The Ellis Act: the ghosts of the past, present, and the future

Written by Landlord Property Management Magazine on . Posted in Blog

We take a close look at Ellis Act evictions and local ordinances that protect the rights

By Daniel Bornstein, Esq.

The 1980s law has always been anathema to tenants’ rights activists who have repeatedly tried to meddle with it.

The Ellis Act is a state law that allows landlords to evict residential tenants in order to go out of the rental business. This right is afforded to rental housing providers even though general public policy is to keep residents housed so long as their tenancy is in good standing. While local governments have a desire to compel landlords to continue to provide rental housing, the Ellis Act puts this impulse in check.

Yet the rights of owners to withdraw their property from the rental market are not unbridled. Local governments still have the ability to implement the Ellis Act and place various restrictions on how landlords exercise these rights.

First, it’s instructive to get some background from a time when the original Apple Macintosh PC went on sale for $2,500 after an iconic, Orwellian-themed “1984” Super Bowl ad was played. We were watching “Ghostbusters” in the theater, Prince owned the summer with the hit of “Purple Rain,” and when we ate burgers, we were wondering, “where’s the beef?”

It was also the year when the seminal case Nash v. City of Santa Monica was aired out in court.

The mother of a 17-year-old student purchased her son a $260,000 apartment building in Santa Monica but it wasn’t long before the young landlord became fed up with operating rental housing. His stated goal was to “evict the group of ingrates inhabiting my units, tear down the building, and hold on to the land until I can sell it at a price which will not mean a ruinous loss on my investment.”

The rent control board didn’t like this business model and refused to issue requisite permits. That’s because a landlord could only obtain a permit to remove rental units from the housing market by showing that rental use would not earn a “fair return” on investment, the removal would not displace low or moderate-income persons, and the removal would not affect the city’s supply of housing. Litigation ensued.

The trial court took a hard look at Santa Monica’s City Charter Section 1803, Subdivision (t) – which prohibits the removal of rental units from the housing market by conversion or demolition without a permit from the Santa Monica Rent Control Board – as it applies to prevent the owner of an apartment building from evicting his or her tenants and tearing the building down.

It held that these rules constituted a deprivation of property without due process of law in violation of the Fourteenth Amendment of the United States Constitution and Article I, Section 7, subdivision (a) of the California Constitution.

California’s left-leaning Supreme Court disagreed with the lower court’s ruling and upheld Santa Monica’s regulatory regime.

But this victory for city legislatures was short-lived, as California’s legislature was quick to respond. 

State lawmakers were incensed by the high court’s ruling that rental property owners can be forced to stay in business because of the fiat of local governments.

As a bit of nostalgia, there were more moderate lawmakers in that era. In today’s day and age when political rhetoric and sympathies fall squarely on the side of tenants, it would be impossible for such a piece of legislation to pass.

Named after James “Jim” L. Ellis out of San Diego, the Ellis Act provides that no statute, ordinance, regulation, or administrative action “shall . . . compel 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, subd. (a).)

What lawmakers can giveth, they can taketh away. 

Much like efforts to repeal Costa-Hawkins (the state law that promises landlords market rents in certain circumstances of “decontrol”), the Ellis Act has been continuously under attack since its passage in 1985, but cooler minds have prevailed.

In recent memory, for instance, a San Francisco ordinance enacted in December 2013 required that before tearing down a building or exiting the rental business, property owners must wait 10 years before rebuilding or renovating any of the formerly rented units. The First District Court of Appeal struck down the law, with Justice Marla Miller noting that the restriction “penalizes property owners who leave the rental market,” a right afforded under the law.

Undeterred, there were several iterations floated in the statehouse. Closest in the rearview mirror was AB 854, dubbed the “Stay in Business Forever Act.” It would have prohibited rental housing providers from availing the Ellis Act to transition tenants out and exit the rental business until such time when all owners of the property have held their ownership interest for at least five years. Further, it would have banned an owner from using the Ellis Act if the owner later buys a property within 10 years of filing a notice of intent to withdraw the property from the market.

It didn’t stop there. In the interest of transparency, AB 854 would have required owners to identify all parties with an ownership stake in the property whenever the owner planned to withdraw accommodations from the market.

The measure lacked the votes needed to advance to the Senate and so the bill died in 2022.

Rest assured,  however, that the campaign for AB 854 galvanized activists around the state and garnered a large collection of endorsements. There is no reason to believe that attempts at Ellis reform will end.

How prevalent is the Ellis Act?

Daniel Bornstein says these types of evictions are atypical and usually arise when the owner doesn’t have many other options and the status quo is not acceptable. The numbers bear this out.

The San Francisco Examiner reported this year that “the number of Ellis Act evictions was on a downward trend even before the pandemic.” According to San Francisco Rent Board data, there were 154 Ellis Act evictions in the city in 2015. Fast forward to 2020, only 73. A far cry from some reports that the Ellis Act is a main driver of evictions and will lead to a tsunami of displacements. The math just doesn’t add up in a city with so many thousands of rental units.

Despite the relatively low number of transitions out of rental units due to the Ellis Act, any lone instance can lead to boisterous protests.

Mom and pop landlords rely on the law as an escape hatch when they are losing money

A favorite argument used by proponents of Ellis reform has been that more regulation would deter speculators from buying rent-controlled properties and displacing tenants.

Had attempts to reform the Act come to fruition, it would have tied all rental housing providers, including mom-and-pops, to money-losing ventures.

Tragically, a countless number of small landlords have hemorrhaged money during the pandemic and for many, the bleeding hasn’t stopped. That is especially so in Alameda County, where barring tenant conduct that presents a threat to public health or safety, or the building is being “red tagged” and deemed unsafe for occupancy, going out of business is the only way to stop losing money.

The Ellis Act does not displace vulnerable tenants as easily as one thinks

Another narrative being articulated by tenants’ advocates is that vulnerable tenants are being displaced and risk homelessness because of the Ellis Act. It’s as if owners are throwing Grandma out on the street themselves.

In fact, these types of evictions are highly regulated with many safeguards in place that demand landlords give ample notice and hefty relocation payments.

Some of our thoughts from 40,000 feet

Calling it quits and going out of the rental business is a weighty decision that should not be taken lightly. It’s the last resort.

Sadly, for some landlords bereft of rental income and with few other theories to evict, the Ellis Act may be a viable option. Our office is happy to dialogue on what the best course of action may be.

Keep in mind that choosing to use the Ellis Act is an option that can be lengthy and costly with attorneys’ fees. Also, cities may place restrictions on the future use of buildings that have been “Ellised.” So, we call this the “nuclear” option.

With all of this in mind, our strong preference is to engage the tenant in a discussion whereby he or she voluntarily vacates the premises in exchange for compensation, a rent waiver, a return of the security deposit, or any mixture of incentives to leave at their own volition with a complete waiver of claims, but let’s continue our train of thought on Ellis Acts.

What if a tenant does not vacate when the owner has followed all protocols when withdrawing all housing accommodations? 

Once all of the I’s are dotted and the T’s are crossed, it is likely that the tenant will vacate because they do not want a blemish on their credit or any notation of an eviction history. For any tenants adamant about staying, an unlawful detainer can be filed, and the matter is almost done. Or is it? The tenant unlawfully occupying the premises can assert any number of things, aided, of course, by free legal representation. For instance, San Francisco’s Proposition F in 2018 provides funding for free, full-scope eviction defense for residential tenants.

Defenses to an Ellis Act Eviction

The first and most compelling defense is that the property owner did not comply with local requirements and exactly adhere to prescribed filings with the Rent Board. Notices must be airtight and indeed, even if one word is missing, the action can be tanked.

While many landlords are accustomed to serving standard 3-day notices for failure to pay rent, tenants being transitioned out by way of the Ellis Act must be given at least 120 days’ notice, and certain other groups of tenants (disabled or elderly) are entitled to even lengthier notice of a full year.

The reams of paperwork and perilous notices attendant to an Ellis Act eviction will typically need to be handled by an attorney.

Cherry-picking: Generally, a landlord cannot do a “partial” eviction. All residential tenants in the building must be given eviction notices simultaneously and not just select tenants.

Waiver of notice: It is a cardinal sin for a landlord to accept money after the tenancy is terminated; this re-establishes the tenancy. It is also important not to change the terms of the tenancy – leave the terms as is to avoid arguments that you’re trying to “wind down the tenancy” and force the tenant out through unlawful means.

The eviction is retaliatory: While this is a common defense in other types of eviction actions, claims that an Ellis Act eviction was commenced out of retaliation may not be so persuasive. After all, it’s not personal to the particular tenant where the owner is not re-renting the unit. In Drouet v. Superior Court, the California supreme court ruled that “a landlord’s bona fide intent to withdraw the property from the rental market under the Ellis Act will defeat the statutory defense of retaliatory eviction.”

Relocation payments

Ellis Act evictions will come with a price in the form of payouts to outgoing tenants. In San Francisco, there is “head counting.” That is, payouts are dispersed to every member of the household. Oakland relocation payments, on the other hand, are based on unit size. In Berkeley, requisite relocation payments are doled out to “households.”

However, we are not done yet; additional payments are required for certain groups of tenants considered to be vulnerable. These may include seniors, disabled persons, households with minor children, long-term tenants, and residents with low income.

Relocation payments keep going North

These farewell payments for no-fault evictions are already in the stratosphere, but they are continually reset on an annual basis and they go up – they don’t go down.

One interesting question for any crusading litigators out there is at what point do relocation payments become so high that it infringes on the rights of property owners?

A San Francisco ordinance passed in 2019 said that even if a property is not subject to rent control, a massive rent increase is considered tenant harassment, and if tenants are unable to pay the increased rent amount and are forced to move elsewhere, it amounts to a constructive eviction. After landlord groups challenged the ordinance, the law was upheld in the courts.

It seems to us that the cloth cuts both ways. If exorbitant rent increases are considered to be “bad faith,” what about exorbitant relocation payments? How high do relocation payments have to reach before these mandated payments rise to the level of bad faith to the point that the government has made it impossible for property owners to recover possession of their property? Starting in September, for instance, San Francisco increased relocation payments for the Ellis Act – and only the Ellis Act – by several thousand dollars per tenant, as compared to other non-fault evictions. Perhaps they will reach a level that invites a lawsuit by landlords. Food for thought.

Some questions remain in Berkeley in light of its eviction moratorium

Berkeley, of course, is in Alameda County. The County’s eviction moratorium remains in place, but there is an exception carved out when the landlord takes the rental unit off of the market.

The City of Berkeley, however, is silent on this exception. At one point, it listed the Ellis Act as a permissible reason to evict as long as emergency orders remained in place. Yet some Berkeley lawmakers examined moratoria elsewhere and found that Southern California locales like Los Angeles did not include an exception for the owner’s desire to remove units from the rental market as a permissible reason to evict under a draconian ban.

Under state law, Berkeley property owners can evict tenants to remove units from the rental housing market but must follow Berkeley’s Ellis Implementation Ordinance to do so. This establishes specific procedures under the state law for owners attempting to withdraw property from the rental market but will, however, take a bit of legal maneuvering. Owners are strongly urged to seek legal advice.

What about other buildings not subject to more restrictive local rules? The Tenant Protection Act of 2019 (AB 1482) applies

If a property falls outside a jurisdiction that has its own “just cause for eviction” regulations, statewide rent and eviction controls kick in. And these are much more simplified.

The landlord merely serves a regular 60-day notice terminating the tenancy. Owners need only provide a payment equal to one month’s rent, or a written waiver of the last month’s rent. It makes for easier bookkeeping to waive last month’s rent than it is to write out a check to the tenant.

We hasten to say that questions remain about how to go out of the rental business by way of AB 1482. This provision of the law was eclipsed by COVID-related eviction protections and so there is not much precedent to rely on.

For example, for how long must the owner keep units off of the rental market? AB 1482 does not specify a time certain. Under the Ellis Act, rental units cannot be re-rented for five years. If landlords avail AB 1482 to go out of business and then prematurely re-rent the properties they purportedly just took off the market, this strikes as bad faith and can invite a costly lawsuit. Be careful with timelines.

Another gaping question: does the landlord have to withdraw all of the rental units, or can certain units be isolated for withdrawal? 

Let’s use a hypothetical in, say, San Francisco and Berkeley. If there is a 15-unit building and the owner endeavors to remove rental units from the market, all 15 would have to be on the chopping block; the owner would not be allowed to “cherry pick.” But if the units are only covered by statewide eviction controls, it remains to be seen whether the landlord can be selective in their removal.

It seems to us, as well, that under AB 1482, there are objections tenants or their attorneys can raise, so don’t be surprised if this provision of withdrawing rental units is put to the test. Unlike other areas of law where there are years, if not decades of legal precedent, AB 1482 went into effect in 2020, so there are several kinks that must be ironed out in the courts.

ABOUT DANIEL BORNSTEIN

More than a practitioner in landlord-tenant law, Daniel Bornstein is the Broker of Record for Bay Property Group, a property management company that protects and optimizes the investments of landlords. He is also renowned for his educational seminars and is called upon as an expert witness in complex real estate litigation matters. To avoid or resolve friction within rental units and cauterize risk, Daniel is happy to dispense informed advice to owners, property managers, and other real estate professionals looking to survive and thrive in today’s challenging and litigious rental housing market. Call 415-409-7611 or email daniel@bornstein.law.

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