Negotiating Tenant Buyouts
Over just the last decade alone, our firm has represented 100s of tenants in buyout negotiations in San Francisco, Oakland and Berkeley. We do not take this role lightly, realizing that each person we are representing is losing a rent-controlled home. We take a very individualized approach to buyouts, taking into account the impact on the tenant of the displacement, length of tenancy, size and location of the unit, disability status, and the age of the tenant. We never take a percentage of a tenant’s buyout, ensuring that the tenant will receive the maximum payment.
How much is my buyout worth?
Valuing a tenant buyout is extremely complicated. Here are some of the factors that weigh in:
- Absent a buyout, what are the landlord’s options for removing the tenant? Oakland, Berkley and San Francisco have very good eviction protections, so sometimes a landlord can only get a tenant out with a buyout. This is especially true where a tenant is disabled, elderly or catastrophically ill.
- If the landlord does have to resort to a no-fault eviction, such as an Ellis Act or an owner-move-in eviction , what will be the impact on the value of building? In addition to re-rental restrictions, Oakland, Berkeley and San Francisco have all promulgated statutes to try to prevent no-fauit evictions. Depending on the city, if a landlord is forced to do an owner-move-in eviction, an Ellis eviction, or some other no-fault eviction, the landlord will never be able to convert to condominiums, merge units, or perform second no-fault evictions.
- What are the tenants’ minimum moving allowances? Moving allowances in San Francisco, Oakland and Berkeley, range from $5000 per unit on the low end to $35,000, depending on number of tenants, number of bedrooms, disability status and age.
- Does the tenant have claims against the landlord for repairs, injuries, illegal rent payments, harassment, or wrongful eviction? If the landlord has not behaved, the tenant should raise all of this as leverage for a higher buyout. Unfortunately, landlords do not always take care of their tenants, and the majority of tenants who contact us have legitimate claims they can raise against their landlords.
- Who is the landlord and what are the landlord’s goals for the building? If the landlord is a real-estate speculator or developer, the buyout will be higher. If the new owners are a family wanting to occupy the building, the buyout will be lower. In general, rent ordinance protections are designed to make it harder for developers to evict and a little easier for owner occupiers to evict. Tenant protections tend to be weaker around owner move in and relative move in.
- How much will it cost for the landlord to higher a lawyer? Knowing the rates of the opposing landlord attorneys in Oakland, San Francisco and Berkeley helps to value a buyout. It is expensive to perform an owner move-in or Ellis Act eviction.
Are buyouts legal?
The appellate court has held that it is legal for a landlord and tenant to enter into a buyout of a rent-controlled tenancy. Geraghty v. Shalizi, 8 Cal. App. 5th 593 (2017). In Geraghty, the court stated that “it is inescapable that these agreements have been utilized and honored for decades.” Id. Several cities have promulgated laws designed to ensure that tenants are protected during the buyout process, including San Francisco, Oakland , San Jose and Berkeley. These statutes require a tenant to be given a window of time to back out of a signed buyout agreement. The statutes also authorize penalties for failing to disclose to tenants that they have a right to rescind.
What is the process?
The buyout process typically begins with the sale of a rent-controlled building to a new owner. The new owner then approaches the tenant to inquire about negotiating an end of the tenancy. It is also not uncommon for a tenant to initiate buyout discussions.
Once a new owner requests buyout negotiations, it is almost always advisable for a tenant to meet with the owner to ask questions about the owners plans for the building and to get a sense for the background of the new owner. The landlord’s intent is very important in determining the value of a buyout. A face-to-face meeting early on in the process can yield a lot of important information about a landlord’s plans. We advise our clients to have at least one meeting, playing naïve to get as much information as possible about the new owner and the new owner’s plans.
We then research the owner, looking into employment history, prior buyouts and evictions, address history, relationships, and all properties owned. If the landlord has purchased and sold several buildings, for example, this could indicate that the landlord is a real estate speculator and lying about moving into a building.
Perhaps the most important step is to evaluate if it is even possible for the landlord to accomplish the landlord’s goals absent a buyout. If a landlord cannot move the tenant out at all or an eviction will substantially devalue the landlord’s investment, the buyout will be much higher.
We also ask our clients to get proof of disability and health from medical providers. For example, in San Francisco, there are three levels of disability that affect tenant rights, and thus the value of a buyout. A Fair Employment and Housing Disability allows for additional minimum moving allowance and more time in a unit. An eviction of a tenant with a disability under the Americans with Disabilities Act will trigger a permanent bar to condominium. And, a tenant who is capable of receiving Social Security can prohibit an owner-move-in eviction altogether.
Once we gather all the information on the owner and the owner’s plans, we draft a demand letter. If the landlord has already made a decent offer, we will make a counter offer. But, if the landlord has not even made an opening offer, the tenant should not make the first move.
If a deal is reached in back-and-forth negotiations, the paperwork is finalized. The paperwork can be onerous and usually goes through two rounds of edits.
How are buyouts taxed?
Tenants are advised to speak to their tax adviser on this issue. The IRS has a publication on taxability of settlements. In general, a buyout is likely taxable. It may be taxable as a long-term capital gain rather than ordinary income in certain circumstances. Any portion of the settlement attributable to claims for return of rent paid or bodily injury would not likely be taxable, but these decisions are best left between you and your tax adviser.