The changed landscape for buyers and sellers of tenant-occupied residential real estate
By Jessica Mullinix
Spring of 2022 saw owners of residential real properties scrambling to sell in order to capitalize on high prices with buyers engaged in frenzied bidding to lock in lower interest rates before they increased. Tenant-occupied residential properties were no exception.
Yet sellers and buyers of tenant-occupied residential properties considering evicting the tenants encountered a changed landscape under the California Tenant Protection Act (CTPA) effective Jan. 1, 2020.
The increased cost and difficulty of evicting long-term tenants under the CTPA must be weighed: (a) by sellers against the value to prospective buyers of tenant-free properties; and (b) by buyers who wish to occupy or vacate the property against the lower purchase price for tenant-occupied properties. Moreover, sellers of tenant-occupied properties now assume the risk, after evicting tenants to vacate the property for sale, that the property will sit vacant for longer in the current high-interest rate environment.
The CTPA restricts a landlord’s ability to evict a tenant (even if the tenant is “month-to-month” or upon expiration of the tenant’s lease term), generally requiring “just cause” to evict a tenant who has occupied a property for over 12 months unless an exemption applies.
Just cause to evict can be “at fault” (tenant-driven, e.g., if the tenant is not paying rent) or “no fault” (landlord-driven). Often, a seller wishing to sell a property free of tenants or a buyer wishing to evict tenants from its property must claim “no fault” just cause for eviction. An eviction notice issued by a landlord claiming “no fault” just cause for eviction should describe both the specific grounds constituting “no fault” just cause and the tenant’s right to relocation assistance (one month’s rent statewide, or three months’ rent in the City of Santa Barbara).
A seller or buyer of tenant-occupied property may claim “no fault” just cause due to “[w]ithdrawal of the [home] from the rental market.”
California’s Ellis Act can be looked at to shed some light on these grounds for eviction.
The Ellis Act requires that a home withdrawn from the rental market, if re-rented: (a) within five years after the tenant is evicted, be rented at the rate paid by the evicted tenant; and (b) within 10 years after the tenant is evicted, first be offered for lease to the evicted tenant.
A seller wishing to demonstrate their good faith intent to withdraw a home from the rental market should seek to sell to a buyer who intends to occupy the property long-term and does not intend to rent the property to tenants.
Another basis for “no fault” just cause for eviction is if the buyer of a residential property intends to “demolish or … substantially remodel” the residence.
Per the CPTA, such remodel should involve “replacement or substantial modification of any structural, electrical, plumbing or mechanical system that requires a permit” or hazardous materials abatement “in accordance with applicable federal, state and local laws” not reasonably achievable “in a safe manner with the tenant in place” and “require[ing] the tenant to vacate … for at least 30 days.”
The CTPA wasn’t intended to affect smaller landlords.
It exempts owner-occupiers who: (a) share bathroom or kitchen facilities with their tenants; (b) rent or lease up to two units or bedrooms (including accessory dwelling units) in a single-family residence; or (c) rent out the second unit in the duplex they occupy.
The CTPA also broadly exempts homes that are “alienable separate from the title to any other dwelling unit” (i.e., a single-family residence or condominium unit), if not owned by a REIT, corporation or LLC of which a corporation is a member.
To qualify for this exemption, landlords should give their tenants the following statutory notice (generally, in the lease or renewal thereof) of exemption:
“This property is not subject to the rent limits imposed by Section 1947.12 of the Civil Code and is not subject to the just cause requirements of Section 1946.2 of the Civil Code. This property meets the requirements of Sections 1947.12 (d)(5) and 1946.2 (e)(8) of the Civil Code and the owner is not any of the following: (1) a real estate investment trust, as defined by Section 856 of the Internal Revenue Code; (2) a corporation; or (3) a limited liability company in which at least one member is a corporation.”
The widely used California Association of Realtors (CAR) lease forms include an addendum (Form RCJC) that includes a checkbox alongside the above statutory notice that can be checked if applicable, yet even licensed real estate salespersons can neglect to check the box indicating a single-family home is exempt.
Many owners of single-family residences or condominiums leased to tenants that would be exempt (had proper notice been given) risk having to pay relocation assistance.
These laws are still relatively new and are confusing, even to some seasoned landlords and real estate professionals.
This article does not constitute legal advice but, if anything, should serve as a cautionary tale. Any residential landlord entering a new or renewed lease of a single-family or condominium property should ensure that the lease includes the statutory notice, especially if the alternative (in the City of Santa Barbara) is to risk paying three months’ rent at City of Santa Barbara rental rates.
Jessica Mullinix is an attorney at Brownstein, Hyatt, Farber, Schreck LLP and is based in the firm’s Santa Barbara office.