San Francisco Tenant Buyout Agreements

In the heyday of tenant buyout agreements, it seems that our office negotiated at least one buyout each and every day. Although not as common recently, buyout agreements remain a viable way to transition tenants out of their rental unit by offering a lump sum payment in exchange for vacating the unit. This vehicle can be particularly attractive when there simply are no convenient legal grounds to compel a tenant to leave.

The history of these agreements has come full circle, it seems. Tenant buyouts were once frowned upon in San Francisco because landlords could not endeavor to repossess a rental unit without serving an eviction notice without “just cause” and paying money to a tenant to vacate did not pass satisfy the just cause requirements of the ordinance.

After judicial challenges, the courts affirmed a landlord’s First Amendment rights to negotiate a tenant buyout agreement with a tenant and these precedents opened the floodgates to a flurry of tenant buyouts.

Although the city kept a pulse on the number of evictions, it could not quantify the brisk number of tenant buyouts, many of which were suspected to come with the implicit threat that the tenant would face imminent eviction unless he or she accepts the buyout. Alarmed by the perceived number of tenant buyouts and fearing that unknowing, vulnerable residents were being harmed by the agreements they voluntarily entered in to (perhaps unaware of the true value of their units), the climate was ripe for regulation.

Although our experience has shown that a properly negotiated tenant buyout is a win-win and the cash infusion has catapulted many tenants to home ownership and tenants are not as gullible as some advocates would lead you to believe, the Rent Board and San Francisco Board of Supervisors adopted an amendment to the city’s Rent Ordinance, known as Section 37.9E. In other locales, it’s fairly uncommon for laws to be enacted that regulate the negotiation and agreement of parties, but Section 37.9E did just that. Its aim was to prevent tenants from feeling coerced into signing agreements and make it easier for them to arrive at the going price for buyouts.

The law requires landlords to notify tenants of their rights prior to negotiating a buyout and if the buyout is accepted, affords the tenant a 45-day window to rescind their decision. The buyouts are to be filed and registered with the San Francisco Rent Board, and to assuage concerns that some speculators were using buyouts to circumvent prohibitions on condo conversions and other tenant protections, instituted a series of rules that limit condo conversion rights. View the entire Ordinance here.

Of course, there are some landlords and tenants that balk at a law that limits their ability to enter into a contract and ignore the tenant buyout ordinance, and many tenants are all too willing to keep the agreement under the table to avoid taxes, keep getting government benefits, or hiding their actual whereabouts. We strongly advise landlords to discuss with Bornstein Law how best to handle the negotiation process through to final transition of the tenants from the property. Remember, failure to comply with the law may subject you to sanction from the City Attorney and a phalanx of tenant attorneys eager to file lawsuits against you for among other claims, wrongful eviction.

Assuming compliance with all the provisions of the tenant buyout ordinance and the tenant is willing to entertain an offer to vacate, striking the right dollar amount can be difficult. There are a host of unique considerations we encountered in the many buyout agreements we have brokered at Bornstein Law.

Though not typical, we have seen six figure buyout deals, seemingly excessive and irrational unless you consider what a home would sell for in today’s red-hot market — a lot more than $100K. In other situations, perhaps the landlord has an opportunity to sell a building, but the potential buyer seeks the property vacant upon close of escrow. Those are but a couple situations that may inflate the price a landlord is willing to doll out to make way for new tenants and buyers. What rent the vacated unit would command is another factor.

Likewise, there are many extraordinary factors that influence a tenant’s position, some that are plain at the outset of the negotiation and others that could surface during a fluid discussion. Perhaps the tenant is elderly, disabled or catastrophically ill, requiring more money commensurate with the added difficulty to relocate. Conversely, maybe a tenant is itching to move but needs an extra $50,000 to help with a down payment on a home to bring their desires to fruition. These tenants clearly may be amenable to a lower dollar amount.

We don’t have a crystal ball, but one thing we do very well at Bornstein Law is manage relationships between landlords and their tenants and oversee the organized process of a properly structured and airtight tenant buyout agreement. Ideally, we remain on the sidelines and do not initiate contact with the tenant, to avoid the intimidation of an introductory phone call. Hard-won experience has shown that if we are the ones that open the discussion of a buyout, the tenant will either be spooked or become exuberant about a pay day and then elicit the assistance of a tenant attorney whose job is to affect the most favorable terms for the tenant.

We would be remiss not to mention that there are anti-harassment laws in place that would seem to throttle the number of times a landlord can ask a tenant to consider a buyout agreement. Under the banner of free speech, what is excessive? Can you attempt to persuade the tenant to be bought out once a year, or ten times a year? As of the date of this writing, the laws have not been tested, so there is no definitive answer to that question. We urge discretion in broaching the conversation and if the tenant says no, they mean no.

According to the notices that must be provided under Section 37.9E, the tenant is explicitly advised that they have the right to decline a tenant buyout agreement. Once declined, owners should not belabor the point, or they may risk crossing the line under anti-harassment provisions.

In parting thoughts, it appears that in today’s climate, a rental property owner is presumed to be manipulative if they propose a tenant agreement, while tenants are presumed to be disempowered. As such, there are a wealth of legal resources for tenants, many of them at no charge. While landlords are not so fortunate to have vocal advocates to protect their interests, Bornstein Law fills the void.