San Francisco Empty Homes Tax Struck Down at Trial Court

| Alex Klein

Last week, the San Francisco Superior Court struck down the City’s “Empty Homes Tax” which was set to be collected for the first time starting in April 2025 for the 2024 tax year. As stated in a message on the San Francisco Treasurer and Tax Collector’s website, the agency is evaluating the court’s decision and its effect on the upcoming collections and will “expect to have more information in the coming weeks.”

Adopted by San Francisco voters with the passage of Measure M, during the November 2022 general election the Empty Homes Tax aimed to add residential housing stock back into the local rental market by imposing a tax on owners of certain multifamily buildings for keeping rental units vacant for 182 or more days each tax year. The Empty Homes Tax would have applied broadly to most multifamily property owners in the City whose properties had vacant units with limited exemptions for 501(c)(3) tax exempt nonprofits, governmental entities, and the owners of residential buildings with two or fewer units.

The tax would have been calculated based on the vacant units’ square footage. For the 2024 tax year, a minimum tax of $2,500 would have been assessed for vacant units with less than 1,000 square feet and up to $5,000 would have been assessed for vacant units with greater than 2,000 square feet. Tax rates imposed under the Empty Homes Tax were set to increase annually over the next few years.

The present litigation was brought in February of 2023, shortly after the passage of Measure M, by a handful of property owners in the City affected by the Empty Homes Tax, in addition to the various interested real estate organizations including the San Francisco Apartment Association and the San Francisco Association of Realtors.

In their complaint challenging the Empty Homes Tax, Plaintiffs argued that the Empty Homes Tax violated the Takings Clause of the US Constitution. Specifically, Plaintiffs argued that the tax amounted to the City compelling property owners to rent their property, an action the United States Supreme Court and California’s First Appellate District have held is a Taking. Yee v. City of Escondido (1992) 503 U.S. 519; Cwynar v. City & Cty. Of S.F. (2001) 90 Cal.App.4th 637, 658. The tax, plaintiffs argued, sought to “achieve indirectly the very result that the Constitution and state law prohibit…” by “coerc[ing] owners to rent their units by severely penalizing those who exercise their rights to keep units vacant…” (Complaint pg.5.)

Plaintiffs also argued that Prop M was preempted by the Ellis Act which prohibits public entities from compelling owners of residential real property to offer their accommodations for rent or lease. Cal. Gov. Code § 7060(a). As Plaintiffs highlighted in their motion for summary judgment, the “compulsion” prohibited by the Ellis Act extends to the imposition of financial or other penalties for declining to rent residential units. See Bullock v. San Francisco (1990) 221 Cal.App.3d 1072.

In addition to arguing that Plaintiffs did not have standing to challenge the tax before paying it under protest, the City argued in its motion for summary judgement that Plaintiffs had mischaracterized Prop M as requiring property owners to rent their units or pay the Empty Homes Tax. Rather, the City argued, property owners merely needed to ensure that their rental units were “occupied, inhabited, or used,” or that they fell within one of Prop M’s vacancy exclusion periods. Defendant’s Motion for Summary Judgement, Pg. 16.

The Court has yet to publish its decision granting summary judgment for Plaintiffs. It is certainly possible that the City will appeal the decision, which will create uncertainty over the future of the Empty Homes Tax.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Alex Klein.

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.

3 Day Notice to Pay or Quit – Compliance and Requirements

| Lindsay Petrone
rent

What is a “person” in the context of a 3 day notice to pay or quit?  Is it a natural person, like an individual, or could it also include an entity?  A recent case, City of Alameda v. Sheehan (2024 WL 4195486, Filed September 13, 2024), just explored this question.  In City of Alameda (“City”), the City served a 3-day notice on Shelby Sheehan (“Sheehan”) who had not paid rent for 17 months pursuant to a lease with the City.  Upon a successfully delivered notice to pay or quit and non-payment by the tenant within the 3-day period, the landlord can thereafter seek eviction of the tenant through an expedited unlawful detainer action.  The 3-day notice to pay or quit directed Sheehan to pay the outstanding rent by cash or check to City of Alameda c/o River Rock Estate Group at an address in Alameda, California.  Sheehan argued that the notice failed to provide the name of a natural person to whom rent may be paid, instead naming a corporation.  Therefore, the notice was invalid because the statute required a “person” to be listed.  The Court in Sheehan confirmed that a “person” in the context of a 3-day notice does include a corporation or entity.  However, the 3-day notice was ultimately defective because the corporation’s name was incomplete and incorrectly stated.

Section 1161 of the Code of Civil Procedure (“Section 1161”) governs the 3-day notice process, in which the notice is required to provide the tenant with the “name, telephone number and address of the person to whom rent shall be paid” within the 3-day period.  Section 1161 does not further define a “Person”.  In Sheehan, the Court looked to the definition of a “person” in another Code of Civil Procedure statute, Section 17, which states “a person includes a corporation as well as a natural person”.  The Court also noted that Section 1161 defines a “Tenant to include any person who hires real property” and that common sense and case-law both recognize that tenants, for the purposes of eviction via unlawful detainers, include both natural persons and entities.  In other words, if a corporate tenant can be served a 3-day notice, then a corporation or other entity can receive the rent.  The Court also recognized a lease can require rent to be paid by electronic means or otherwise to a corporate landlord, rather than to a named individual by mail.  Therefore, it would not make logical sense to allow payment to a landlord who is an entity, but then not allow an entity to collect the rent under a 3-day notice.  The Court also looked to the legislative history and noted that the legislature could have stated “natural person” in Section 1161 but did not.  For the stated reasons above, the Court held that the recipient or “person” named to receive the rent in a 3-day notice could be an individual or an entity.

Ultimately, in this case, the entity River Rock Estate Group was incorrectly spelled and the address stated on the 3-day notice for that entity did not match any River Rock entity found on the Secretary of State website.  As such, the 3-day notice did not strictly comply with the requirements of Section 1161 and would need to be corrected and again served on Sheehan to be enforceable.  The City of Alameda case reiterates that the requirements of Section 1161 must be strictly followed in order to be enforceable and also confirms a “person” to whom rent can be paid may be an entity or an individual, as long as clearly stated as to whom and where the money should be paid.  Landlords should make sure their notices are accurately drafted and follow the guidelines in Section 1161 to ensure any subsequent unlawful detainer action is valid if the rent remains unpaid after the 3 days.

 

Authored by Reuben, Junius & Rose, LLP Partner, 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.

Force Majeure and Covid: Implications on Tenancies and Rental Payments

| Lindsay Petrone
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.