Oakland’s Just Cause for Eviction Ordinance defines a “rental unit” as any unit in any real property, regardless of zoning status, that is rented or available for rent for residential use or occupancy. Oakland’s Rent Adjustment Ordinance defines a “covered unit” simply as “any dwelling unit.” Neither ordinance distinguishes between legal or illegal units. So generally, when an illegal unit in Oakland is rented to a residential tenant, the tenancy is subject to the protections afforded by both ordinances.
What is an Illegal Unit? The term “illegal unit” is actually a misnomer. The unit itself may not actually be illegal. Instead, it is the use of that unit that may be illegal because it does not comport with occupancy laws. Nevertheless, for purposes of this article, I will refer to these units as illegal units. In order to have a lawful unit for residential occupancy, there must be a certificate of occupancy issued by the City of Oakland for that unit. So, for example, a single-family home would have a certificate of occupancy identifying one permitted dwelling unit while a duplex would have a certificate of occupancy identifying two permitted dwelling units. It is not uncommon for a single-family home with an in-law room or cottage to have a certificate of occupancy identifying the property as having only one permitted dwelling unit. These in-law rooms may be perfectly legal when used for the purpose intended, such as allowing a family member or friend to stay and sleep in the room as an accessory use of the main part of the house. However, installing a kitchen or oven without permits and renting them as separate dwelling units would be an illegal use of that space. And as explained above, once an illegal unit is rented to a tenant, it generally results in a tenancy that is protected under both the Rent Adjustment Ordinance and the Just Cause for Eviction Ordinance. Rent Adjustment Ordinance The Rent Adjustment Ordinance significantly limits the amount a landlord may increase rents to residential tenants. A landlord may only increase it once per year and in an amount determined annually by the Rent Board. These limitations would apply to illegal units. There are a few exceptions to the applicability of the Rent Adjustment Ordinance, including rental units located on a property containing three or fewer units where the owner is principally residing in one of those units and has been doing so for at least two years. So, for example, if an owner has lived in a single-family home for two years and rents a second illegal unit located on the property (such as an in-law unit) separately, then the tenancy in the illegal unit may not be covered by the Rent Adjustment Ordinance. Under such scenario, the owner could increase rents despite the limitations imposed by the Rent Adjustment Ordinance. Notwithstanding the above, whether a landlord is even entitled to any rent at all for an illegal unit, let alone an annual increase, is questionable due to a recent Southern California case that will be discussed in more detail below. Just Cause for Eviction Ordinance The Just Cause for Eviction Ordinance requires that a landlord have “just cause” in order to evict a tenant. The ordinance sets forth eleven just causes for eviction. One of the just causes for eviction is nonpayment of rent. Presumably a landlord could evict a tenant in an illegal unit who fails to pay rent. This seems logical since an illegal unit is covered under the Just Cause for Eviction Ordinance and nonpayment of rent is an established just cause for eviction. However, a recent court case out of Southern California challenges this logic. In November 2016, the Appellate Division of the Los Angeles Superior Court held that a nonpayment of rent eviction of a tenant in an illegal unit was not proper. The Court reasoned that a rental agreement for an illegal unit is void, and therefore a landlord is barred from collecting any rent or evicting a tenant for nonpayment of rent. In other words, the tenant had no obligation to pay any rent at all to the landlord, so any notice to pay rent or quit necessarily overstated the amount of rent due and was therefore, invalid. While this court decision from Southern California is not binding on Alameda County Courts, judges here may still consider the analysis and persuasiveness of that decision and apply it to similarly situated tenancies in Alameda County. Furthermore, this decision underscores the harsh reality a landlord may face when electing to rent an illegal unit. If nonpayment of rent is not a viable option to evict a tenant in an illegal unit, then the Just Cause for Eviction Ordinance provides another just cause basis that a landlord may utilize. A landlord may evict a tenant from an illegal unit in order to remove that illegal unit from the residential rental market due to a code violation. This can be a lengthy (typically requires a minimum 60-day notice) and expensive (tenant would be entitled to considerable relocation payments) basis to evict a tenant. But it is still an option a landlord may consider when seeking to recover possession of a tenant occupied illegal unit. And like with the Rent Adjustment Ordinance, there are some exceptions to the applicability of the Just Cause for Eviction Ordinance, including rental units located on a property containing three or fewer units where the owner is principally residing in one of those units. Under this circumstance, the owner who principally resides in one of the three or fewer units on a property does not need just cause to evict a tenant residing in an illegal unit on that property. In other words, under this circumstance the illegal unit would not be subject to the Just Cause for Eviction Ordinance as soon as the owner began principally residing in one of the units and for so long as the owner continued to live in that unit. Landlord Liability Under California law, contracts that are entered into for an illegal purpose are void, so the parties are not obligated to perform under that contract. A lease is a contract. So, where the purpose of the lease is to rent an illegal unit, the lease may be void. This was the analysis that led to the decision in the above discussed Southern California case. Consequently, in addition to a potential zero rent liability, there are other potential risks and liabilities associated with renting an illegal unit. For instance, a tenant may break the lease and walk away at any time without consequence. The tenant may also sue the landlord claiming a multitude of things, such as fraud and misrepresentation, violation of the rent ordinance, breach of the warranty of habitability, etc. In any such lawsuit, a tenant may seek to recover damages from the landlord, which may include:
Return Of Some Or All Rent That Has Been Paid – If there is no obligation to pay rent, then the tenant may seek reimbursement of any rent that was paid.
Emotional Distress – A tenant may seek to be compensated for emotional anguish suffered as a result of living in, or being displaced from, an illegal unit.
Out-Of-Pocket Expenses – A tenant may seek reimbursement for expenses incurred, such as expenses necessary to move out of the illegal unit.
Treble Damages – If the landlord’s conduct resulted in a Rent Adjustment Ordinance or Just Cause for Eviction Ordinance violation, then under those ordinances, the tenant’s actual damages would be tripled.
Punitive Damages – A Tenant may seek an additional sum of money to punish the landlord if it is found that the landlord’s conduct was intentional and reprehensible.
Attorney’s Fees And Costs – A tenant may seek reimbursement of the attorney’s fees and costs incurred to litigate the case against the landlord.
Potential Defenses to Tenant Lawsuits There are numerous potential defenses a landlord may raise in response to a tenant lawsuit. Here are a few:
Statute of Limitations: This is the time within which a lawsuit may be filed after the adverse conduct. Here are some potentially relevant statutes of limitations: Violation of the Rent Adjustment or Just Cause for Eviction Ordinances – 1 year; Breach of oral contract – 2 years; Personal Injury and Negligence – 2 years; Fraud and misrepresentation – 3 years; and Breach of written contract – 4 years.
The Illegal Status of the Unit was Known to the Tenant: Such tenant knowledge may undermine a tenant’s claims of fraud and misrepresentation. It may mitigate liability for other claims as well since the tenant assumed the risk when moving in.
Quantum Meruit: This is a Latin phrase meaning “as much as he deserved.” It refers to the actual value of the services performed. Quantum meruit determines the amount to be paid when no contract exists. In other words, there is an actual value for the housing services provided and the tenant should not be entitled to a refund of all the rent, but instead an offset for the value of the services provided.
Ways to Minimize Liability While there are thousands of illegal units rented throughout the Bay Area, the safest course of action to minimize liability is simply not to rent them. The risk and potential exposure to liability may outweigh any benefit a landlord gets from renting an illegal unit. A landlord may also consider legalizing the rental unit. Given the need for housing in the Bay Area, some local governments are making it easier to obtain a certificate of occupancy for illegal units. If the landlord chooses to assume the risk by renting an illegal unit, then the landlord should not misrepresent or hide the fact that it is an illegal unit. If a tenant is aware that the unit is illegal before moving in, then presumably the tenant is making an informed decision to do so, which may minimize potential liability. Of course, the tenant may have more sinister motives behind the desire to move into an illegal unit. A landlord should treat the tenancy and rental unit with care. Be responsive to tenant complaints. Don’t give excessive rent increases that violate the limitations imposed by the Rent Adjustment Ordinance. Illegal units, which are often more affordable than other rental units, provide a source of much needed housing in the Bay Area, and the vast majority of tenancies in those units don’t result in adverse litigation. The ones that do generally begin with a disgruntled tenant. So, the landlord should not stir the pot. Whether renting legal or illegal units, all landlords should maintain an insurance policy for the subject property at all times that provides coverage for “personal injury” and “wrongful eviction.” Having such a policy may afford an owner protection against some of the potential claims that may be asserted by tenants. Finally, all landlords should consider various asset protection strategies. No one ever expects to be sued, whether by a tenant in a legal unit or in an illegal unit. But everyone must recognize that it may occur. So, landlords should be prepared. There are a number of legal strategies that a landlord may employ before a lawsuit occurs to protect assets and minimize potential losses in the event of a future lawsuit. These strategies should be considered and implemented sooner rather than later. Because once a lawsuit is filed, it is usually too late to do so.
© 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.