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Court Talk: Buyout Backlash


In 2011, Defendant Shalizi purchased a four-unit apartment building in San Francisco. He wanted to move into a unit rented by Plaintiff Geraghty. The Plaintiff had been living in the unit for almost 22 years and paid $938 a month. Shortly after purchasing the building, Defendant sent a letter to Plaintiff informing him that Defendant was interested in moving into his unit and intended to commence an owner move-in eviction or Ellis Act eviction. The letter inquired whether the Plaintiff would be interested in entering a voluntary buyout agreement before Defendant initiated the owner move-in eviction. After some negotiations, Plaintiff and Defendant entered into buyout agreement, styled as a court pleading. The Plaintiff would receive $25,000 and have several months to move. In exchange for vacating the unit and releasing the Defendant from: any and all claims which have or may have arisen from Tenant's occupancy of the Premises at any time or any and all claims

related to the Premises, including, but not limited to, claims for wrongful eviction, non-compliance with or violations of the

provisions of the San Francisco Residential Rent Stabilization and Arbitration Ordinance and Rules and Regulations, . . . [or the] right to reoccupy the Premises. The Defendant moved into the unit in October 2011. However, six months later, the Defendant lost his job and moved to Cupertino to be closer to his new job. Defendant rented the unit to a new tenant for $3,700 a month.

After learning that the Defendant had moved out and the unit had been rented to someone else, the Plaintiff sued the Defendant. The Plaintiff claimed that the buyout agreement violated the San Francisco Rent Ordinance. The Defendant moved for summary judgment, and it was granted. The Plaintiff appealed. The main thrust of the Plaintiff’s appeal was that the buyout agreement violates section 37.9, subdivision (e), of the San Francisco Rent Ordinance, which provides: “Any waiver by a tenant of rights under this Chapter […], shall be void as contrary to public policy.” The Court of Appeals went through the history of 37.9, subdivision (e), explaining that the ordinance does not prohibit a waiver of rights in a negotiated buyout agreement, the Court said: “looking at the history of the city’s legislation concerning landlord-tenant buyout agreements and the case law concerning these agreements, the conclusion is inescapable that these agreements have been utilized and honored for decades.” The Court upheld the validity of the buyout agreement and held that “the entire premise of the buyout agreement was to dispense with rent ordinance provisions in exchange for a significant amount of money. Otherwise, the deal would have been pointless.” Landlords should know that buyout agreements are enforceable and can be a powerful tool to reduce the troubles and costs of potential and future litigation.


Landlord filed an unlawful detainer complaint alleging that the Tenant, after being served with a three-day notice, failed to pay the past due rent or vacate the premises. The Landlord sought among other things possession of the unit and past due rent. The Tenant answered by filing a motion for summary judgment, arguing that his unit was covered by the Los Angeles Rent Stabilization Ordinance (LARSO); he also argued that because the Landlord failed to acquire a certificate of occupancy, the Landlord could not enforce any rental obligations for a unit that was unlawfully placed in the rental market. The Tenant further argued that the three-day notice was defective since the Landlord could not legally charge rent for the unit. The Landlord countered by conceding that although the unit was not permitted and could not recover the past-due rent, the Tenant was not entitled to possession of the unit because the rental agreement was void and unenforceable. Judgment was entered for the Tenant. The Appellate Court upheld the lower court holding because an unlawful detainer action is a statutory proceeding and therefore the statutory procedures must be strictly followed. One of the requirements for an unlawful detainer action is that the three-day notice must state the accurate amount of the past due rent. If a three-day notice does not reflect an accurate accounting of the past due rent, the notice is invalid and will not give rise to an unlawful detainer action. The Court held that because the unit was unlawfully placed in the rental market, the rental agreement was void. Consequently, the Landlord could not collect rent or use the unlawful detainer procedures to attempt to collect past due rent. Landlords should be aware of local laws requiring a certificate of occupancy. Failure to have one can not only forfeit the ability to collect past due rent, but also could take away the remedy of unlawful detainer action to regain possession. Landlords can be forced to use other costlier and prolonged legal maneuverings to regain possession.

While the holding in this case is only relevant in the city of Los Angeles, a judge in other parts of California might be willing to adopt the ruling as persuasive authority. Tenant lawyers in other parts of the state are already citing this decision for the proposition that a tenant in a non-permitted unit need not pay rent. And at the same time, these lawyers are threatening to sue the landlord for renting out an illegal unit


The Tenant and Landlord in this case entered into a one-year residential rental agreement. The Tenant’s rent was subsidized through the Federal Section 8 Program. This program requires periodic inspections of the subsidized unit. The Housing Authority — which manages the program at the local level — sent the Landlord a letter outlining a series violations of the Federal habitability standards. A follow-up inspection was scheduled, and if the Landlord did not fix the problems with the unit by the second inspection the Housing Authority would suspend payments and cancel the lease. The premises did not pass the second inspection and payments were suspended and the Housing Authority told the Landlord that he could not collect monies from the Tenant. Notwithstanding the warning from the Housing Authority, the Landlord demanded that the Tenant pay the whole rent including the portion covered by the Housing Authority. The Tenant failed to pay the rent. Consequently, the Tenant was served with a three-day notice to pay or quit. By the time the notice had expired the Tenant failed to pay the rent or surrender the premises. The Landlord filed an unlawful detainer action. The Tenant answered by claiming that the premises did not meet the habitability standards and violated the contract with the Housing Authority. The trial court found for the Landlord holding than once the Housing Authority canceled the contract, the Tenant became liable for the full rent, and thus the holdover was an unlawful detainer.

The Tenant appealed, and the Appellate Court overturned the lower court's holding because, under the rental agreement, the Tenant was only obligated to pay a portion of the total rent, with the Housing Authority liable for the balance. Consequently, the Court held that the three-day notice to pay rent and quit was defective because it sought the full amount of past due rent when the Tenant was only required to pay a partial amount. Because of the defective three-day notice to pay rent or quit there was no basis for an unlawful detainer action. Further, the Court held the judgment violated Housing and Urban Development regulations as a landlord is prohibited from collecting from a tenant any unpaid housing subsidies. Because the Landlord failed to fix the habitability violations, he lost his ability to collect any rent from the Tenant during that period. Landlords should be aware that certain federal regulations apply when entering into leasing agreements with people whose rent is subsidized by the federal government. These regulations can severely limit a landlord’s right to collect rent when due. Before doing business with the government, make sure that you are ready, willing, and able to comply with all applicable regulations.

​​Copyright © 2017 by Fried & Williams LLP. All Rights Reserved. The information in this article is general in nature and should not be considered legal advice. For any specific matter, please consult with an attorney.

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