Q: I have a long term tenant that is a company, not a person. The company houses a different employee in the unit every year. Can I raise the rent to market when they next bring in a new employee?

Yes. It is not uncommon for a landlord to enter into a lease agreement with a corporation who wishes to use the residential apartment to house corporate occupants. In such a situation, it is also not uncommon for the occupants of the corporate unit to change from year to year. Despite the fact that the unit remains subject to eviction control, the landlord may raise the rent when a new the prior occupant vacates the unit and a new occupant takes possession. The Costa-Hawkins Rental Housing Act (California Civil Code Section 1954.53(d)), and its local counterpart, San Francisco Rent Ordinance Section 37.3 (d), authorize an unlimited rent increase in some circumstances where the original occupant no longer permanently resides in the unit and the remaining subtenant(s) or assignee(s) did not reside in the unit prior to January 1, 1996. Specifically, pursuant to Section 6.14(c) of the San Francisco Rent Ordinance Rules and Regulations: “When all original occupant(s) no longer permanently reside in a rental unit, and the last of the original occupants vacated on or after April 25, 2000, the landlord may establish a new base rent of any subsequent occupant(s) who is not a co-occupant and who commenced occupancy of the unit on or after January 1, 1996 without regard to the limitations set forth in Section 37.3(a) of the Rent Ordinance unless the subsequent occupant proves that the landlord waived his or her right to increase the rent by: (1) Affirmatively representing to the subsequent occupant that he/she may remain in possession of the unit at the same rental rate charged to the original occupant(s); 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.” If the above requirements are present, a landlord may raise the rent of the corporate unit to fair market value. However, the landlord has two options as to how to go about raising the rent while ensuring it is not subject to an unlawful rent increase in the eyes of the Rent Board. One option is to petition the Rent Board for a determination that the landlord may raise the rent pursuant to the Costa-Hawkins Rental Housing Act. The first step in obtaining such a ruling from the Rent Board is to fill out a petition seeking such a determination and file it with the Rent Board. The petition seeking a determination under Section 37.3(d) is available online at the San Francisco Rent Board’s web site and must be accompanied by a written statement as to the basis of the petition and any evidence or documentation supporting the requested determination. Specifically, the landlord must answer: “Why the Landlord believes no original occupants permanently reside in the unit and that any remaining subtenant or assignee took possession on or after January 1, 1996.” Where the landlord seeks such a determination, the burden of proof is on the landlord. Such a burden is difficult to meet, and because the landlord is not required to file such a petition prior to imposing any rent increase under Section 37.3(d), it is not to the landlord’s advantage to do so. The second and preferable option is to unilaterally serve a notice of rent increase under the Costa —Hawkins Rental Housing Act, alleging the all original occupants have permanently vacated the unit and any remaining subtenants took possession after January 1, 1996. The landlord must serve a thirty day notice is it seeks to raise the rent in amount 10% or less from the current base rent and a sixty day notice where it seeks to raise the rent more than 10% over the current base rent. The effect of bypassing the Rent Board’s determination regarding the rent increase shifts the burden of proof onto the tenant to prove that he or she is not subject to the rent increase. There are, however, risks in unilaterally imposing a rent increase pursuant to Section 37.3(d). One such risk is that the tenant can refuse to pay the rent increase forcing the landlord to serve a Three Day Notice to Pay Rent or Quit and filing a costly and perhaps risky Unlawful Detainer Action should the tenant fail to pay the increased amount. A savvy tenant who may have some documentation/evidence to prove that such a rent increase cannot be imposed will use this documentation/evidence to successfully defendant the unlawful detainer action thus forming the basis for a possible wrongful eviction action against the landlord. One way to ensure that you avoid such a risk is to clearly specify on the lease agreement who will be occupying the rental unit. The PPMA Lease Agreement does a great job in giving the landlord the ability to specify the name or names of all persons who will be occupying the unit, thus avoiding any argument that a person not named on the lease agreement is an original occupant or that all original occupants have not vacated the unit. Despite the risk involved in unilaterally serving a rent increase notice under Costa-Hawkins/Section 37.3(d), a landlord who has solid documentation regarding the history of all original and subsequent occupants and who has been put on notice that the last original occupant has vacated can safely serve a rent increase notice even if the same corporate tenant remains. Under the proper circumstances, Costa-Hawkins/Section 37.39(d) are one of very few methods by which a landlord can decontrol a previously rent controlled unit, allowing a unit which may be substantially below market rent to be raised to market rent. In cases where the unit is rented to a corporation and the occupants change from year to year, the use of the Costa Hawkins rent increase can be particularly effective in ensuring the unit’s rent is always at market.

Daniel R. Stem, Esq. Wasserman Stem Law Offices