Friday, September 04, 2015

Mak v. City of Berkeley Rent Stabilization Bd. (Cal. Ct. App. - Sept. 2, 2015)

Jason and Karen Mak own four apartment units in Berkeley.  They want to raise the rent, but there's a problem.  Their tenant, Elizabeth Burns, has lived in the unit for 28 years.  So they want her out and a higher rent.

Not surprisingly, however, Berkeley's rent control ordinance doesn't allow that.  So they figure out a workaround.  They'll evict her and say that one of the owners (Jason) wants to live there.  That's an okay reason to kick her out under the ordinance.  So they give her a 60-day notice.

But there's one problem.  Once you serve a 60-day notice, and kick the tenant out, you can't then raise the rent (for a period of time, anyway) if the owner does not, in fact, take over the unit.

But the Maks have a workaround for that as well.  They strike a deal with the tenant.  They'll give her some compensation (e.g., free rent) and she'll agree (1) to vacate the unit, and to (2) deem the 60-day notice withdrawn.  Which will mean that, she's she's "voluntarily" left the thing, the Maks can raise the rent to where they want.

Good for everyone.

Except the Court of Appeal sees through this "transparent attempt to circumvent the provisions of local rent control provisions."  Affirming the trial court's decision that these machinations don't work and that the rent remains controlled.

That's surely the right rule.  But don't think that the Court of Appeal's holding here really solves all that much.  It merely slightly moves the statutory inflection point.

All the Maks had to do (in my view) to make this scheme work was to strike a deal with the tenant before the 60-day notice went out.  They just show up and say:  "We want to kick you out and raise the rent, and you want money/free rent.  So -- in the words of Monte Hall -- 'Let's Make a Deal.'"

If that happens, everyone wins.  (Except the City and future tenants, of course.)  The tenant leaves the apartment "voluntarily" and the rents effectively get raised.

The only thing it requires is slightly more sophisticated planning.  Strike the deal before the 60-day notice rather than after.

Same result.

In academia, we all this "regulatory arbitrage".  If there's a statute that obtains a certain public benefit, parties can usurp for themselves this benefit by arbitraging the statutory dictates.  That strategy works in a number of regulatory settings.

Including here.  At least if you're smart about it.

So good job Court of Appeal.  Just remember that you haven't actually solved the problem.  You've merely moved the strategy up in time a tiny bit.