Question: What kind of incentives, like rent rebates or temporary reductions in rent, can I offer to my tenants in order to entice them into renting or staying at my property?

Answer:

In the current marketplace, consumers are besieged on a daily basis by cable companies, airlines carriers, cell phone operators, and other service providers with offers of reduced rates, “buy one get one free,” and twelve months for the price of ten. These offers are designed by businesses as incentives or enticements to lure consumers to using their product or services over the services of competitors. These incentives are standard industry practice and are effective in capturing a larger market share than otherwise would be attained given the competitive nature of the market place and the ever growing number of service providers.

Incentives are also industry standard in the residential housing market place, particularly when the housing market is soft. Examples of such incentives include offering a free month of rent, allowing certain months at a reduced rental rate, or giving a tenant twelve months for the price of eleven. Such incentives are marketing tools which help landlords make their properties more attractive to renters and allow them to steer prospective tenants away from other properties. The use of such incentives, until recently, involved relatively little risk of liability if landlords and property managers were careful to fully disclose them and execute documents with prospective tenants that such incentives were not meant to constitute permanent rent reductions. However, the rules of the game regarding the use of incentives have drastically changed.

A recent ruling by the San Francisco Rent Board held that a rent reduction granted by a landlord to a tenant will be amortized over a twelve month period and will permanently reduce that tenant’s base rent. This case involved a large residential landlord who offered incentives to prospective tenants to enter into one year leases and to its existing tenants to renew their one year leases. The incentive offered came in the form of coupons which tenants could use to reduce their monthly rental obligations. The coupons could be submitted by tenants in any combination as long as the total value of the coupons used did not exceed the total monthly rent as stated on the lease agreement. The landlord took painstaking efforts to ensure that the use of these coupons by tenants would not be employed to permanently reduce the tenant’s base rent as stated on the written lease agreement. Tenants were required to and did sign several documents wherein they acknowledged that the incentives were temporary in nature, could be discontinued at any time, and did not affect the monthly rent as stated on the lease agreement. All annual rent increases were thereafter imposed by the landlord on the base monthly rent as stated in the lease agreement. When the rental market improved, the coupon program was discontinued, and tenants who previously received coupons then rushed to file Rent Board petitions alleging unlawful rent increases, asserting that the rent they paid in conjunction with the coupons was the true base rent, and that all annual increases imposed by the landlord should be imposed on that amount. The Rent Board agreed with the tenants.

The upshot of this ruling is that LANDLORDS CAN NO LONGER GIVE ANY TYPE OF RENT CONCESSION, FOR TO DO SO WILL HAVE THE EFFECT OF PERMENTLY REDUCING BASE RENT. ANY RENT INCREASE IMPOSED ON ANY AMOUNT OTHER THAN THE REDUCED BASE RENT— REDUCED BY THE AMORTIZATION OF THE INCENTIVE- WILL BE UNLAWFUL.

The Rent Board’s decision in this case has wider implications than just penalizing landlords who used these incentives by finding that such incentives will permanently reduce base rent. The decision will now seemingly penalize property owners who give temporary rent decreases to tenants who are experiencing financial hardship and cannot afford to pay all or a portion of their monthly rent. Such a temporary rent reduction may now permanently reduce the base rent. The message the Rent Board has sent to property owners is that landlords can no longer help tenants who are experiencing financial hardship, and rather than offering tenants in need a temporary rent reduction, the landlord must serve the tenants with a Three Day Notice to Pay Rent or Quit and commence eviction proceedings against them if they do not pay full rent.

While it is true that rent concessions benefit property owners in many ways, such concessions also benefit tenants by giving them financial rewards for executing long term leases, being tenants in good standing, and avoiding eviction for non payment of rent when they experience financial hardship. Although the Rent Board’s decision in the case referenced in this article is being appealed and the final disposition of the matter is yet unknown, until the decision is rendered in the appeal, landlords should not give prospective or current tenants any rent reductions, whether to reward them for being good tenants or to assist them during times of financial hardship. Such “temporary” rent concessions, regardless of the measures property owners take to ensure that these concessions are temporary, may be amortized over a twelve month period and may permanently reduce base rent, thereby subjecting owners to possible unlawful rent increase petitions should the annual allowable increases be imposed on the rent that does not take into account the offered incentive.

Daniel R. Stern Wasserman-Stern