What is a Buyout?
A buyout is an agreement between an owner and a tenant. Typically, the tenant agrees to voluntarily vacate a rental unit in exchange for money.
Are Buyout Negotiations and Agreements Legal?
Generally, yes. Approaching and negotiating a voluntary buyout with a willing tenant is lawful & protected speech under the Constitution. Just don’t threaten, intimidate, coerce, or commit fraud.
Oakland’s Tenant Protection Ordinance prohibits offering a tenant money to vacate with intimidation or threats. It also prohibits offering money more than once within six months of a tenant says “no” in writing.
Reasons to Negotiate a Move-Out
There are various reasons to approach your tenant. You may want to remove a low rent- paying and eviction controlled tenant to increase the value of your property. Another reason would be to remove an occupant after foreclosure. The process is commonly referred to as “cash for keys”. Another reason would be to sell the property. An intent to sell the property is not a ground for eviction. But, the unit is likely much more valuable with a low-rent paying tenant out. And yet another reason is to avoid the expense and time associated with an eviction. Evictions can be timely and costly. Furthermore, they may place restrictions on the future use or rental of the property.
How to Approach Your Tenant
Even when the owner does not have any just cause or intent to evict, an owner may still approach the tenant to negotiate a buyout. There are countless ways and scenarios where a landlord may begin such negotiations. A simple straight forward example would be to ask the tenant if he or she would consider vacating in return for a sum of money. This may open up a dialogue and move-out by the tenant. Just remember not to harass, threaten, intimidate, or coerce the tenant. If the tenant says, “I’ll never move and I don’t ever want to talk about it,” then at least you’ll know. At this point it would be a good idea to discontinue buyout discussions. Remember, if the tenant puts this in writing, then the owner cannot mention the subject of moving again for at least six months.
When the owner has just cause and an intent to evict, an owner can approach the tenant before doing so to negotiate a pre-eviction buyout. The owner can inform the tenant of the intent to evict, which may act as an incentive for the tenant to negotiate an agreement to move. This can be considered a good faith approach that lets the tenant know your intentions. This is not an unlawful threat so long as you intend to carry out the lawful eviction, and do so if no agreement is reached.
Put the Move-Out Agreement in Writing
It is advisable to have an attorney draft a move-out agreement to ensure you are protected. There are many important terms that should be included in such an agreement.
Identify the Parties: Name all parties to the agreement, which should include all owners and all occupants.
Identify the Unit: Clearly identify the subject unit, including all parking, storage, and common areas.
Move-out Date: Of course, you will need to include the precise date that the tenant is required to move out.
When the owner has just cause and an intent to evict, an owner can approach the tenant before doing so to attempt to negotiate a pre-eviction buyout.
Payment Amount: You should set forth the exact payment amount, how the payment should be made, and when the payment is due.
Voluntary Vacating: It should be stated that the tenant(s) are voluntarily and permanently vacating and that the owner HAS NOT demanded them to do so.
All Occupants: The agreement should be signed by all occupants of the unit. It should state that the tenant and all occupants will vacate and that possession of the unit must be surrendered free of all occupants when they do. This will prevent the tenant from leaving a guest or someone else behind.
Release of Claims: It is important that the agreement include a release of claims by the tenant. This will dissuade future claims or litigation by the tenant against the owner. Such release language may look something like this:
Tenant hereby releases and forever discharges owner, and owner’s predecessors, employees, agents, representatives, successors, assigns, heirs, officers, managers, members, and attorneys from any and all causes of action, damages, losses, claims, liabilities, and demands, whatsoever relating to or arising out of tenant’s occupancy or tenancy at the unit and property.
Unknown Claims: A thorough release of claims includes a release of unknown claims. State law permits this if certain language is included in the agreement. Such further release language may look something like this:
The parties agree that this agreement extends to all claims, known or unknown, past, present, or future, and that any rights granted under California Civil Code Section 1542 are hereby expressly waived. California Civil Code Section 1542 reads as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.
Security Deposit: Just so there is no misunderstanding, the agreement should identify the amount of the deposit and how it will be handled.
Remove All Possessions and Garbage: It should be clear that the tenant is responsible for removing his or her things from the unit or else they will be liable for any costs incurred from the failure to do so.
Attorneys’ Fees Provision: You may want to include a provision requiring the payment of attorneys’ fees in event of breach.
Confidentiality Provision: You may want to include a provision making the terms confidential. You might not want other tenants in the building to know about the buyout.
How Much Should You Pay to Buy a Tenant Out?
This is impossible to answer without knowing more about the subject unit and tenant. Unlike Berkeley and San Francisco’s Rent Boards, the Oakland RAP does not collect statistics, or dollar amounts, on buyouts. To help evaluate the value of a buyout, here are some factors that you should consider:
Is the tenant paying below market rent?
Do you have just cause to evict? If so, then is the tenant entitled to relocation payments?
How badly do you want the unit?
Has your tenant(s) been there for a long time?
What is the value of the property with and without the tenant in possession?
There are some risks that may be associated with negotiating with your tenant. Breach of a buyout agreement is not just cause to evict. So, if the tenant fails to vacate after agreeing to do so, you can’t evict the tenant on that basis. However, most tenants honor these agreements and vacate. The more incentive to vacate, the greater likelihood the tenant will move on time. For this reason, any agreed payment should be made only at the time the tenant vacates. This will provide greater incentive to comply. Plus, you will not risk losing payments made in advance of vacating.
No matter how you approach a tenant, the tenant could construe your communication as a wrongful endeavor to recover possession. A tenant may try to sue the owner for wrongful eviction.
It is important that all owners of rental property in Oakland always have an insurance policy that includes coverage for wrongful eviction. If you don’t have it, you should get it now!
Every situation is different. While one tenant might be willing to vacate for a nominal or reasonable amount, another tenant may demand $100,000. It is important to develop a strategy and a target payment amount before approaching the tenant. It is also important to know your tenant and read your tenant’s reaction and response to the negotiations. If possible, try to get the tenant to make the first proposal so that you have an opportunity to consider and respond with a more reasonable offer.
© 2017 by Fried & Williams LLP. All Rights Reserved. The information contained in this article is general in nature. For advice on any particular matter, please consult with our attorneys because the facts of your situation may be unique and the law changes from time to time.