Property owners beware - liability falls on you. Property owners can incur significant expenses including relocation payments, costs of filing an unlawful detainer lawsuit, or the costs of defending lawsuits filed by tenants when dealing with unpermitted units.
What is an unpermitted or illegal unit?
In general, an unpermitted, non-confirming, or illegal residential unit is a dwelling that is created without obtaining proper building permits or a unit that does not have a city issued certificate of occupancy. It is common for a single-family home with an in-law room to have a certificate identifying the property as having only one dwelling. It is also common for a property owner to rent the in-law unit separately to a residential tenant. Thousands of units in the Oakland are rented without proper certificates of occupancy.
The purpose of a certificate of occupancy is to ensure that the rented property complies with all local building and housing codes. Examples of unpermitted units include garages or basements converted to residential units without permits.
Oakland takes the position that tenants of unpermitted units receive the full benefits and protections of the Rent Ordinance, including rent control and good cause for eviction protections. Thus, an unpermitted unit is not exempt from Oakland’s Residential Rent Adjustment Ordinance and Just Cause for Eviction Ordinance.
Property owner liability
Renting an unpermitted unit to a tenant might seem like a way to increase profits. But property owners expose themselves to liability when they do so. Unpermitted units may represent a health or safety risk to the occupant. The code violation and habitability laws make it extremely appealing for tenants to sue property owners.
The tenant may also sue the property owner for various claims based on the condition of the unit such as breach of warranty of habitability, misrepresentation, fraud, unfair business practices, illegal collection of rent payments and violations of city ordinances. The tenant may seek emotional distress damages, attorney’s fees and costs. If a violation is found, the actual damages awarded to the tenant could be tripled.
What can a property owner do if the unit is unpermitted?
A property owner may be notified of an unpermitted unit by the City issuing of a Notice of Violation. Other times, a property owner receives a complaint from their tenants. Or a property owner may be fully aware that the unit is unpermitted but may not understand the problems they could face.
A property owner should also make sure to have the appropriate insurance coverage for wrongful eviction and personal injury. Defending lawsuits against tenants for wrongful eviction, breach of warranty of habitability, etc. can be very expensive. Please keep in mind, tax collection agencies also take the position that if a property owner has been receiving tax benefits on the unpermitted unit, including improvement and depreciation deductions, those tax benefits may need to be returned by the taxpayer (property owner) plus interest and penalties.
Do not rent unpermitted units
The safest course of action is not to rent out any unpermitted unit. The risk and potential exposure to liability outweighs any benefit a property owner gets from renting the unit.
An owner should always make full written disclosure to prospective tenants if the rental unit is unpermitted. This way, the tenant will be in a difficult position to later claim fraud or misrepresentation.
If you have an unpermitted unit, here are a few of your options: legalize the unit, terminate the tenancy, or engage in move out negotiations and buyout the tenant.
Bringing an unpermitted unit up to code
To legalize the unit, you will need to acquire all necessary permits. A property owner can work with a licensed contractor and Oakland’s building and planning department to obtain all necessary permits. Bringing an unpermitted unit up to code is not always worth it. It can be costly to a property owner. For example, if the unpermitted unit does not have appropriate ceiling heights, correcting ceiling heights may require excavation and extensive foundation work.
Permanently removing a unit from housing
A property owner must follow a multi-faceted procedure when evicting a tenant based on bring a unit up to code that is tenant occupied. Before a formal notice terminating a tenancy is provided to a tenant, a property owner must first obtain all necessary permits. Keep in mind, that a written disclosure is required before permits are obtained if a unit is being permanently removed from housing use or if a demolition permit is necessary.
After all permits have been obtained, a property owner may need to file a petition for extension to complete repair work with Oakland’s Rent Adjustment Program. A property owner needs to provide a copy of this petition of extension with the formal 60-day notice terminating the tenancy to a tenant. Along with these notices, a property owner will need to make payments to the tenant. The notice must contain particular language. If the notice does not have the required language, a court may find the notice defective. Consult with an attorney that practices in this area of law to assist you in preparing these notices.
A tenant that is displaced for 60 days or more is entitled to payment under Oakland’s Uniform Relocation Payment Ordinance. A property owner will need to pay the amounts stated under that ordinance.
If the tenant vacates after the notice expires – Congratulations, you now have possession of your property and should start repair work immediately. If the unit becomes available for housing after the repair work is completed, the tenant has the first right to return under the same terms that existed before the tenant moved-out. If the tenant does not vacate then you need to recover possession of the property by filing an unlawful detainer.
Eviction – the unlawful detainer process
If you are forced to evict because your tenant did not move-out after the expiration of the notice, the property owner must then file an unlawful detainer lawsuit and seek a judgment for possession. To initiate the unlawful detainer action, a complaint must be filed with the court and served on the tenant, along with a summons.
A tenant must file an answer to the complaint. After the tenant files an answer, the property owner may request the court to set the trial date within 20 days. A tenant may decide to fight the eviction and utilize various procedural tactics to delay the process and increase the costs and legal expenses for the property owner.
After the tenant files a response to the complaint, either side may propound discovery to prepare for trial or settlement. Discovery is the process where parties gather information about the action from the other party through various methods such as depositions, written questions (interrogatories), requests for documents, or property site inspections.
Prior to trial, the court will set a settlement conference. The court strongly encourages parties to settle. Most cases settle. If the case does not settle, then the action proceeds to a trial. At trial, the property owner must prove the tenant was lawfully terminated and that the tenant remains in possession. If the property owner prevails, they may obtain a judgment for possession of the unit.
Why not serve the tenant with a non-payment of rent?
You may not evict a tenant living in an unpermitted unit for non-payment of rent. Under California law, contracts including leases that are entered into for an illegal purpose are void. This means that if you are renting out an unpermitted unit subject to a lease, the parties are not obligated to comply with the lease and the tenants could potentially stop paying rent.
An Appellate Division of Southern California Superior Court has held that a 3-Day Notice to Pay Rent or Quit served on a tenant living in a garage was defective. The reasoning was if the lease is void, essentially an illegal contract, the property owner was not entitled to rent, and the property owner could not evict for nonpayment of rent. In another case, the court held that a 3-Day Notice to Pay Rent or Quit was not proper since the notice must state the amount of rent that is due. The court reasoned that unless there is a certificate of occupancy for the premises, no rent is due.
Another option for dealing with an unpermitted unit is to negotiate a move-out. The negotiation typically results in an agreement where a tenant voluntarily moves out in exchange for money. Oakland requires the property owner to provide a tenant with disclosure forms and file paperwork with the Rent Adjustment Program (RAP) before engaging in any move-out discussions. And if an agreement is made, a recital of tenants’ rights must be included in the agreement. The agreement must also be filed with the RAP.
The financial benefit of renting an unpermitted unit is drastically diminished when faced with the risks associated with bringing the unit up to code or engaging in litigation. Smaller property owners can be more significantly impacted when renting unpermitted units. Many smaller property owners are not economically prepared for these unexpected costs and are forced to sell their properties. As with Ghost Ship fire, an unpermitted space can expose a property owner to criminal liability and even lead to a loss of life. If you have an unpermitted unit you should contact an attorney to see how you can protect yourself and limit your liability.
© 2019 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