Foreclosure and Rent Control

Question: I recently purchased a three-unit building through a foreclosure. Unfortunately, one of the units has a relative of the former owner and she is failing to pay rent. She claims she can live there, protected by the rent laws. Is that true?

Yes, it may be true, but there are several issues raised by this situation. In 1985, the California Court of Appeal ruled, in a case entitled Gross v. Superior Court (1985) 171 Cal. App. 3d 265, that a tenant could not be evicted from a building under rent control by an owner who purchased the building at a foreclosure sale when there was no separate “just cause” for eviction. In other words, the foreclosure was not a “just cause” for eviction, so unless the new owner had a lawful “just cause” like nonpayment of rent or owner move-in, the tenant could remain in possession. The Court noted that San Francisco’s rent law does not list as a ground for eviction a change of ownership pursuant to either a judicial foreclosure proceeding or a trustee’s sale. Twenty years later, the rent law still does not allow a new owner, who purchased a property through a foreclosure, to evict the tenant unless there is one or more of the fourteen “just cause” reasons for eviction.

So in this case, the new owner needs to consider the landlord-tenant relationship that existed between the tenant-relative and the prior owner. If there was a written or oral rental agreement that required this tenant to pay rent, then she may be in breach of the lease, thereby allowing an eviction action to be commenced for the just cause of nonpayment of rent. Likewise, if the new ownership satisfies all of the requirements to recover this unit for owner or relative occupancy, then those proceedings could also be initiated. And if the new landlord wants to remove this entire building from rental use, an Ellis Act could be used.

But what if there is no just cause for eviction and this tenant wants to stay, claiming that her relative allowed her to live in the unit for free (or for some ridiculously low rent)? The rent law has a remedy: The new landlord may file a “special circumstances” petition with the Rent Board. Under Rent Board Rules and Regulations Section 6.11, a one-time rent increase may be allowed if, because of a special relationship between the landlord and tenant, the initial rent on a unit was waived or set very low. At the Rent Board hearing, the new owner must present evidence of what comparable units rented for at the time the tenant moved in so as to guide the Administrative Law Judge in setting a fair rental amount.

Some have argued that if a person is living for free in a unit, presumably because of a special relationship with the prior or current owner, then there is no landlord-tenant relationship and the occupant is not subject to protection under the rent law. This author disagrees with that analysis. A “tenant” is broadly defined as “[a] person entitled by written or oral agreement, sub-tenancy approved by the landlord, or by sufferance, to occupy a residential dwelling to the exclusion of others.” There is no requirement that the person be obligated to pay rent. Therefore, when acquiring a building, either through foreclosure or a normal purchase, assume that the tenants in occupancy, even if friends or relatives of the prior owner, have full tenancy rights, and do not attempt to evict them or to raise their rents unless you do so in accordance with the rent laws.

DW