Coyne v. City and County of San Francisco, 3/21/17, 1DCA/5
Some historical background to this case — Back in the 1980s, a property owner called Nash was tired of rent control and wanted to go out of the business of renting property. The City of Santa Monica refused to let him take his property off the rental market unless he could show he couldn’t make a “reasonable” return on the property. He couldn’t make that showing, and so he sued. In 1984, the California Supreme Court upheld Santa Monica’s decision. In 1985, the California legislature enacted the Ellis Act, which was intended to overturn the court’s decision in the Nash case. The Act prohibits a city or county from “compel[ling] the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease . . . .” Gov. Code, § 7060(a). Since that time cities like San Francisco have been trying to find a way to defeat the Act. And so enter the Coyne case.
From 1994 to 2014, San Francisco enacted a series of ordinances that required owners who exercise their rights under the Ellis Act to make relocation/mitigation payments. These payments were initially set at about $1500, they increased to $4500, were adjusted for inflation to about $5500, and are subject to caps that eventually grew to approximately $16,000 per unit. Owners had to make additional payments of about $4000 to elderly and disabled tenants. In 2014, SF was feeling it so it upped the ante.
SF enacted a rule that landlords had to pay for “the difference between the tenant’s current rent and the prevailing rent for a comparable apartment in San Francisco over a two year period.” The law had no cap, and tenants could use these ransom payments for anything they liked – a fancy car or to increase their stock portfolio. Courts struck down the ordinance.
The People’s Republic was not done. In response, it enacted a similar ordinance, this time capping the mitigation/relocation payment at $50,000 and requiring tenants to promise they would use the ransom payments on relocation expenses. SF also created a “hardship” process for owners who were willing to expose their entire financial picture to city bureaucrats, even though there were no objective standards concerning how bureaucrats would had to evaluate hardship petitions. In addition, the ordinance allowed owners to ask for receipts from former tenants to ensure that the ransom payments were used for relocation, over a period of three years. A provision designed for owners who have nothing else going on.
Coyne filed suit to challenge this ordinance.
Again the court struck down the new ordinance. The ordinance caused a head-on collision with California’s Constitution , which allows cities and counties to enact and enforce police powers so long as they don’t conflict with general state laws. In determining whether there is a conflict between the ordinance and the Ellis Act, the court adopted a test used by many other courts: Whether the city placed a prohibitive price on owners who wish to exercise their rights under the Ellis Act. A prohibitive price compels landlords to remain in the residential business, and would therefore defeat the Act. As one court has said: “The Ellis Act does not permit the City to condition plaintiff’s departure upon the payment of ransom. [¶] To allow the City to so enlarge the concept of mitigation that it prevents plaintiff from exercising his right to go out of business would make the Ellis Act a dead letter except for those owners fortunate enough to have no tenants to displace.”
The court surveyed cases where cities had improperly imposed a “prohibitive price” on landlords who wished to take their property off the rental market, including ordinances requiring landlords 1) to obtain a permit before taking their property off the market; 2) to replace the housing stock or pay a fee in lieu; 3) to pay relocation assistance to all evicted tenants; and, 4) to provide notice to affected tenants of relocation assistance due when the property is taken off the market.
The court had no problem finding that SF’s ordinance was in conflict with the Act. The court could find no other ordinance where a city tried to force a massive payment as a condition of exercising rights under the Ellis Act. And, allowing cities to ransom owners would defeat the law.
The court rejected the SF’s reliance on Government Code section 7060.1(c), a savings clause in the Ellis Act which preserves local authority to mitigate “any adverse impact on persons displaced by reason of the withdrawal from rent or lease of any accommodations.” SF argued that increased rent was an “adverse impact” of eviction that the savings clause allowed them to regulate with the ordinance in question. The Court disagreed: An increase in rent was not an adverse impact of the eviction but an impact that stemmed from the City’s rent control itself. Rent prices are a function of the market (not of an eviction) and the increase in rent faced by a tenant is a result of the fact that rent control keeps rent at an artificially low rate. Finally, the court noted that a savings clause must be strictly construed, and not be interpreted in a way that would defeat the purposes of the statute itself. That’s statutory construction 101.