The Ellis Act allows owners of residential real estate to take their properties off the rental market if they fulfill certain conditions, including the removal of all units at the property from the rental market.  A recent case entitled Hilaly v. Allen clarified one of the specific conditions precedent to an Ellis Act “eviction” and discussed the impact of a residential estoppel in the context of such eviction.  (2019 WL 2500495, Filed May 21, 2019). As part of any Ellis Act eviction process: (1) the tenants must be notified of the intent to withdraw the unit, (2) the tenants must have sufficient move out time (one year in the case of an eligible or disabled tenant), and (3) during the notice period, the tenancy must continue on the same terms and conditions as existed prior to the notice of removal from the rental market.  In Hilaly, the owner of the San Francisco property (Hilalys) decided to recover possession of its property and issued an Ellis Act eviction notice to the tenants at the property, which included an elderly and disabled tenant named Allen. Allen had an oral lease at the property with the prior owner for an apartment and use of a garage and driveway at the property.  During the Hilalys purchase of the property, a questionnaire was issued to Allen with no explanation of its significance.  The questionnaire included a question whether parking was included at the property and if so, what was the space number.  Allen stated no to the question because, although she had driveway and garage rights, she didn’t have the right to a numbered parking space.  The Hilalys thereafter closed on the property and later issued this Ellis Act eviction notice to the tenants.  During the one-year notice period (as to Allen’s lease due to age and disability), the Hilalys started using the driveway and blocked Allen’s access to use the same. Allen set out to defeat the Ellis Act eviction on the premise that the owner changed a tenancy term when they blocked Allen’s access to the driveway and garage during the one year notice period.  The Hilalys argued that the Ellis Act confers a landlord with the unfettered right to leave the residential rental business and the requirement to maintain the tenancy on the exact same terms contradicts settled law which bars habitability defenses to an Ellis Act eviction.  As such, the removal of the driveway rights, even if it made the premises less habitable, did not negate her right to possession and was not a defense to the Ellis Act eviction.  The Court agreed with the premise that a withdrawing owner is relieved of affirmative repair obligations during the notice period, but also found that a landlord must refrain from taking affirmative steps to reduce an elderly or disabled tenant’s leasehold during the notice period.  The Court agreed with Allen and found that the owners unlawfully changed a term of Allen’s tenancy during the one-year notice period, and as such, allowed for an affirmative defense to the eviction. The Hilalys also alleged that even if the Ellis Act supported such a defense for “change in tenancy terms”, Allen was barred from using such a defense based upon Allen’s answer to the questionnaire stating no parking or driveway rights were included in her lease.  Therefore, there was not a change in a term of tenancy since she confirmed no such rights  existed.  The Court again held for Allen stating that this questionnaire was not a contract and Allen was not bound by contract to complete the questionnaire.  Also, the questionnaire did not state that Allen’s answers would be binding on her leasehold.  The Court in Hilaly differentiated an estoppel in a commercial context stating that a commercial estoppel binds the tenant to its factual statements, in part because the parties in a commercial transaction have more equal bargaining power and share a widespread understanding that estoppel certificates are binding and relied upon. The Hilaly case illustrates that a landlord must conform to very strict procedures to ensure an Ellis Act eviction will not be defeated, including that any term of the lease must remain the same during the required notice period.  Further, the Court in Hilaly confirmed that an informal “estoppel” in a residential context carries less weight than an estoppel in a commercial context and that a residential tenant may not be held accountable for statements made within said estoppel.   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.  

This month, the California Supreme Court affirmed the Fourth District’s decision in Black Sky Capital, LLC v. Cobb (2017) 12 Cal.App.5th 887 (“Black Sky”), ruling that a creditor who holds two deed of trust on the same property may recover a deficiency judgment on a junior lien extinguished by a nonjudicial foreclosure sale on the senior lien. In so holding, the California Supreme Court applied a strict construction of Code of Civil Procedure section 580d, which reads, in part, “…no deficiency shall be owed or collected, and no deficiency judgment shall be rendered for a deficiency on a note secured by a deed of trust or mortgage on real property or an estate for years therein executed in any case in which the real property or estate for years therein has been sold by the mortgagee or trustee under power of sale contained in the mortgage or deed of trust.” CCP §580d(a). Relying on the plain language of section 580d, the California Supreme Court emphasized that the statute precludes a deficiency judgement on a note secure by a deed of trust on real property when the trustee has sold the property “under power of sale contained in the … deed of trust. The court concurred with the Fourth District’s reasoning that the phrase “the … deed of trust” makes clear that section 580d applies only where the sale of the property has occurred under the deed of trust securing the note sued upon, and not some other deed of trust. In the words of the California Supreme Court, “nothing in the text of section 580d indicates that the statute applies where no sale has occurred under the trust deed securing a junior lien, even if the lien is held by a creditor who has foreclosed on a senior lien on the same property.” The Fourth District’s ruling – and the California Supreme Court’s affirmation of the same – stray from the long followed decision in Simon v. Superior Court, (1992) 4 Cal.App.4th, 63, 66, which held that the anti-deficiency protections of California Code of Civil Procedure 580d barred a creditor in such circumstances from pursuing a deficiency on the junior note. While noting that where there is evidence of “gamesmanship” (e.g. intentional loan splitting, bid rigging, etc.) by the holder of senior and junior liens on the same property, a substantial question may arise whether the liens should be treated as a single lien within the meaning of section 580d, the California Supreme Court concluded that such circumstances were not present in the case before it, as the loans at issue were made more than two years apart. The court did not elaborate on what other factors might be considered in determining the presence of “gamesmanship” by a holder of senior and junior liens on the same property. Practical Considerations The California Supreme Court’s upholding of the Fourth District’s ruling is likely to be heralded as a victory for lenders, as the opinion in Simon – which unequivocally rejected a lender’s ability to recover on a junior lien after foreclosing on the senior lien – is now a dead letter. So long as the two loans are truly separate and there have been no improprieties at the foreclosure sale, a lender foreclosing on a senior note should be able to pursue a deficiency judgment on the junior note. Unfortunately, the California Supreme Court provided virtually no guidance on what would constitute “loan splitting.” In Simon, two loans were signed four days apart with the liens recorded on the same day, while Black Sky involved loans made two years apart. The large delta between the respective timelines of senior and junior loans being made in Simon and Black Sky creates a gray area that will at some point need to be addressed by the courts. When has enough time passed so that a subsequent loan made on the same property would not constitute loan splitting? Six weeks? Six months? A year? What were the motivations behind making the second loan? For now, those questions will remain unanswered at the judicial level. In the meantime, lenders should carefully consider these circumstances when making or buying multiple loans secured by the same property. Authored by Reuben, Junius & Rose, LLP Attorney, Michael Corbett 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.

Later this summer, Oakland will be releasing its draft Downtown Oakland Specific Plan (the “Plan”).  A preliminary draft plan was released earlier this year (which can be accessed here).  The preliminary draft is the initial version of the draft Plan.  The Plan presents Oakland’s transformative ideas and recommendations for the future development of the downtown area.  The Plan encompasses approximately 850 acres, and is generally bounded by 27th Street to the north, I-980, Brush and Market Streets to the west, Embarcadero and Jack London estuary waterfront to the south, and Lake Merritt and Channel to the east. Before digging into the details, a quick rundown of the Plan’s projections for development through 2040 is as follows: Approximately 55,000 jobs Approximately 29,000 residential units Approximately 17.2M square feet (“sf”) total commercial Office: Approximately 13.8M sf Retail/Neighborhood Commercial: Approximately 2.5M sf Flex Commercial: Approximately 0.9M sf Approximately 0.2M sf flex industrial Approximately 1.3M sf institutional 14,062 parking spaces Pre-Determined Community Benefits Program The Plan calls for creation of a carefully calibrated bonus incentive program. The program is to have clearly identified benefits provided in exchange for increase in intensity that can be applied to mixed-use projects of any size. The pre-determined community benefits program will be developed in partnership with the community. The program will establish a finite number of consistent, pre-defined project requirements based on the Plan’s goals. The increased intensity allowed can be in the form of increased height, floor area ratio limits, or increased density provisions (to encourage micro-units and other affordable-by-design residential unit types). The community benefits program is still being developed. However, three options for priority benefits have been preliminarily identified: (1) affordable arts and maker space; (2) parks and open space; and (3) affordable commercial (including community-serving nonprofit)/neighborhood retail. Opportunity Sites Identified for Increased Bonus Intensity The Plan identifies “development opportunity sites” for new development downtown. Sites that meet one or more of the following criteria are considered “opportunity sites:” (1) land/improvements ratio < 0.25 (this ratio is the value of improvements divided by the total value of the property); (2) re-developable existing uses (i.e., parking, vacant, auto-related, low-rise commercial); or (3) minimum lot size of 30,000 sf. “Opportunity sites” are eligible to participate in the pre-determined community benefits program discussed above. Within the plan area, four “transformation opportunity areas” are identified as having clusters of “opportunity sites” and areas adjacent to large “opportunity sites.” The areas are eligible to take advantage of the pre-determined community benefits program. The four “transformation opportunity areas” identified are: Victory Court/Lake Merritt Channel Park; Nimitz Freeway/I-880; Produce Market (adjacent to Howard Terminal); and Lake Merritt Office District. The Plan recognizes increasing floor area ratio will make it possible to develop iconic skyscrapers in key locations, such as near the 12th Street and 19th Street BART Stations. Office Development The Plan proposes two areas with office development priority, the Lake Merritt Office District and the Central Core District. These two office priority areas are identified for increased bonus intensity. Not surprisingly, the two office priority areas are located near the two BART stations within the plan area, 12th Street and 19th Street BART Stations (Lake Merritt Station is within the Lake Merritt Area Plan). The proposed office development identified in the Plan totals approximately 14M sf. Assuming buildout as projected, approximately $15M in impact fees for affordable housing will be generated. A key challenge to the proposed office development in the Plan area is the limited number of prime sites for office development. Approximately half of the Plan area has historic status. Housing and Affordability Housing Development The Plan proposes generation of 29,077 new residential units. With the creation of approximately 55,000 new jobs, the Plan has an approximate 1.9 jobs:housing ratio. Assuming this residential development potential is reached, approximately $639.7M in impact fees for affordable housing would be generated. Of the new residential units, approximately 4,320 – 7,250 units are projected to be affordable housing. This would be a significant increase in affordable housing provided compared to the what was produced from 2015 through 2017, which totaled 492 affordable units out of the 7,176 new units. Creation of “Green Loop”; Transit-Oriented Development The Plan calls for establishing a “Green Loop.” The “Green Loop” will provide an integrated system of walking and biking paths though downtown. It will link cultural districts, and connect people to the Lake Merritt and Estuary waterfronts as well as to adjacent neighborhoods and districts. The “Green Loop” is proposed to extend along 20th Street to the north, Lake Merritt and Channel to the east, Embarcadero and Jack London estuary waterfront to the south, and Martin Luther King, Jr. Way to the west. As part of an effort to promote a transit-oriented development strategy for Downtown Oakland, the Plan includes the following strategies: Concentration of employment near downtown’s BART stations, supporting transit ridership and a commute destination outside of capacity-constrained Downtown San Francisco; Support for growth in a regional multimodal transportation hub that allows easy transfers to/from BART; and Support for retail, arts, entertainment, and restaurants near BART stations, supporting off-peak transit ridership. Four Cultural Districts Proposed The Plan seeks to leverage and protect Oakland’s diverse cultures as an engine for artistic innovation and economic growth by establishing and implementing cultural districts. Four cultural districts are proposed by the Plan: 14th Street Black Arts Movement and Business District; Chinatown Cultural Heritage District; Arts & Garage District in Koreatown Northgate (“KONO”); and Jack London Maker District. The cultural districts would have special zoning and land use regulations to preserve arts and culture, including: Requiring a certain percentage of floor area for projects in key areas accommodate uses consistent with the district’s overall character and vision; Allowing for additional height along 24th and 26th Streets in KONO in exchange for dedicated ground floor arts-related uses or other community benefits; and Restrictions on the amount of office, bar, restaurant, and cannabis uses. The Plan is projected to be released later this summer along with a draft environmental impact report.