Voters Approve Mayor’s Transfer Tax Exemption

The Mayor’s proposal to waive San Francisco’s Transfer Tax for certain converted residential space (“Measure C”) was approved by voters on March 5, according to the City of San Francisco’s official preliminary election results. We previously provided an overview of this measure that is aimed at encouraging conversion of office to residential use in the City on October 25, 2023.

Generally, under the new law, up to the first 5,000,000 square feet of “Converted Residential Property” can be exempted from the City’s Transfer Tax. Conversions that involve demolition of nonresidential property to construct new residential property may also be considered Converted Residential Property subject to the tax exemption.

However, the measure caps the amount of new square footage that can be considered Converted Residential Property. For projects where a building is demolished to construct new residential property at the same site, the amount of Converted Residential Property only includes residential square feet in the new building that exceeds the square feet of any residential space in the demolished building, up to a maximum of the total gross floor area of the non-residential space in the demolished building, plus 10%.

According to SPUR, the approval of Measure C comes with the following benefits:

  • Acceleration of office to residential conversion projects can speed downtown recovery through reducing the cost of development;
  • Activating obsolete office buildings with housing can increase foot traffic and economic activity;
  • The Board of Supervisors can make future changes to the transfer tax as needed legislatively, allowing flexibility for the City to make adjustments based on economic conditions

The tax exemption under Measure C applies to the First Transfer of Converted Residential Property—meaning the first transfer after a certificate of final completion and occupancy or temporary certificate of occupancy is issued for the property, whichever is earlier. So, projects will generally see the benefits of Measure C once construction is complete.

The passage of Measure C alone is not expected to close the feasibility gap for most office to residential conversion projects, and additional incentives will be needed to make such projects financially viable.

Authored by Reuben, Junius & Rose, LLP Attorney Kaitlin Sheber.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Legal Victories for CEQA Streamlining

Earlier this month, the California Court of Appeal ruled that a qualifying development project in San Diego County could use the County’s General Plan Environmental Impact Report (“EIR”) to streamline the project’s environmental review, over the objections of neighbors and the County’s Board of Supervisors. A similar result was recently achieved in San Francisco.  RJR partner Tuija Catalano secured a victory at the Board of Supervisors for a housing project, with the Board determining that the project properly used San Francisco’s recently certified Housing Element EIR to streamline CEQA processing for the project. The Court of Appeal’s opinion further strengthens the use of CEQA streamlining and exemption provisions and validates San Francisco’s established process of “tiering” project specific CEQA review off its General Plan and Area Plan EIRs.

In San Diego, County planning staff determined that a recycling plant project that was consistent with the County’s most-recent General Plan could be evaluated for a CEQA evaluation pursuant to CEQA Guidelines Section 15183, which generally limits the CEQA evaluation for a project consistent with a General Plan (including a Housing Element) or an Area Plan to potential unique (“peculiar”) impacts. After several technical studies confirmed the recycling center project did not result in significant or peculiar impacts not already evaluated in the General Plan EIR, County staff prepared a 15183 evaluation with mitigation measures from the General Plan EIR’s Mitigation Monitoring and Reporting Program.

If that fact pattern sounds simple enough, the administrative CEQA review process was actually more complicated and unfavorable for the developer: the developer originally pursued an initial study to prepare either an EIR or Negative Declaration before pivoting to a 15183 evaluation only after all of the background technical studies were completed.  The Board of Supervisors sided with neighbors and upheld an administrative appeal over the recommendation of the staff to deny the appeal. The trial court also sided with the Board of Supervisors. The Court of Appeal reversed the trial court’s decision with a surprisingly straightforward opinion.

Importantly, the Court held that the project could pivot to a 15183 evaluation and confirmed the eligibility of this streamlining evaluation for projects using a General Plan or Area Plan. The Court next found that the Supervisors failed to base their conclusions on any substantial evidence in the record. It also explicitly rejected layperson testimony from neighbors at the Board of Supervisors appeals hearing (related, it also confirmed that the substantial evidence standard—which is less deferential—applied even when a court reviews a city or county’s determination an exemption is not applicable). The crux of the Court’s argument:

the Board of Supervisors failed to identify the specific nature of the … project’s ‘peculiar’ impacts that required environmental review, except to point to broad environmental categories. Nor did the Board of Supervisors address, with specificity, the effect of uniform policies and procedures on their purported impacts.

Hilltop Group, Inc., et al v. County of San Diego, et al. (2024) ___ Cal.App.5th ___.

The Court’s opinion confirms the use of 15183 can be appropriate, even for a large-scale project like a recycling plant, and should make cities and counties more comfortable using their General Plan or Area Plan EIRs on larger-scale projects. The opinion also emphasizes that politics only goes so far when an administrative record is lacking: a city or county cannot simply decree that a certain environmental topic addressed in a 15183 exemption— for example, preservation—is not adequately analyzed. The local agency needs to provide specifics with adequate factual and legal backing (as mentioned above, “lay opinion and personal observations” by neighbors was not substantial evidence). And that determination needs to address why mitigation measures or otherwise-applicable laws could not further reduce or eliminate the peculiar impacts.

Closer to home, San Francisco has a 15-year history of using CEQA Guidelines Section 15183 in the context of Plan Area EIRs (such as Eastern Neighborhoods Plan Area EIR and Central SoMa Plan Area EIR) to issue Community Plan Evaluations for projects within the applicable Plan Areas. With the certification of San Francisco’s Housing Element (2022 Update) EIR in November 2022, many projects outside Area Plans became eligible for similar streamlined CEQA review based on the General Plan (i.e. Housing Element) EIR that applies Citywide.

On February 6, 2024, the Board of Supervisors heard the first CEQA General Plan Evaluation appeal, and with a 10-1 vote the Board found that the use of Section 15183 streamlining provision based on the Housing Element EIR was proper.  The recent Board of Supervisors appeal decision, as well as the San Diego Court of Appeal opinion are important.  Cities and counties can look to these decisions to support streamlined process based on General Plan EIRs on projects that are consistent with the development density within the General Plan policies. The Board decision and the Court of Appeal opinion are especially good news for projects that are located outside Area Plans that until now were required to complete a negative declaration or an EIR if they were not eligible for any of the categorical CEQA exemptions.

 

uthored by Reuben, Junius & Rose, LLP Attorneys Tuija Catalano and Mark Loper.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Courts Draw New Boundaries in Property Line Cases

Two recent California court decisions, involving all-too-common neighbor disputes, have provided new guidance concerning easements and property ownership.

In Romero v. Shih (S275023 [2024]), the California Supreme Court ruled that a neighbor (Sierra Madre, L.A. County) can acquire an exclusive right to a driveway easement by implication even where all of the elements of adverse possession are not met, namely, where the party claiming an easement has not paid taxes on the land in question.  The Court reversed the Court of Appeal, which had held that as a matter of law, such an easement could have been created only by a written instrument.  According to the Court of Appeal, the key fact was that the easement was “exclusive”.  Because it was used as a driveway, no other use of the property was possible.  Given the significance of this property right, such an easement could be created only by a written instrument.

The California Supreme Court disagreed.  The driveway had existed and been used by the neighbor for at least 30 years.  The two properties had been bought and sold over the years, but the respective deeds made no mention of the driveway.  Nevertheless, the Supreme Court found that a writing evidencing the easement wasn’t necessary, nor was it necessary that all of the elements of adverse possession be met.  The Court concluded that an easement by implication can be created where any reasonable person observing the two properties and an existing driveway would have assumed the neighbor using the driveway retained at least some continuing interest in the disputed strip of land.

The key facts were that for over 30 years, between the original separation of the properties and the discovery that the user of the driveway didn’t actually own the property, every successive owner of either property had allowed for and/or behaved as if the easement owner had the right to encroach upon the disputed strip of land with the driveway, which had remained unchanged in its use and function since at least the initial property separation.  This was enough to establish an implied easement.

The case of Goodhart, et al v. Honeybadger Acquisitions (A165781 [2023]) concerned the creation of an “equitable easement” in Tiburon.  For over ten years, the Goodharts improved and maintained approximately 950 square feet of land, believing the area was part of their front and rear yards.  The defendant discovered the area was his property when he commissioned a survey in connection with his plan to build a perimeter fence.  After defendant commenced construction of the fence, the Goodharts brought suit, seeking injunctive relief and a declaration that they are entitled to an equitable easement to use the disputed area.

The court’s decision was not a final judgment but rather granted a preliminary injunction, finding that the easement claimant (Goodhart) was “likely to prevail on the merits”.  The court explained that an [equitable] easement over the trespassed-upon property in the trespasser’s favor is created if the trespasser shows that (1) her trespass was ‘ “innocent” ’ rather than ‘ “willful or negligent,” ’ (2) the public or the property owner will not be ‘ “ ‘irreparabl[y] injur[ed]’ ” ’ by the easement, and (3) the hardship to the trespasser from having to cease the trespass is ‘ “ ‘greatly disproportionate to the hardship caused [the owner] by the continuance of the encroachment.’ ” ’ ”  (Shoen v. Zacarias (2015) 237 Cal.App.4th 16, 19.)

The court found that the Goodharts’ trespass was innocent because they thought the property was theirs.  As to potential injury to the defendant property owner and the balancing of harms, the court found this favored the Goodharts.  If the defendants built a fence on the true property lines as planned, it would come within two feet of the Goodharts’ driveway and front steps and the back of their house, and the Goodharts would lose approximately 950 square feet of their yards.  In comparison, the disputed areas constituted less than 1% of the defendants’ property and was located downhill from their residence on undeveloped hillside that was largely unusable to them.  Under these circumstances, the Goodharts were entitled to an equitable easement over the subject area of defendant’s property.

Authored by Reuben, Junius & Rose, LLP Attorney Thomas Tunny.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

 

 

 

Expanding Housing Choice: SF Finalizes Draft Rezoning Proposal

The San Francisco Planning Department has released more details on its Expanding Housing Choice Program, a citywide rezoning that will primarily target the city’s westside. The rezoning proposal originates in the city’s 2022 Housing Element Update, which was adopted last January, and requires the city to rezone to allow for approximately 36,000 housing units in order to meet its regional housing need allocation (RHNA) goal. Much like last year’s Constraint’s Reduction Ordinance legislation, the Expanding Housing Choice Program proposes sweeping changes to the Planning Code that are meant to spur housing development. These changes include upzoning along various transit and commercial corridors, relaxing of development standards and density controls, adoption of objective design standards, and the creation of a local “housing program” to rival the state’s density bonus law.

The most visible–and perhaps most controversial–aspect of the Expanding Housing Choice Program is the proposed upzoning along commercial and transit corridors in the city’s “well-resourced neighborhoods”.  At the end of January, the Planning Department released its final draft proposal map, which would see height limits of 65-85 feet (or 6-8 stories) on most major streets on the westside, where near uniform 40-foot (4 stories) height limits have reigned for decades. Although the proposal may look simple at first glance, it should also be noted that the draft map shows “final heights” that are intended to be the maximum height after the application of any density bonuses, and the actual base height limits will be lower than those shown on the draft map.

On February 1, 2024, the Department gave an informational presentation on the rezoning to the Planning Commission, and it was met with several hours of public comment. Many residents expressed disagreement over the upzoning, including concerns about the loss of quieter neighborhoods, impacts to traffic and infrastructure, and displacement of longtime residents and commercial uses. The comments were well received by the Planning Commission, who asked Department staff to consider altering the proposal to address the comments. If last year’s Constraints Reduction Ordinance is any indication, it is likely that the upzoning proposal will be modified several times and go through several heated hearings at the city’s Board of Supervisors, Land Use committee, and Planning Commission.

A less controversial aspect of the Expanding Housing Choice Program includes the creation of a new “local housing program” that will provide an alternative to the state density bonus law that has risen in popularity in recent years. The new local housing program will offer housing projects various development benefits, such as density bonuses and streamlined processing, in exchange for providing affordable housing units. Unlike the state density bonus, however, which gives developers the ability to override development standards, the local housing program will give the city more control over these projects’ physical aspects and design character.

In addition to these major changes, the city will also adopt objective design standards to streamline project review and give projects more certainty from the initial design phase. Other changes include “density decontrol” along transit and commercial corridors, which will remove hard density limits (i.e. 2 units per lot) and allows projects to construct as many units as would reasonably fit within the envelope of a code-complying project. The proposal would also provide an alternative way to comply with the city’s inclusionary housing requirements by allowing small developments (less than 25 units) to provide units as rent-controlled units rather than BMR units.

While the Planning Department has finalized its Expanding Housing Choice proposal after almost a year of outreach and public engagement, the legislation still needs to be introduced, reviewed, and adopted by the city’s legislative body. Due to the wide-reaching changes and controversial reaction to the proposal so far, we expect it will continue to evolve over the coming months.

The Basics: Are you really covered as an additional insured?

Leases, construction contracts, easement agreements, and other contracts often require one party to name the other as an “additional insured” under its liability insurance policy.  The insuring party often provides its counterpart with a “certificate of insurance.”  The receiving party may believe that the insuring party complied with its obligations.  But unless an additional insured endorsement is issued, the negotiated risk transfer to the insuring party’s insurance carrier was not accomplished.

A certificate of insurance is nothing more than evidence of insurance.  It typically identifies the insurance carrier, states the kinds of coverage that are maintained, and outlines the insured’s policy limit(s).  A certificate does not provide additional insured status to the certificate holder.

Additional insured status may be conferred by a “scheduled” or “blanket” additional insured endorsement.  A “scheduled” endorsement is specific to the additional insured, includes its name on the endorsement, and amends the insurance policy:

Section II—Who Is an Insured is amended to include as an additional insured the person(s) or organization(s) shown in the Schedule. . . .

(Insurance Services Office, Inc. (“ISO”) endorsement CG 20 10).  When an insured who is frequently required to provide additional insured coverage to other parties (e.g., a subcontractor), its insurance carrier may simply include a “blanket” additional insured endorsement in the policy.  Such endorsements may identify the “Name of Additional Insured Person(s) Or Organizations(s)” as follows:

Any person whom you have agreed in a written and executed contract, prior to an “occurrence”, that such person or organization be added as an additional insured on your policy.

(ISO CG 20 10 12 19).  But the coverage is typically limited by the endorsement.  For instance:

If coverage provided to the additional insured is required by a contract or agreement, the insurance afforded to such additional insured will not be broader than that which you are required by the contract or agreement to provide for such additional insured.

Additional limitations often appear, including:

If coverage provided to the additional insured is required by a contract or agreement, the most we will pay on behalf of the additional insured is the amount of insurance:

  1. Required by the contract or agreement; or
  2. Available under the applicable limits of insurance;

Whichever is less.

(ISO CG 20 10 12 19 (2018)).  The limitations outlined in additional insured endorsements are important because the additional insured may receive less coverage than it might otherwise expect, or none at all.

An example highlights the issues:

A construction contract requires a contractor to procure and maintain a minimum of $5,000,000 in liability insurance coverage.  The contractor assumes indemnity obligations and agrees to provide $5,000,000 in additional insured coverage for the benefit of the property owner.  The parties agree that the contractor will cause its subcontractors to indemnify and provide additional insured status to the owner and contractor, and that any subcontractor that performs excavation will insure against subsidence risks.  The owner’s objective is to assure that if damage results from the excavation, the excavation subcontractor’s insurance company will defend the owner and pay the loss.  The owner intends to transfer the risk to the subcontractor’s insurance carrier.

But when the contractor enters into its subcontracts, the excavation subcontractor is only required to carry $2,000,000 in liability insurance coverage, agrees to provide additional insured status to the contractor only, and is not explicitly required to carry subsidence coverage.  The contractor provides a certificate of insurance to the owner that (a) shows the owner as the certificate holder on a $10,000,000 liability insurance policy, and (b) attaches a blanket additional insured endorsement.

During construction, the excavation subcontractor is negligent, and a neighboring property is damaged.  The owner asks the subcontractor’s insurance carrier to defend the claim.  But the insurance carrier will likely not defend or indemnify the owner, because the subcontractor did not agree to provide the owner with additional insured status.  If the carrier does provide coverage, it is likely that only $2,000,000 of the subcontractor’s $10,000,000 insurance coverage will be available.  Worse yet, the carrier may deny the claim entirely because the loss was caused by land subsidence, and the excavation subcontractor did not agree to provide that coverage (even if the subcontractor’s policy actually insures against that risk).  The insurance carrier will rely on the language of the blanket additional insured endorsement to support its positions.

When parties negotiate risk transfer provisions, they intend that losses will be allocated between them (and their insurance carriers) in a particular way.  But the risk transfer is not typically complete when the contract is signed.  Business owners and property owners will be well-served by paying attention to the details of insurance coverage – before there is a problem – to assure that their objectives are achieved.

Authored by Reuben, Junius & Rose, LLP Attorney Corie A. Edwards.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Leases V. Licenses and Eviction Rights

court cases

The question has been previously raised – is a lease the same as a license – in that does the underlying occupant/user acquire tenancy rights by such occupation regardless of whether you define an agreement as a license or a lease.  A recent case – Castaic Studios, LLC vs. Wonderland Studios (97 Cal.App.5th 209) – discusses an important aspect of this issue.  In Castaic, Wonderland, as licensee, defaulted under a license agreement and the licensor, Castaic, elected to seek an unlawful detainer action to remove the licensee, only to be told by the lower court that it was not an available remedy under the license.  Here, Castaic granted Wonderland the “exclusive” but “non-possessory” right for the use of the property.  The license stated it was “not a lease or any other interest in real property but a contractual arrangement that creates a revocable license”.  The licensor waived the right to an unlawful detainer under the license agreement and the license provided it would be governed by “contract laws and not by the landlord tenant laws”.  It further stated, that upon a default, the licensee agrees that licensor may cease to provide access to the licensee’s area of use without notice or the need to initiate legal process.

The Courts of Appeal analyzed the contract to determine if the remedy of unlawful detainer applied here.  They stated that the fundamental goal of contract interpretation is to give effect to the mutual intention of the parties as it existed at the time they entered into the contract.  Further, in interpreting the contract, the court gives the words their ordinary and popular meaning, unless the parties have given the words a specialized or technical meaning.  Here, the Court stated that even if the license contains some elements of a lease, its express terms show the parties’ intent to waive any rights afforded by the landlord tenant laws, including a landlord’s remedy of unlawful detainer.

Castaic argued that the waiver should not be enforced.  The Court disagreed based on two principles: (1) the parties have the power to determine the terms of their contractual relationships and (2) other than a law established for a public reason, any person may waive the advantage of a law intended for its benefit.  Here, Castaic waived the right to bring an action for unlawful detainer and the Court saw no public reason that would prohibit a landowner from agreeing to waive the unlawful detainer remedy.  Finally, the Court stated that the existence of a landlord tenant relationship was essential to an unlawful detainer action.

Castaic highlights that if an agreement is clear that it is a license and not a lease, the courts will review on the plain terms of the language of that license and the parties’ intent.  In this case, the Court found that the parties were explicit that an unlawful detainer remedy was unavailable to the licensor and nothing outside the language of the license would allow it to be implied otherwise.

New State Condo Law Allows Reduced HOA Assessments for Designated Affordable Units

We are following up on a previous update where we discussed Assembly Bill 572.  After undergoing a few amendments in the State legislature, the Bill passed and became effective January 1, 2024.  AB 572 amended Section 5605 of the California Civil Code, which is part of the Davis-Stirling Common Interest Development Act.

The amended law, with certain exceptions, prohibits a homeowners association (HOA) that records its original declaration (CC&Rs) on or after January 1, 2025, from imposing an increase of a regular assessment on the owner of a deed-restricted affordable housing unit that is more than 5% plus the percentage change in the cost of living, not to exceed 10% greater than the preceding regular assessment for the HOA’s preceding fiscal year.

In a significant break from previous State law and regulations, a qualifying HOA may impose an assessment against an owner of a deed-restricted affordable housing unit that is lower than the assessment imposed against other unit owners according to the proportional ownership of total subdivision interests subject to assessments.  This change would appear to allow an HOA to require market-rate unit owners to subsidize affordable unit owners with respect to payment of certain HOA assessments.

The new law is not all encompassing.  As stated above, it only applies to new common interest developments that record their original CC&Rs on or after January 1, 2025.  It also does not apply to any of the following:

  • A development of 20 units or fewer.
  • A development where the percentage of the units that are deed-restricted affordable housing units exceeds the percentage required by an applicable zoning ordinance in effect at the time the development received final approval.
  • A development that is located within a city, county, or city and county that does not have an applicable zoning ordinance requiring a percentage of deed-restricted affordable housing units and meets either of the following conditions:
    • The percentage of the units that are deed-restricted affordable housing exceeds 10 percent of the total number of units in the development at the time the development received final approval.
    • For certain other developments that were approved for streamlined processing pursuant to Section 65912.124 of the Government Code, the percentage of the units that are deed-restricted affordable housing exceeds 15 percent of the total number of units in the development at the time the development received final approval.

The well-intentioned law is designed to protect owners of designated affordable housing units from large increases in HOA assessments.  Owners of affordable housing units are typically low or moderate income and large increases in HOA assessments can be a financial burden, and can jeopardize their ability to afford the HOA assessments along with the monthly mortgage and other costs of home ownership.

Critics of the new law argue that it could lead to disproportionate financial burdens on homeowners who cannot afford to subsidize others as well as create inequities and divisions within the community by identification of a class of affordable housing or low-income owners, which could lead to resentment among other owners.

Critics also point out that the law may undermine the ability of HOAs to raise the necessary funds to maintain the community by limiting assessment increases for all owners in the HOAs effort to avoid unequal assessments, resulting in artificially low budgets, and/or deferred maintenance and repair obligations.  Artificially low assessments could eventually require multiple special assessments to fund HOA budget shortfalls.

Authored by Reuben, Junius & Rose, LLP Attorney Jay Drake.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Ninth Circuit Overturns Natural Gas Ban

Can cities and states really ban natural gas hookups? On January 2, 2024, the Ninth Circuit handed down a decision in California Restaurant Association v. City of Berkeley finding that Berkeley’s natural gas ban was preempted by federal legislation and struck the ordinance down.

In 2019, the City of Berkeley adopted first-of-its-kind legislation amending the city’s building code to prohibit the use of natural gas in virtually all newly constructed buildings, with some limited exceptions. Berkeley’s ordinance was originally enacted with the goal of curbing greenhouse gas emissions and encouraging all-electric infrastructure in the city. Soon after its enactment, however, the California Restaurant Association sued, arguing that the ordinance was preempted by the federal Energy Policy and Conservation Act (EPCA). The EPCA, enacted by Congress in 1975, provides a comprehensive scheme for federal energy regulation. For the purposes of this lawsuit, however, the statute also governs federal regulation of consumer goods using natural gas. Under the EPCA, these consumer goods are referred to as “covered products.” Under the EPCA, once a federal energy conservation standard is adopted for a covered product, state and local governments are prohibited from further regulating the product with some minor exceptions.

The district court, which first heard the case back in 2019, was largely favorable to Berkeley’s arguments that the ordinance was not preempted by federal law. After rejecting the city’s motion to dismiss the California Restaurant Association’s suit, the district court interpreted the EPCA narrowly so that the Act would not “sweep into areas that are historically the province of state and local regulation.” [i] The district court concluded that the EPCA was not preempted because the ordinance did not explicitly regulate or mandate the installation of any particular product or appliance, and because the ordinance’s effect on consumer products was “at best indirect.” [ii]

The majority for the Ninth Circuit disagreed with the lower court, explicitly abandoning the district court’s limited reading of the EPCA’s preemption statue. As the majority at the Ninth Circuit observed, following the plain language of the EPCA, once the federal government adopts an energy conservation standard for consumer products covered by the EPCA, state and local governments are limited in their ability to further regulate those products. At the appeals court, Berkeley had argued that the EPCA’s concern with covered products should be understood narrowly to exclude the distribution of natural gas. But the court was unpersuaded.

An inherent aspect of regulating covered consumer products under the EPCA, the majority observed, is whether those products can access natural gas at all. Therefore, the EPCA must preempt local and state regulations like Berkeley’s natural gas ban affecting natural gas supply to those covered products. But, as the court opined, the EPCA’s scope is not infinite and the statute may not preempt state or local regulation of a utility’s distribution of natural gas.

At the appeals court, Berkely had also argued that a finding that the city’s natural gas ban was preempted by the EPCA would necessarily repeal the Natural Gas Act, a comprehensive ban and federal regulatory scheme for the sale of natural gas. The Court, however, did not find any implied preemption because the Natural Gas Act only restricts the Federal Energy Regulatory Commission’s ability to regulate local distribution of natural gas, and therefore did not implicate the EPCA.

This ruling leaves other California jurisdictions with similar natural gas bans, such as San Francisco, San Jose, and Los Angeles, in an awkward position and will likely temper efforts by other jurisdictions to adopt similar bans. The case, though, is widely expected to be appealed to the Supreme Court, which may address the extent of the EPCA’s preemption of local gas regulation in the years to come.

[i] Cal. Rest. Ass’n v. City of Berkeley, 547 F. Supp. 3d 878,891 (N.D. Cal. 2021).

[ii] Id.

Force Majeure and Covid: Implications on Tenancies and Rental Payments

force majeure

What happens when a tenant does not pay rent citing the financial impacts of the COVID pandemic?  Can such tenant rely on the force majeure provision in the lease to excuse the payment of said rent?  These questions arose in lease contexts throughout the pandemic and a recent Court of Appeal case weighed in on one such situation.  In West Pueblo Partners, LLC v. Stone Brewing Co., LLC (C.A. 1st, April 3, 2023.  Westlaw Cite: 2023 WL 3151827), the court found that West Pueblo Partners, LLC (“Landlord”) could bring an unlawful detainer action to evict Stone Brewing Co., LLC (“Tenant”) and Tenant was not excused from paying rent due to a force majeure event, specifically the COVID pandemic.

In West Pueblo, Tenant operated a brewery and restaurant that was shut down in different capacities due to COVID restrictions during 2020 and 2021.  Tenant alleged they did not have to (and in fact did not) pay rent citing the force majeure provision in the lease which stated in relevant part “if a party is delayed from performing any of its obligations under the lease due to act of god or governmental act, then the time for performance of such party shall be extended for an equivalent amount of time.”  Tenant argued the governmental regulations and business interruptions triggered the force majeure provision and they were excused from paying rent during such time period.

The Court of Appeal reviewed the force majeure provision in the lease (which, to note, did not include a typical qualification that the payment of rent is always required regardless of any force majeure event) and found that if the force majeure event had effectively stopped Tenant from paying rent, that is one thing (for example, a snowstorm blocked the ability to send a wire), but here they had the financial means and chose not to pay the rent due to COVID restrictions and negative impacts on their business.  The Court of Appeal also dug into prior cases analyzing force majeure provisions generally and reiterated that “the qualifying event must have still caused a party’s timely performance under the contract to become impossible or unreasonably expensive.”  The Court of Appeal found that force majeure events which merely make performance unprofitable or more difficult or expensive do not suffice to excuse a contractual obligation.

The West Pueblo court did repeatedly note that Tenant admitted it had the financial means to pay the rent but elected not to do so.  This was a relevant consideration for the Court of Appeal when it reviewed other (out of state) cases on the subject which held certain tenants were excused from paying rent due to COVID and force majeure considerations.  In those cases, the tenants could not pay rent due to COVID because they did not have the financial ability to do so.  Here, Tenant was a company with multiple operations and admitted it could have paid the rental amounts due, but obviously had dramatically less income due to the restrictions.

The West Pueblo case highlights that although a party’s performance may be delayed if they are unable to act due to the force majeure event, it does not necessarily excuse them from performing said action if it was just more expensive or much harder to do so.  It must be impossible or egregiously expensive to comply in order to warrant excusing a contractual obligation.  Even COVID restrictions, which decimated restaurants’ ability to make money, do not necessarily insulate such tenants from their obligations under their leases.  This is especially true if the tenant objectively has the means to make the rental payment otherwise.

 

Authored by Reuben, Junius & Rose, LLP Attorney Lindsay Petrone.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

Details on San Francisco’s Proposed Housing Production Ordinance

ordinance

Recently, Mayor London Breed and Supervisor Joel Engardio introduced an ordinance removing some of the Planning Code’s regulatory barriers to housing. A major implementing measure of San Francisco’s recent Housing Element, it is rich in detail and nuance and proposes a range of common-sense changes to increase housing production. Below, we summarize some of the major aspects of the proposal captured in the first draft of the ordinance, broken up into two sections: process streamlining, and relief from certain building design and density restrictions.

Process Streamlining

  • Eliminating conditional use requirement for certain developments. Automatic conditional use (“CU”) approvals for developments on certain “large lots” in neighborhood commercial districts would be eliminated. Similarly, CU requirements for buildings taller than 40-50 feet in RH, RM, RC, and Broadway NC districts would be eliminated, as would buildings taller than 50 feet along the Van Ness Special Use District. This would unlock the development potential of many sites where the height limit is comfortably above the 40-50 foot CU threshold.
  • HOMESF. HOME-SF would be modified to allow projects on sites where a single-family home exists and is proposed to be demolished, and to remove a requirement that the Planning Department’s Environmental Review Officer determine the project will not have any adverse wind, shadow, or preservation impacts.
  • Dwelling unit demolitions. Outside of the “priority equity” areas of San Francisco—which are neighborhoods with a higher density of vulnerable populations; see the map at the bottom of this alert—some residential demolition projects will not require a CU. The project cannot remove more than two residential units; the units to be demolished cannot be tenant occupied or have a history of evictions within the last 5 years; the building cannot be an historic resource; the project needs to add at least one more unit than is proposed for demolition; and the unit needs to comply with the Housing Accountability Act’s protections for replacement units and recent tenants.

Design and Density Regulation Changes

  • Increased residential density in RH districts. The ordinance would eliminate the need for a conditional use (“CU”) to exceed the one- to three-unit base density in RH districts. And, it would principally permit one unit per 3,000 square feet of lot area in the three RH-1 districts; one unit per 1,500 square feet of lot area in RH-2; and 1 unit per 1,000 square feet of lot area in RH-3, exclusive of any ADUs. Also, residential projects in RH zones that meet certain eligibility criteria currently can have up to six units on corner lots, and up to four units on non-corner lots. The ordinance would add group housing to this potential density bonus on RH-1 zoned lots and eliminate an owner occupancy requirement, opening up the number of sites that could qualify for this density increase.
  • Making senior housing easier and more widespread. Currently, senior housing—which generally allows increased residential density—is only permitted within ¼ mile of an NC-2 zoning district or higher. The ordinance would eliminate this restriction, opening a wider area of the city for this much-needed type of housing. It would also eliminate an automatic CU requirement for senior housing in RH and RM districts that are not close to neighborhood commercial districts.
  • Minimum lot width and area. The City’s minimum lot width would be reduced from 25 feet in most districts to 20, and lot area reduced from 2,500 square feet to 1,200. This would allow more residential density on some larger lots.
  • Reducing rear yard requirement. San Francisco’s rear yard requirements are notoriously complicated and a regulation that often requires exceptions or limits the development potential of a property. The ordinance would make the rear yard requirement 25% of lot depth or 15 feet in most zoning districts. In certain “R” districts, the requirement would be 30% or 15 feet. It also includes a common-sense option for corner lot developments to provide an interior corner open area, saving the need for a variance or other entitlement.

We should note that the legislative digest flags a few aspects of the residential streamlining proposal that do not appear to be included in the first draft of the ordinance. These may be added to subsequent versions of the legislation, and it could be amended as it is brought to the Planning Commission and eventually the Board of Supervisors. We will continue to track this important ordinance as it moves forward. We will also track other legislation that seeks to further implement the Housing Element.

 

Authored by Reuben, Junius & Rose, LLP Attorney Mark Loper.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.