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Uses For and The Benefits of the Ellis Act

© Copyright  2000-2011  Landlord.com

Letís face it, rent control in any form stinks. In those jurisdictions in California that have it, there is an important law that every landlord and property manager needs to know more about. The Ellis Act was passed by the California legislature in 1986. It was designed to supersede a judicial decision which effectively granted to city councils and county boards of supervisors the power to force a landlord to continue to offer his property for rent, regardless of the landlordís desire to retire from the rental business. The act sets up an unconditional right to go out of business -- something which one would have thought was protected by the 13th Amendment to the US Constitution anyway -- and limits the power of localities to regulate the process by which it may be exercised.

The purpose of this column is to acquaint the landlord with his right to withdraw his unit from rental use in a jurisdiction with rent and eviction controls. In addition, we will consider the regulations which localities may impose on the exercise of that right. The precise limitations imposed differ in each jurisdiction, and from time to time, as they have been the subject of some litigation. For this reason, not all jurisdictions have necessarily imposed all the limitations which they are permitted to impose, or to their fullest permissible extent. The landlord should check with his local rent control board to determine what is in effect, as such an undertaking for each rent control jurisdiction is beyond the scope of this article.

Landlords who offer rental "accommodations" are protected under the act. Accommodations are defined in its first section, Government Code Section 7060.

7060. (a) No public entity, as defined in Section 811.2, shall, by statute, ordinance, or regulation, or by administrative action implementing any statute, ordinance or regulation, compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease.

(b) For the purposes of this chapter, "accommodations" means the following:

(1) The residential rental units in any detached physical structure containing four or more residential rental units.

(2) With respect to a detached physical structure containing three or fewer residential rental units, the residential rental units in that structure and in any other structure located on the same parcel of land, including any detached physical structure specified in paragraph (1).

By this definition, the landlord may remove from rental use all the units in a structure containing four or more units, regardless of whether there are other structures containing rental units on the same parcel; or, all the rental units in a structure containing three or fewer residential rental units if, and only if, he also removes all other rental units in all other structures on the same parcel.

Example: The landlord owns two duplexes on a single parcel. He lives in one of the duplexes and wishes to remove the adjoining attached unit from the rental market. Because his duplex contains three or fewer units, he must remove both duplexes from the rental market to avail himself of the protection of the act.

Example: The landlord owns a modest apartment complex of three buildings, each of four units, all on the same parcel. Because of a recent zoning change, he is permitted to have professional offices on the lot. He decides to remove the front building from residential use, remodel it, and rent it out for professional offices. In this case, he is permitted to do so under the act because, since the building has four units, he is not obligated to remove all the other units on the same parcel. The definition of "accommodations" means that he is not renting accommodations when he rents out professional offices.

It is clear that single family dwellings and smaller buildings such as duplexes and triplexes owned by the landlord are covered by the law. Condominiums certainly are not, as they are part of a structure containing individually owned units, not residential rental units, and the courts have so held. The same is probably true as well of town homes and garden homes.

There is no requirement that the landlord remove all the rental units in the rent controlled jurisdiction from rental housing use. Nor must the unit permanently remain out of the rental housing market. There are ways the units can re-enter the rental housing market, but they can be sufficiently regulated as to render the Ellis Act useless as a back door method of avoiding rent control. This will be discussed as we go through the regulations which the rent control jurisdiction may impose on the landlord going out of business.

There are several things which the Ellis Act does not do, and these must be taken into account as the landlord considers his going out of business option.

1. The act does not relieve a landlord who has agreed with a public entity to provide housing accommodations in exchange for financial assistance, interest subsidy, etc., from fulfilling his obligations.

2. The act does not purport to diminish planning, zoning and subdivision approval authority of the locality. The locality is under no obligation to grant a subsequent application for a zoning waiver to convert the building to commercial use, for example.

3. The act does not prevent the locality from compelling the landlord to pay relocation assistance to lower income households. These last are currently defined at Health and Safety Code Section 50079.5 as those whose income level would otherwise qualify them for Section 8 housing.

4. The act does not impair any existing lease or rental agreement. A fixed term lease may not be terminated on the ground the landlord is going out of business, and a periodic tenancy must still be terminated by service of a notice terminating tenancy.

As a condition of removal of the units from rental use, the locality may only impose the following obligations:

1. That the owner notify the rent board of his intention to remove the units, giving certain information such as the names of tenants, description of the buildings, rents, etc., not more than 60 days before the projected removal.

2. That the landlord record with the County Recorder, in the chain of title, an abstract of this information.

3. That the landlord notify the tenants affected of the notification to the rent board, together with other items of information.

4. That the landlord notify the rent board in the future if he decides again to offer the units for rent.

5. That relocation assistance be given to lower income residents as mentioned above.

In order to prevent landlords from using the Ellis Act as a way around rent and eviction controls, there are a number of regulations in the act itself which affect the landlord who, after withdrawing his units, attempts to re-enter them into the rental housing market.

If the landlord offers any of the units for rent within one year of the date the units were withdrawn, then many bad things happen. First, the landlord must offer the unit at the same rent, plus any allowable increases under the rent ordinance, except a vacancy decontrol increase, as was being charged at withdrawal. Second, the landlord is liable for actual damages to the displaced tenant plus punitive damages of up to six months rent, in addition to any other remedies under the law -- damages for fraud, for example. Third, the rent board or other public entity may sue the landlord on behalf of the tenants for damages, actual and punitive. Fourth, the landlord must offer the rental unit to the displaced tenants on the same terms as were in effect at the time of withdrawal, if the tenant has requested such within 30 days after displacement.

If the units are offered for rent one year or more after withdrawal, then the landlord must offer the units at the rental rate being charged at the time of withdrawal of the units, plus any allowable increases except a vacancy decontrol increase. The local entity can require, for a period of not more than ten years after removal of the unit from the rental market, that the landlord offer to renew the tenancy of the displaced tenant within thirty days after notification to the rent board of the landlordís intention again to offer the unit for rent.

If the original building is demolished and a new building constructed on the property and offered for residential rent within five years of withdrawal, then two things happen. First, the building is subject to rent control, even if there is a new construction exemption in the ordinance. Second, the newly constructed units must be offered at a price based on a fair and reasonable return (the law is a little unclear on this point, but this is its most likely meaning).

These constraints do not apply to a bona fide purchaser of the property for value unless the public entity records a specific notice concerning them in the chain of title before title is transferred. Note, this applies to a bona fide purchaser for value, not, for example, to a brother in law who receives a quit claim deed.

Finally, because the exercise of rights under the Ellis Act does not automatically impair any rental agreements which the landlord has outstanding, the landlord must proceed to his eviction remedies if the tenants do not move voluntarily. However, notice the language in Government Code Section 7060.6.

7060.6. If an owner seeks to displace a tenant or lessee from accommodations withdrawn from rent or lease pursuant to this chapter by an unlawful detainer proceeding, the tenant or lessee may appear and answer or demur pursuant to Section 1170 of the Code of Civil Procedure and may assert by way of defense that the owner has not complied with the applicable provisions of this chapter, or statutes, ordinances, or regulations of public entities adopted to implement this chapter, as authorized by this chapter.

The only defense to the landlordís attempt to evict, other than failure to comply with the unlawful detainer statutes, is that he has failed to comply with the Act and the regulations the Act actually permits localities to impose. To this extent, the Act supersedes all other eviction controls existing in the landlordís jurisdiction.

The full impact of the Ellis Act has yet to be measured, however, several uses for the Act suggest themselves, particularly in jurisdictions such as San Francisco, which has recently imposed major restrictions on owner move in evictions. Without going into all the details, which will differ from jurisdiction to jurisdiction, the Act may be of use in at least the following circumstances.

clearing a single family dwelling in preparation for a buyer who desires to live there

clearing a set of four flats for occupancy by four tenants in common. This is something not permitted under some ordinances on an owner move in basis, and the new owners must be careful that it is on a mortgage sharing, not rental, basis

clearing a single family dwelling for occupancy by a relative in jurisdictions such as San Francisco where this option has been removed, or for a non-qualifying relative

clearing a unit for a friend

With the increased use which will undoubtedly be made of the Act as local city councils and boards of supervisors desperately attempt to shore up their eviction controls, there is the question of what they might do to emasculate the Actís provisions. Thus far, the courts have consistently held that the Act is pre-emptive, and that local entities are powerless to ameliorate its effects, except to the extent that the statute itself permits.

One troubling power reserved to the localities has to do with the displacement payment to "lower income" households. There is no measure in the Act describing with specificity what the payment is for or limiting its amount. While some writers have assumed that this amounts to payment of relocation expenses, the statute speaks instead of the power of the locality to "mitigate any adverse impact" of the displacement. It is as much an adverse impact to dislocation to have to pay a higher rent for another rental unit, say, as it is to have to pay Bekins to move furniture there. Unless somehow circumscribed by a judicial ruling, which is always possible, the sky is the limit. It is here, most likely, that the Act will be assaulted next, by making it financially unfeasible for the landlord to exercise his rights under it. We urge California landlords to oppose most vigorously any such encroachment on the protections conferred by the Ellis Act.

The invocation of the Ellis Act is not to be undertaken lightly. The implications of the remedy for the landlordís estate, and the finality of the decision, mandate that the decision be made only in consultation with a CPA, a Realtor, and an experienced lawyer. The CPA should analyze the financial impact on the landlordís estate, the true cost of withdrawing the units from rental housing use. The Realtor should determine the impact on the value and future salability of the property. The lawyer will safely escort the landlord through the procedural minefield, determine that withdrawal is the best overall remedy, and ensure the notices are correct and all the regulations complied with. Nevertheless, for the landlord with a serious and otherwise intractable problem, the Act may provide an appropriate remedy.


Addendum

The Ellis Act article was prepared before Governor Davis signed a bill amending the Act in October, 1999.  This addendum is designed to inform the reader of the effect of the amendments.  A complete text of the bill as signed is available in PDF format.  An Adobe reader is required and can be obtained by clicking the icon.  The sections of the Bill pertaining to the Ellis Act are in sections 7060 through 7060.7.  We urge any landlord who contemplates availing himself of the provisions of the act to read these sections before consulting with his attorney.

The amendments to the Ellis Act provide the following:

     The notice of intent to withdraw the unit from residential housing use is extended from 60 to 120 days.

     The landlord who offers a withdrawn rental unit for rent within two years of the date of withdrawal is now liable for damages, including punitive damages, extending the period from the old one of one year.  This extension also applies to the requirement under the Act to offer the unit to the former tenant, in the absence of a local ordinance extending that requirement.

     The landlord who gives a notice in connection with a unit the occupant of which is over the age of 62 or disabled, must give at least one years notice of intent to withdraw with respect to that unit.  Other units in the building or complex are not affected.  The procedure by which the tenant may claim this benefit is covered in section 7060.4.

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