Can Tenants be Evicted so Landlord can Withdraw Property from Rental Market?

In the recent case of 640 Octavia, LLC v. Pieper, the trial court granted plaintiff landlord 640 Octavia, LLC’s (640 Octavia) summary judgment motion in an unlawful retainer action under the Ellis Act (Gov. Code, § 7060 et seq.).

Tenants Karl Pieper and Jose Montoya argued that the trial court (1) improperly sustained 640 Octavia’s objections to evidence relating to the landlord’s lack of intent to withdraw its property from the residential rental market, and (2) “improperly discounted” other evidence it did consider, relating to the landlord’s failure to strictly comply with the Ellis Act.

The Court of Appeal disagreed and affirmed the trial court's judgment.

640 Octavia is a Wyoming limited liability company, managed by Edward Kountze, that owns the real property at 640 Octavia Street in San Francisco, which has four residential units.

Kountze lived in a unit in the building with his partner. When 640 Octavia became the owner of the property in 2017, Pieper and Montoya (tenants) lived in unit 3.

In January 2020, 640 Octavia served tenants with a “Notice of Termination of Tenancy” (NOT). The NOT stated that the landlord was terminating tenancy and 640 Octavia was withdrawing the property “from the residential rental market” pursuant to the Ellis Act and section 37.9A of the San Francisco Residential Rent Stabilization and Arbitration Ordinance (S.F. Admin. Code, ch. 37) (Rent Ordinance).

The NOT continued: “This notice (the ‘Notice’) is what is commonly referred to as an ‘eviction notice’.”

The landlord also executed and filed with the San Francisco Residential Rent Stabilization and Arbitration Board (Rent Board) a “Notice of Intent to Withdraw Residential Units from the Rental Market” (NOITW).

640 Octavia recorded the NOITW with the county recorder.

The Ellis Act provides, with certain exceptions not relevant here, that no statute, ordinance, regulation, or administrative action shall “compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease.” (Gov. Code, § 7060, subd. (a).)

“A landlord who complies with the Ellis Act may therefore go out of the residential rental business by withdrawing the rental property from the market.” (Drouet v. Superior Court (2003) 31 Cal.4th 583, 587 (Drouet).)

Section 37.9A, subdivision (e) of the Rent Ordinance requires the landlord make relocation payments to tenants who lose their residence when it is removed from the rental market. The Rent Board publishes updates of the relocation amount due per tenant. The landlord must pay half of the relocation payment when it serves the NOT and pay the other half when the tenant vacates the unit. When 640 Octavia served the NOT, it owed the tenants relocation payments of $6,985.23.

Counsel for the landlord testified by declaration that she sent the NOT to the tenants’ address and enclosed checks for $3,492.62 for each of them.

She explained the postal service “returned to sender” the NOT and checks due to the overflow of mail in the tenants’ mailbox.

The landlord and tenants had been engaged in protracted litigation, including in a case brought by the landlord in federal court based on diversity jurisdiction, and so on March 11, 2020, counsel for 640 Octavia sent the NOT and checks to tenants’ counsel.

Counsel explained the NOT and checks had been returned by the postal service. On March 20, the tenants’ counsel responded that he had been “recently retained” in connection with the correspondence from 640 Octavia, notwithstanding his representation of them in ongoing litigation against the landlord, but was “not authorized to accept or receive” the relocation payments and therefore they were “rejected.” He also stated that his clients were exercising their right to extend occupancy of the rental unit until at least February 3, 2021, based on the tenants’ disabilities.

640 Octavia filed the unlawful detainer action on February 11, 2021.

It alleged that 640 Octavia had withdrawn the property from the rental market under the Ellis Act and complied with all applicable provisions of the Rent Ordinance, but the tenants had failed to vacate and continued in possession of the premises.

The tenants demurred, and the trial court overruled the demurrer. The tenants then answered the complaint, asserting various affirmative defenses, including that 640 Octavia had bad faith, ulterior, and improper reasons for seeking to recover possession of the premises.

640 Octavia moved for summary judgment. It submitted, among other things, the NOT, NOITW, and memorandum of the NOITW.

Kountze declared that, since at least January 2019, he had a “bona fide intent to withdraw the Property from the residential rental market.” He stated that when he purchased the property in 2016, he had “intended to use it for my family—one unit for myself, one unit for my partner, and one unit for my adult daughter, with a shared family office,” and now “would like to provide her a place to call home in the Bay Area where she can focus on her [graduate] studies.”

In November 2019, 640 Octavia signed license agreements for non-exclusive occupancy and use of unit 1 (with Daniel Amarel) and unit 2 (with Kountze and his partner). Unit 4 was vacant. Kountze declared that, other than the tenants in unit 3, none of the other units were occupied.

The tenants opposed summary judgment. They submitted, among other things, notices to quit or cure sent by 640 Octavia to them in 2017 and 2018, reports of private investigations conducted on the property in 2017, police reports from 2017 to 2019, screenshots from surveillance video in 2018 purporting to show Kountze making a neck “slashing” motion into the camera, text messages between Kountze and Amarel from 2018 and 2019, and documents from the unsuccessful federal action initiated by 640 Octavia against them. 640 Octavia objected to this evidence on various grounds, including relevance.

The trial court granted summary judgment for 640 Octavia and against the tenants. It sustained 640 Octavia’s relevance objections to the evidence summarized above.

The court concluded that 640 Octavia “has proven its compliance with all applicable state and local requirements, and has established its bona fide intent to withdraw the subject property from rent or lease.”

Specifically, it determined that 640 Octavia had the right to seek possession of the premises because it complied with the Ellis Act and applicable provisions of the Rent Ordinance in terminating the tenancies. It also determined that 640 Octavia’s “dominant motive in terminating this tenancy” was to “comply with the Ellis Act and withdraw the Property and the Premises from the residential rental market.”

The trial court concluded that 640 Octavia “established all elements of an Ellis Act unlawful detainer,” and the tenants had “failed to create a triable issue as to any material fact regarding elements of the cause of action or to any affirmative defense.”

The court explained that the tenants’ affirmative defenses could not overcome 640 Octavia’s prima facie case, were not defenses as a matter of law, or lacked sufficient admissible evidence to create a triable issue of fact. The court entered judgment in favor of 640 Octavia for restitution of possession of unit 3. The tenants appealed.

The tenants contended the trial court erred in concluding that 640 Octavia: (1) had a bona fide intent to exit the rental market; (2) served the NOT on all known tenants at the property; and (3) complied with the Ellis Act and Rent Ordinance in its service of the relocation payment checks.

The tenants argue that the trial court incorrectly concluded that 640 Octavia had a bona fide intent to remove the property from the rental market.

The tenants’ argument fails here as a result of the law reconciling a retaliatory eviction defense with an unlawful detainer claim in the context of the Ellis Act.

The defense of retaliatory eviction is codified at Civil Code section 1942.5.

This defense bars a landlord from recovering possession in an unlawful detainer action in retaliation against a tenant because of his or her exercise of rights or complaints made regarding tenantability.

Here, the tenants alleged that 640 Octavia sought to evict them in retaliation for the ongoing conflicts between Kountze, Pieper, and Montoya. The Ellis Act allows a landlord to respond to a retaliatory eviction defense by proving the landlord had a bona fide intent to exit the rental market.

The California Supreme Court explained in Drouet: “where a landlord has complied with the Ellis Act and has instituted an action for unlawful detainer, and the tenant has asserted the statutory defense of retaliatory eviction, the landlord may overcome the defense by demonstrating a bona fide intent to withdraw the property from the market. If the tenant controverts the landlord’s bona fide intent to withdraw the property, the landlord has the burden to establish its truth at the hearing by a preponderance of the evidence."

The trial court sustained 640 Octavia’s objections to three categories of evidence as irrelevant. The tenants contend that these evidentiary rulings were an abuse of discretion or otherwise reversable error, because the evidence relates to 640 Octavia’s lack of intent to take its property off the rental market.

The appellate court agreed with the trial court.

There was no dispute that the parties in the case have been engaged in ongoing conflict for many years. The trial court appropriately excluded evidence reflective of that longstanding conflict as irrelevant. At most, the evidence showed that 640 Octavia’s desire to exit the rental business was impacted by its protracted fights with the tenants.

The tenants argued that they have shown a triable issue of material fact as to whether 640 Octavia served “all tenants” with the NOT. The tenant- defendants received the NOT.

According to the tenants, however, the evidence excluded by the trial court suggests that Amarel, Kountze, and his partner—not defendants nor subject to any other eviction proceedings—were also tenants in the building.

The tenants thus argued that 640 Octavia needed to present evidence that it also served these three individuals with the NOT.

640 Octavia responded that the written license agreements it submitted on summary judgment showed Amarel, Kountze, and his partner were “licensees” rather than tenants, and that there was no need to serve any of them with the NOT.

The appellate court agreed with this argument and found in favor of the landlord and affirmed the judgment.

LESSONS:

1.         The Ellis Act provides, with certain exceptions not relevant here, that no statute, ordinance, regulation, or administrative action shall “compel the owner of any residential real property to offer, or to continue to offer, accommodations in the property for rent or lease.” (Gov. Code, § 7060, subd. (a).)

2.         A landlord who complies with the Ellis Act may therefore go out of the residential rental business by withdrawing the rental property from the market.

3.         Where a landlord has complied with the Ellis Act and has instituted an action for unlawful detainer, and the tenant has asserted the statutory defense of retaliatory eviction, the landlord may overcome the defense by demonstrating a bona fide intent to withdraw the property from the market.

4.         If the tenant controverts the landlord’s bona fide intent to withdraw the property, the landlord has the burden to establish its truth at the hearing by a preponderance of the evidence.