“Moving Out Subtenants to Increase the Rent”


I just purchased a new building and three subtenants want to sign a new lease.  Should I have them move out first?
 
While it may seem logical and good business to have whomever is residing in your unit actually reflected on the lease agreement that controls the unit, don’t forget that the Rent Ordinance often defies ordinary logic, usually to the detriment of the landlord.  Adding people to a lease or creating a new lease with those subtenants will make those individuals the “tenants” of a landlord, and very possibly grants them “original tenant” rights under the Rent Ordinance, and thus would hinder and delay your ability to increase the rent to market rate. 
 
The question does not indicate whether an “original tenant” still resides in the unit along with the subtenants, but since you ask whether the subtenants should “move out,” it seems that there is no longer any “original tenant” in the unit.  Presumably, your intention in wanting the subtenants to “move out” and then sign a new lease agreement and move back in is to obtain a fair market rent.
 
The Rent Ordinance frowns upon any action that can be construed as a sham and/or is a waiver of tenant’s rights.  Having three subtenants move out, and then move back in to give the appearance of a new tenancy at a higher rent would violate the Rent Ordinance; the tenants could later argue that they were coerced to sign a new lease agreement and pay higher rent for a unit they already occupied under rent control protection.
 
That is why the state Costa Hawkins Act may be applicable in your situation.  The Costa-Hawkins Rental Housing Act (California Civil Code Section 1954.53(d)), and the local corresponding provision, San Francisco Rent Ordinance Section 37.3 (d), authorizes an unlimited rent increase in some circumstances where the original occupant no longer permanently resides in the unit and the remaining subtenant did not reside in the unit prior to January 1, 1996.
 
However, subtenants can challenge the unlimited rent increase if they can show that the landlord waived her rights to increase the rent by:

(1) Affirmatively representing to the subsequent occupant that they may remain in possession of the unit at the same rental rate charged to the original occupant; or
(2) Failing, within 90 days of receipt of written notice that the last original occupant is going to vacate the rental unit or actual knowledge that the last original occupant no longer permanently resides at the unit, whichever is later, to serve written notice of a rent increase or a reservation of the right to increase the rent at a later date; or
(3) Receiving written notice from an original occupant of the subsequent occupant’s occupancy and thereafter accepting rent unless, within 90 days of said acceptance of rent, the landlord reserved the right to increase the rent at a later date.
 
You should review the previous landlord’s tenant files to see whether a “6.14 notice” or other reservation of rights to increase the rent were served on the subtenants, or when actual notice was received that the last original tenant vacated the unit.  The presence (or absence) of those documents will determine whether an unlimited rent increase under Costa Hawkins would overcome any challenge by the subtenants.
 
Even if you are unable to serve a rent increase under Costa Hawkins, do not forget that the subtenants are still bound by the terms of the lease agreement of the original tenant, even though they may not be listed on said agreement.
 
Marina Franco