expand and remain competitive. SoccerCity naturally disagrees with this position and points to several areas on or around the current SDSU site where the university can expand, but is simply choosing not to.

On SDSU West’s face, there is something comforting about having a pillar of San Diego oversee and manage the development of an area that is so central to San Diego. It is also comforting to know that the City Council would retain control of the sale price to SDSU. That said, the sale price is effectively all the City Council would control; once the land is sold to SDSU, SDSU owns it outright and the City loses much of its oversight. A further challenge, is SDSU West’s ambiguity surrounding the means for financing and the timeline, both of which are completely missing from the SDSU West Proposal.

Tell Us How You Really Feel!

I think there are certain things that lend themselves to a ballot measure. Those items are limited to discrete ideas where politics or special interests have made it nearly impossible for the representatives of the City or State to act responsibly and disinterested. For example, things that affect campaign finance, gerrymandering, giving elected officials raises, or even whether to increase or decrease taxes are all appropriate discrete issues to put directly before the electorate.

On the other hand, when the idea at issue is a development project of the scale and size of SoccerCity and SDSU West, which includes so many moving parts, a forced sale or a forced 99 year lease , a ballot measure is ridiculous. I did not read the whole 600+ page proposal by SoccerCity and neither will any of you. On the other hand, the SDSU West Proposal leaves far too much to the imagination for my comfort level.

The fact is that the City of San Diego is the entity most well-equipped with the resources and experience to oversee and develop the SDCCU Stadium, not the voters. You start by looking downtown, from the Ballpark to Little Italy; you can then expand out to the surrounding communities– the City has done this over and over again successfully. There have no doubt been set backs in certain communities, Barrio Logan and East Village for example, but those set backs are part of the City’s resume now and should not be viewed in a vacuum. Quite the opposite.

The political and financial underpinnings of each of the proposals are troubling as well. Regardless of whether you support SoccerCity or SDSU West, there will be a financial boone to either victorious party. That financial boone must be part of a process that is inclusive rather than exclusive. Put another way, neither SDSU West nor SoccerCity should garner a windfall just because they gathered a bunch of signatures.

From a personal perspective, I’m not a fan of soccer. I take the Jim Rome approach to soccer and, with all due respect to some of my close friends who may be reading this, I would rather undergo a root canal than watch soccer. That said, I am but one San Diego resident. The reality is that soccer viewership has been steadily growing and San Diego is one of the biggest soccer markets in the US, ranking 9^th overall.

That said, I do question whether a stadium is necessary or even warranted in that part of the city. That area is ideally situated for a mixed use, high density residential and retail expansion. With residential rental and housing prices going through the roof, that makes a lot of sense to me. Of course, some part of the area should also be used to address the growing needs of SDSU. Whether that includes the need for a stadium in that location is still up for grabs. A stadium in East Village probably makes more sense given the infrastructure already in place. As a keystone project, it could be used to revitalize East Village and bring in new developments. It could also be used to relieve the needs of an already overcrowded convention center.

At the end of the day, I hope that the San Diego voters remember that no on both is an option. Despite what has been advertised, this is not a choice between SoccerCity (Measure E) and SDSU West (Measure G). Rather, these are two proposals being pushed forward by competing special interests, each of which simply gathered enough signatures on their idea to put it before you—the voter—on the ballot.

Airbnb and Short-Term Rentals in San Diego: The Ban that Never Was

November 1, 2018/in All Blog Posts, Real Estate/by Chris Evans

You have likely seen the signs around town — “Neighborhoods are for Neighbors, Not Vacation Rentals.” This phrase has become the mantra of “Save San Diego Neighborhoods,” the lead organization pushing back against San Diego’s rapidly expanding short term rental market. Save San Diego is an organization fighting to stop the “illegal conversion of San Diego homes to short-term vacation rentals.” In doing so, Save San Diego has been pushing the San Diego City Council to impose significant regulations with respect to short-term rentals such as Airbnb.

Mounting such a fight, however, has not come without its challenges. The primary group pushing back against Save San Diego to try and keep San Diego’s short-term rental market alive and thriving is “Share San Diego,” a coalition of San Diegans in support of short-term rentals. Naturally, Share San Diego is strongly supported by short-term rental companies, such as Airbnb and HomeAway. Short-term rental units generate nearly $300 million annually for San Diego homeowners and an additional $200 million for the surrounding businesses. For perspective, the San Diego Padres—San Diego’s only professional sports franchise—generated only $266 million in total revenue for all of 2017. Obviously, there is a lot at stake when trying to regulate an industry of this size.

Despite resistance from Share San Diego and other proponents of short-term rentals, Save San Diego looked like they achieved victory back in July and August of 2018 when the San Diego City Council voted to outlaw vacation rentals in secondary homes, limiting short-term stays to one’s primary residence only.

The victory, though, was only temporary.

In response to the City’s decision to regulate short term rentals, Share San Diego put together a referendum petition that garnered over 62,000 San Diegan signatures in support of challenging the regulations. The petition forced the City to either rescind the ordinance or to have a public vote on the ordinance. On October 22, 2018, as a result of the referendum, the San Diego City Council made its choice and voted 8-1 to rescind the newly minted short-term rental ordinance—the ordinance that the Council passed barely three months earlier.

The repeal of the short-term rental regulations marked a significant win for Share San Diego, Airbnb and other proponents of short-term rentals. Yet, while Share San Diego may be leading on the scoreboard as of today, Save San Diego and other opponents of the short-term industry will undoubtedly continue to advocate for new regulations. Consequently, the repeal of short-term rental regulations has created tremendous uncertainty with regard to how the City of San Diego will look to regulate short term rentals going forward, if at all, and poses the question of what in fact is best for San Diego.

How Did We Get Here

In March 2017, San Diego City Attorney Mara Elliott issued a memo wherein she determined that “any use that is not listed in the City’s zoning ordinance is prohibited.” As a result, because short-term rentals are not listed, it was concluded that the San Diego Municipal Code does not permit short-term rentals in any zone in the city—residential, commercial or otherwise. At that point, the issue appeared cut and dry—short-term rentals are illegal and, therefore, should no longer be allowed. Not quite. Despite this memo being issued, Mayor Kevin Faulconer’s office chose not to declare the short-term rentals illegal and instead decided to wait for regulations, which caused the “mini-hotels” to continue spread throughout San Diego.
The City Attorney’s memo and the fact that short term rentals continued to be permitted by the Mayor’s office created a vacuum of uncertainty that the San Diego City Council was forced to address.
On July 16, 2018, the San Diego City Council voted to outlaw vacation rentals in secondary homes, limiting short-term stays to one’s primary residence only, so long as the rentals do not exceed six months out of the year, the owner applied for a permit and paid an annual fee of $949. Notably, the regulation did not include any exemption for the areas of Mission Beach, where 44% of the homes are estimated to be short-term rentals, or Pacific Beach—areas that include a total of over 3,100 short-term rental homes.
On August 1, 2018, after a five hour long hearing where opponents of the regulation voiced their concern, the San Diego City Council reaffirmed its July 16^th decision. This put the new regulation on course to become effective in July 2019. The reaffirmation of the short term rental ordinance was viewed by Share San Diego as “a massive loss for both property rights and the tourism industry in San Diego” and a decision that “will leave thousands of short term rental hosts without a lifeline and even more small business crippled with losses in revenue and traffic.”
Backed by Airbnb and HomeAway, opponents of San Diego’s short-term rental ordinance organized to fight the new regulations—lawsuits were threatened, testimony was heard, organizations were formed and, ultimately, a referendum petition was circulated with goal of forcing San Diego to revisit its controversial short-term rental regulations.
On August 30, 2018, Share San Diego’s referendum seeking to overturn the short-term rental ordinance collected signatures from more than 62,000 San Diegans. Only 36,000 signatures were needed.
On October 8, 2018, Share San Diego’s referendum and its 62,000 signatures were certified by the San Diego City Clerk. The certification presented the San Diego City Council with two options: (1) rescind the short-term rental ordinance; or (2) place the ordinance up for a public vote at a future date, likely in 2020.
On October 22, 2018, the San Diego City Council voted 8 – 1 to rescind the July 16^th short-term rental ordinance. Given the delay a 2020 public vote would bring, in addition to the potential of incurring millions of dollars defending lawsuits filed by opponents of the ordinance, rescission of the ordinance and starting over was the preferred choice for both opponents and proponents of the regulation.
The City now has the option of adopting a new set of rules within the next year, but such rules would have to be substantially different from the ones that were repealed. What set of regulations would be “substantially different” is yet another unknown

What Are We Yelling About?!

When addressing the importance of the short-term rental market in San Diego, Share San Diego and other opponents of the short-term rental ordinance focus largely on the undeniable economic benefit that short term rentals bring to San Diego and property owners. Short-term rental hosts are of the position that they should have the right to use their properties as a way of supplementing their income. In addition to the direct supplemental income a property owner garners from renting their home short-term, the community itself receives an economic boost.

Specifically, in October 2017, Alan Nevin of the Xpera Group published a study focusing on the economic impact of short-term rentals in San Diego. The study concluded that short term lodging in the City of San Diego generated almost $500 million in spending ($300 million direct and $200 million indirect and induced spending), $700,000 in sales tax revenue and over 3,000 jobs[1]. San Diegans earned $5.2 million over Labor Day weekend alone as they hosted 15,000 travelers. For comparison, as stated above, the San Diego Padres generated $266 million in total revenue in 2017.

A common counter to the economic benefit that short-term rentals bring to San Diego is that the benefit is coming at the expense of San Diego hotels. However, the Xpera Group’s report concluded that not only do the majority of short-term renters stay seven nights or longer (i.e. longer than a typical hotel stay), but short-term rental nights made up only 2.7% of hotel nights in San Diego. Of that 2.7%, the report further concluded that the short-term rental nights did not pull from hotel nights because of the cost and location of where the short-term rental nights occurred. The conclusion, as set forth in the Xpera Group Report, is that the short-term rental market “has had a minimal or negligible effect on the hotel market.”

As a result, opponents of the short-term rental market and those that want to regulate the industry (i.e. Save San Diego Neighborhoods) shy away from trying to diminish the economic impact of the short-term rentals. Rather, the main argument put forth by proponents of short-term rental regulations is essentially that short-term rentals harm the character and stability of neighborhoods in a way that is inconsistent with City Planning and negatively impacts San Diego residents.

As posited by Save San Diego Neighborhoods, short-term rentals disrupt San Diego communities by creating businesses in areas that were designed and intended to be purely residential communities. Unlike even monthly rentals, a short-term rental involves significantly more moving parts and, more often than not, a different type of customer. The infrastructure (i.e. roads, law enforcement, garbage collection, utilities, community maintenance) needed to support a vacation renter, short term or otherwise, is fundamentally different than that which is required to support a residential tenant. When the frequency of vacation renters is drastically increased through short-term rentals, the strain on the communities’ infrastructure is exacerbated. At some point, the strain will become too much. Similar to the SDSU Mini Dorm issue, the character of neighborhoods and the stability of communities are necessarily and unavoidably jeopardized, or at the very least, transformed, by the proliferation of short-term rentals.

One of the other main policy arguments put forth by Save San Diego Neighborhoods is that short-term rentals drive up rental and housing costs for San Diego residents. As outlined in our prior article related to rent control, rents in San Diego have increased substantially over the last three years. The average rent in March of 2018 in San Diego was $1,887, which represented a 20% increase since 2015. The median cost of rent is simply much higher than the average San Diegan can afford, which is causing families to be pushed into suburban neighborhoods where rents tend to be lower. However, Save San Diego Neighborhoods argues the increase in short-term rentals removes thousands of otherwise available long-term rental homes from that market.

Similarly, from a homebuyer’s perspective, Save San Diego Neighborhoods argues the increase of short-term rentals is naturally drawing otherwise uninterested investors to the residential housing market. The average potential homeowner is then forced to compete with investors whose sole business model is based on valuations associated with vacation rentals. The California homeownership rate already lags around 10 percentage points below the national homeownership rate, 54.6% versus 64.2%. That means that Californians rent at a rate that is 10% higher than the national average. In a market where investors are already competing with primary residence holders for middle class housing, the ever-expanding short-term rental market provides yet another obstacle to middle class homeownership. Put another way, with the ease of short-term renting created through sites like Airbnb, what is to prevent Pacific Beach and Ocean Beach from becoming like Mission Beach where over 44% of the homes are used as vacation rentals?

The economic benefit cannot be denied and will continue to be the primary argument of Share San Diego and those in favor of short-term rentals in San Diego. Opponents of short-term rental regulations will not try to deny this fact. That is not to say, however, that the economic benefit cannot be outweighed by a more compelling interest. In this instance, that interest is preserving the character and stability of a community and preventing the fundamental, unanticipated transformation of communities.

Technology—Yet Another Layer

There is one other, overlapping reality to this ongoing short-term rental saga: technology. Similar to the taxi industry and Uber, short-term rentals existed long before AirBnb and HomeAway came along. Airbnb simply made short-term rentals much more accessible in the exact same way that Uber made ride-sharing so easy that it has become ubiquitous.

It is technology that has allowed the use of short-term rentals to expand throughout the world. In years past, without technology (read: Internet), the increase of short-term rentals in certain communities and neighborhoods may have moved at rate that allowed those communities to adapt and families to adjust. Now, the rapid expansion of short-term rentals at the rate seen by communities, such as San Diego, make it nearly impossible for those communities to keep pace and adjust appropriately.

The challenge, then, is not whether short term rentals should be regulated in San Diego, but, rather, how the short-term rentals should be regulated. Clearly, some boundaries need to be drawn in a way that allows residential communities and neighborhoods to support an increase in vacation renters. Both sides likely agree with this position.

However, government, especially at the local level, is extraordinarily poorly equipped to regulate technology. This is especially true in an emerging market where even those that are shaping the landscape of the technology cannot claim to have visibility beyond three or four years. This fundamental shortcoming is exacerbated by the political nature of the California housing market and the size of the short-term rental market. This does not even begin to address the legal implications of such a decision (another blog for another day). The technological component and the political considerations surrounding short-term rentals will make it extremely difficult for a local body of government, such as the San Diego City Council, to regulate.

To Sum It All Up

Share San Diego and Save San Diego Neighborhoods each present strong arguments in favor of their respective positions. However, the reality is that attempts by the City of San Diego to regulate the short-term rental industry will inevitably benefit one side over the other. Ultimately, because of the relative strength behind each side in this fight and the arguments each side presents, this matter is likely to be resolved through a ballot measure and public vote.

While the most recent short-term rental ordinance from July 2018 may have had a short life span, if any at all, the potential for compromise between the two sides—one that furthers each of their goals—is certainly within the realm of possibility and one that San Diego and its residents should strive to achieve.

[1] The 2017 figures increased from approximately $196 million in direct and indirect spending in 2015.

Prop 10: Does Rent Control Make Sense for California?

September 29, 2018/in All Blog Posts, Real Estate/by Ajay Gupta

In June, the California Secretary of State confirmed Proposition 10 as a ballot initiative that, if passed, will allow cities in California to implement rent control. With the housing shortage in California, San Diego in particular, renters have seen dramatic increases in rent that quite simply have not kept up with the cost of living. As a result, San Diego is seeing gentrification in areas not normally associated with the displacement of middle- class renters, like La Mesa and the surrounding suburbs of downtown. This displacement is what is most likely bringing Proposition 10 to the ballots this November.

Historically, middle–class workers in California were able to afford homes, which granted them stability in terms of their cost-of-living. However, with skyrocketing housing prices, even those with good jobs have found themselves struggling to get into their first home. This confluence of unaffordable housing and the gentrification of the middle- class has brought the issue of rent controls back into the public purview.

Currently, rent controls are largely prevented under the 1995 Costa Hawkins Rental Housing Act.

The Costa Hawkins Act contains three major provisions:

It protects a landlord’s right to raise the rent to market rate on a unit once a tenant moves out.
It prevents cities from establishing rent control—or capping rent—on units constructed after February 1995.
It exempts single-family homes and condos from rent control restrictions.

Rents in San Diego have increased substantially over the last 3 years and vacancy rates remain low. The average rent in March of 2018 in San Diego was $1,887, which represented a 20% increase since 2015. At the same time, vacancy rates remain low, approximately 3.2%, which is below the historical average.

San Diego, unlike Los Angeles and San Francisco, has not implemented any rent controls. Across California, there are only 15 municipalities that have implemented rent controls prior to the acceptance of Costa Hawkins. Most rent control ordinances limit the permissible rent increase the landlord can charge if the tenant chooses to stay in the unit year over year. Rent control ordinances typically also prevent a landlord from evicting a tenant unless the landlord is planning on removing the property from the market. Finally, in some areas, even if the landlord is courting a new tenant, the landlord would be limited in the amount that he could charge the new tenant.

The implementation of rent controls will dramatically shift rights from property owners in rent controlled areas to renters who are fortunate enough to obtain housing in those areas.

The Economics:

In San Diego, the primary cause of higher rental costs is the result of the shortage of available rental units. With vacancies approaching 3%, most economists agree that San Diego’s high rental prices are a direct product of a fundamental lack of supply. Under this line of reasoning, which is the prevailing wisdom, the implementation of rent controls would simply lower the value of housing and therefore discourage investment in new housing. As the argument goes, while a select few who are in rent controlled districts would benefit, the decrease in new housing investments would cause higher rents for the remainder of San Diego’s renters.

Another line of reasoning focuses on the demand side of the equation. California’s homeownership rate is currently around 10 percentage points below the national homeownership rate, 54.6% versus 64.2%. That differential has always been true in California. Not surprisingly and directly proportionate, the rate of renters in California is about 10% higher than the rate of renters for the rest of the country, 46% compared with 36% respectively. Theoretically, by increasing homeownership rates, you would automatically decrease the number of renters in the market. Proponents of a demand side argument theorize that implementation of rent controls may decrease the value of homes for investors, but the value of homes would remain constant for primary residence holders. By shifting the value away from investors, homeownership rates will increase naturally through the conversion of rental properties to primary residence holders.

The rationale surrounding the demand side analysis is tortured on a number of levels. Most obviously, increasing homeownership rates by converting rental properties into primary residences simply decreases the number of available rental units on the rental market. While it does address the issue of gentrification for those that are able to buy homes, it does little to actually address the fact that there are more renters than houses available for them.

The argument does, however, touch on a fundamental issue that is unique to California: With such a large percentage of California’s population being renters, 10% more than anywhere else in the country, does California have an obligation to provide some stability to middle- class workers who are lifelong renters?

The Politics

The real rationale for Proposition 10 and the repeal of Costa Hawkins is grounded in politics, not economics. First, Proposition 10 itself does not implement rent controls; it simply would allow municipalities to implement rent controls at the local level. Proponents of Proposition 10 argue that areas such as San Francisco, Silicon Valley and National City all have different housing needs that should be addressed at the local level. Proposition 10 simply gives local municipalities the flexibility they need in order to meet the needs of their community and develop flexibility in community planning.

Proponents of Proposition 10 argue secondarily that housing stability should be a right as opposed to a privilege. The median household income in San Diego County in 2017 was $66,500. According to BankRate.Com, assuming 20% down and only $1,000 a month in non-housing related expense, the maximum recommended housing price is about $240,000. Meanwhile, the median home prices in San Diego rose 8.6% in April, 2018 to reach its highest level ever at $570,000.

Based on these numbers, the average middle- class worker cannot reasonably expect to ever buy a home in San Diego or in most metropolitan areas in California. Since that is our current reality, then shouldn’t local municipalities be given the option of protecting middle- class families from being displaced from their communities? Shouldn’t local government be given the tools to promote a stable and diverse community? If we value economic and racial diversity, shouldn’t a community be given the flexibility to plan for low income families through rent controls?

I struggle with these issues personally. We moved seven times in 11 years before we bought our home in 2018. Most of that was by choice, but I do know that rents went up precipitously over the same period. The one time where our landlord was selling the home we were renting, it was frustrating. As our kids are getting older, we are definitely accumulating more stuff, making the prospect of moving more daunting. Having a home now, I value homeownership, the stability it brings, and the investment in the community it allows. It would be devastating to know that I could never buy a home and I think that under those circumstances, I would want some stability in terms of my rental situation.

On the other hand, I firmly believe that the housing shortage and gentrification are supply side problems. The only practical means of bringing more housing on the market is to streamline the process of development and to increase investment into the housing market. Ultimately, the California housing market must be relied on to do what the California housing market has always done: Correct itself and bring housing back in line with what people can afford.

On balance, I take the position that Costa Hawkins should not be repealed. There are a myriad of reasons that lead to unaffordable housing in California. While each of these reasons can be separately analyzed and are topics worthy of their own articles, we have to start by looking at Proposition 13 and the relatively low effective property tax rates in California. From there, we quickly move to the development life cycle and costs of litigation. Finally, we have to look at the wealth effect and role that real estate plays in California’s economy.

Ultimately, what I am confident that we will find is that investors are competing with the middle-class for homes and driving the middle-class out of the owner occupied market and pushing them into an already flooded rental market. Further, I’m confident that the driving force behind the low owner-occupied housing rates can be traced to tax incentives that favor the investment buyer over the owner-occupied buyer.

As a result, the path to addressing middle-class gentrification is through policies that encourage higher owner-occupancy rates. While rent control may cause a small and unintended increase in owner-occupied housing rates, it really does little to help renters. Trying to address gentrification through rent control measures as allowed under Proposition 10 is just the wrong tool for the job, even if done at the local level. Instead, we must look long and hard at policies that have caused California to have the second lowest owner-occupancy rate in the country.

San Diego Right To Know Ordinance: What Landlords Should Know Before Evicting Residential Tenants

July 20, 2018/in All Blog Posts, Real Estate/by Chris Evans

Landlords seeking to evict tenants within the City of San Diego are required to observe numerous eviction laws and guidelines imposed by the State of California that govern the eviction process. The laws already contain several nuances to which a landlord must strictly adhere or otherwise risk jeopardizing the eviction in question. However, in addition to the California eviction laws, a landlord must also strictly follow eviction laws adopted and imposed by the City of San Diego. One of such laws specific to the City of San Diego is the Tenants’ Right to Know Ordinance (the “RTK Ordinance”). San Diego Municipal Code Chapter 9, Article 8.

What Is It?

In 2004, the City of San Diego adopted the “Tenants Right to Know Ordinance,” which is a just cause eviction ordinance. The RTK Ordinance significantly impacts a landlord’s ability to terminate, or refuse to renew, the tenancy of a long-term residential tenant by requiring the landlord to provide cause for termination. Generally, the RTK Ordinance states that if a landlord wants to terminate a residential tenancy of more than two years, the landlord must have one of nine enumerated reasons for doing so and must inform the tenant of such reason at the time of serving the requisite notice under California law. The stated purpose of the RTK Ordinance is “to promote stability in the San Diego rental housing market and limit adverse impacts on long-term residential tenants displaced and forced to find replacement housing in the expensive and limited San Diego housing market.

The RTK Ordinance, San Diego Municipal Code Section 98.0730, states the following nine reasons upon which a landlord can rely to terminate or refuse to renew a tenancy consist of the following:

Nonpayment of rent;
Violation of Obligation of Tenancy;
Nuisance;
Illegal Use;
Refusal to Renew Lease;
Refusal to Provide Access;
Correction of Violations/Necessary Repairs or Construction;
Withdrawal All Rental Units from the Rental Market;
Owner or Relative Occupancy

For example, if a landlord wanted to end a residential month-to-month tenancy that has lasted for over two years and that pertains to a property in the City of San Diego, the landlord could only do so if one of the foregoing reasons existed. If one of the reasons existed, the landlord would serve the proper notice to the tenant as ordinarily required under California law (i.e. 3-day, 30-day, 60-day notice, whichever the case may be), and the landlord must include the specific reason for termination in the notice. This differs from the general practice in California wherein a landlord can terminate a month-to-month tenancy by simply providing a 30-day or 60-day notice, for any reason and such reason need not be given to the tenant.

Challenges to Interpretation.

At first glance, the RTK Ordinance appears relatively straightforward in that the typical reasons for terminating a tenancy match those permitted by the RTK Ordinance. However, problems may arise due to the ambiguous terminology used in the RTK Ordinance.

For example, while it is clear that the RTK Ordinance applies only to tenancies of more than two years in duration, it remains unclear whether the RTK Ordinance applies solely to month-to-month tenancies, or whether the RTK Ordinance also applies to fixed term tenancies. Our office is of the opinion that the RTK Ordinance is limited to the month-to-month tenancies given the fact that a fixed term tenancy automatically terminates without notice. However, the issue has yet to be litigated and could pose costly and time-consuming problems to a landlord looking to evict a tenant if a tenant, rightly or wrongly, sought to challenge the issue.

Additionally, further ambiguity arises where a landlord relies on the “Correction of Violation” cause to terminate a tenancy. The RTK Ordinance provides that a valid cause to terminate a tenancy exists if the landlord needs possession of the property in order to make “necessary repairs and construction” to the property in question. This obviously begs the question of what is “necessary,” which is not surprisingly undefined in the RTK Ordinance. Again, the issue has yet to be sufficiently litigated to create any sort of certainty around the issue for landlords seeking to evict.

Summary.

The RTK Ordinance is a very tenant-friendly ordinance that creates further nuance to the eviction procedures in the City of San Diego. The RTK Ordinance imposes additional burden on a landlord seeking to evict a residential tenant. Should an unlawful detainer be filed, the RTK Ordinance also provides a mechanism for the tenant to challenge the eviction by alleging as an affirmative defense that the landlord failed to abide by the RTK Ordinance. For instance, if the tenant contests the reason provided by the landlord in the notice (i.e. tenant contends he or she was not causing a nuisance), the tenant can allege the landlord did not abide by the RTK Ordinance and would bear the burden of proving that the landlord did not follow the RTK Ordinance.

Landlords need to be cognizant of the requirements of the RTK Ordinance in order to smoothly and efficiently evict a long-term residential tenant. Failure to adhere to the provisions of the RTK Ordinance could substantially and negatively impact a landlord. At a minimum, the landlord will suffer the lost time and inconvenience of having to serve a new notice that includes proper cause for eviction. If the landlord has gone so far as to actually commence an unlawful detainer suit based on the bad notice, the consequences can potentially be far worse. Not only will the tenant win the eviction case and the landlord will have to start the entire process over again, thus losing more time and rent, but a successful win for the tenant could subject the landlord to paying the tenant’s costs and attorneys’ fees.

The creation of the RTK Ordinance affirmative defense also creates a level of unpredictability for landlords when renting properties in the City of San Diego. Naturally, landlords will need to assess this potential risk and unpredictability associated with the RTK Ordinance and will take such risk into account when renting their properties to potential tenants.

Given the above, if you want to terminate a long-term residential tenancy, be sure to consult a real estate litigation attorney to help ensure that you are in compliance with the provisions of the RTK Ordinance and California eviction law.

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