Ellis Act Faces an Uncertain Future : Legislation That Gave Landlords a Non-Rental Option May Backfire

When Lawrence Kates successfully used the Ellis Act a few weeks ago to discourage the City of Thousand Oaks from expanding rent controls, the new state law looked like a clever tool for landlords to fight local government.

Now the tool is starting to look tarnished.

Kates issued 30-day eviction notices to tenants, many of them senior citizens, in the 496-unit Oakview apartments owned by his company, Standard Investments of Los Angeles. He agreed to withdraw the notices only after city officials agreed to delay expanding its rent controls for at least six months.

Mayor Alex T. Fiore was quoted then as calling Kates’ action a form of “blackmail,” but Kates said in a telephone interview that “only about 25% of the units in Thousand Oaks are under rent control now, and the city wanted to control 100%. We simply don’t want to operate under rent control.”

The Ellis Act was intended to give landlords an option. Effective last July 1, it prohibits “any public entity from enacting or implementing ordinances to compel a residential property owner to offer or continue to offer the property for lease or rent.”

On Sept. 24, however, the City of Santa Monica and the Santa Monica Rent Control Board filed a lawsuit, in what is now called the Yarmack case, contending that “the Ellis Act does not authorize a landlord to evict tenants . . .(or) remove rental units . . . in violation of local law.” The suit charges that such actions “will violate the city charter.” A Superior Court hearing is scheduled Oct. 14.

‘City-Versus-State’ Issue

Dugald Gillies, legislative advocate for the California Assn. of Realtors, which sponsored the Ellis Act, scoffs at the city’s suit. “I can’t see how they can win,” he said. “This city-versus-state issue comes up repeatedly, and the rule is fairly well established that when the state adopts a comprehensive body of legislation, as the Ellis Act is, and states its intention to preempt, as the Ellis Act does, the court will uphold the preemption.”

In addition, he said, the new law deliberately includes charter cities. “I’m sure that the city attorney is aware of that, but what the heck? They litigate everything in Santa Monica.”

City Attorney Robert Myers claims that Santa Monica’s success rate on rent-control issues has been high. “We’ve won almost every case,” he said. And he expects to win this one. “We would never file a lawsuit we didn’t think we had a chance of winning, and we think we made a compelling argument against evicting tenants.”

The city argues that “nowhere in the act are landlords given the specific right to evict tenants, nor are local eviction statutes prohibited.”

So how could a landlord go out of business otherwise? Howell Tumlin, administrator of the city’s Rent Control Board, says “by attrition.” As tenants move, landlords can leave the units empty.

Rand Corp.’s Empty Units

That’s what the Rand Corp. has been doing for some time in the three apartment buildings it owns in Santa Monica, but Rand attorney Sherman Stacey said, “The city objects to evicting, but without evicting, it could be 30 years before a building could be used for anything else.”

The Rand Corp., which has filed under the Ellis Act, wants to demolish the three apartment buildings, which have 19 occupied units, and build a facility to complement its adjacent holdings, which are used for research and education.

“The Rand Corp. isn’t in the business of buying property for rentals. It bought for corporate expansion,” Stacey explained. He is studying the city’s lawsuit but says it won’t necessarily affect plans of the Rand Corp. or any other building owner to go out of the rental business under the Ellis Act.

The city sued Henry and Regina Yarmack and Bernard and Rebecca Appelbaum for notifying the Santa Monica Rent Board in July of their intent to withdraw their Tour Inn Motel from the rental market. Craig Mordoh, director of legal affairs for the Apartment Assn. of Greater Los Angeles, noted, “It’s interesting that the city picked a small owner rather than the Rand Corp.”

The motel’s residents would have been among the first tenants in Santa Monica who would have had to move under the Ellis Act. The lawsuit is the first to challenge the new law.

Owners of 17 Santa Monica buildings containing 131 apartments--78 of them occupied--filed notices of intent to go out of the rental business under the Ellis Act. This number of owners is higher than Berkeley, West Hollywood or East Palo Alto, the three other California cities with the tightest rent controls. As of last week, there were no filings in East Palo Alto, one in Berkeley and one in West Hollywood, though more are expected there by owners whose units were built or converted as condominiums but were then rented rather than sold.

Surprising Number

“I’m surprised so many filed (in Santa Monica),” Tumlin of the Santa Monica Rent Control Board acknowledged, “but there are really fewer than 17 owners, because five buildings belong to a single landlord who, for philosophical and spiteful reasons, wants to take all of the properties off the market.” This is not the Rand Corp., which Tumlin said “made its plans to expand known many years ago and indicated then that it had no desire to be a landlord.” He termed the Rand Corp.’s filing under the Ellis Act “understandable.”

Tumlin was surprised by the number of filings because of the city’s strong rent-control stance. “I think most (apartment building) owners know our position and know that if they use the Ellis Act, they can only empty their buildings (not put them to any other use), and now we are taking the position that they can’t even do that (empty the buildings).”

Even before the city filed its “Yarmack case” lawsuit, it passed provisions that made getting out of business under the Ellis Act nearly prohibitive. There is a $250 filing fee for each unit in which a tenant faces eviction, a minimum 60-day waiting period and relocation payments of $2,000 to $4,000 per unit. By comparison, there is a $1,000 relocation fee in Los Angeles.

“So the fact that more owners didn’t file is probably a measure of their prudence rather than their zealousness to get out of the business,” Tumlin said.

Among the owners of the 32,000 rental units in Santa Monica who didn’t file is Jerome J. Nash, whose unsuccessful lawsuit inspired the Ellis Act.

Nash Reversed

Nash, whom Tumlin described as “a young student at UCLA” when the suit was filed, went to court after he was denied a permit to raze his six-unit building, claiming that the city’s rent-control law violated his right to go out of business. He won in Superior Court but was reversed in the state Supreme Court, and in 1985 the U. S. Supreme Court refused to hear the case.

Gillies of the California Assn. of Realtors said, “The result of the Nash case produced a statement of law that to us was harsh and we thought should be changed.” The association got Sen. Jim Ellis (R-San Diego) as the sponsor.

A spokeswoman for Ellis indicated that it is still too soon to know the act’s effects. “I’d give it six months,” she said.

Even Kates isn’t sure what will happen in Thousand Oaks when the rent-control issue is raised again in a few months. What if Thousand Oaks then institutes relocation allowances or a filing fee like Santa Monica? “Then we’ll have a disagreement,” he said.

Gillies doesn’t see the act as a cure-all. “It’s like throwing the dog a bone,” he said.

He feels the same about SB 2580, introduced by Sen. Nicholas C. Petris (D-Oakland) and currently awaiting Gov. Deukmejian’s signature.

Two Provisions

Felice Tannenbaum, chief of staff for Petris, said that the bill has two provisions: compliance and certification. “It says that if a landlord is in substantial compliance (with whatever rent controls a city has adopted), the landlord can’t be penalized unjustly.” In some jurisdictions, landlords who applied for a rent increase have been punished by having their rents rolled back to earlier values, say 1980, she explained.

As for certification, the Petris bill follows a lead taken by the city of Berkeley to establish or certify rents for each apartment building as of a certain date, with annual increases calculated from that time. McConnell of the Berkeley Rent Stablization Board said that before his city instituted a certification program, “there was confusion about what a landlord could charge. There was never a way for an owner to get a fix on what the legal rent was.”

However, not even all landlords are happy with certification. Tannenbaum said, “Some landlords feel so alienated that certification doesn’t do enough.” Mordoh of the Apartment Assn. of Greater Los Angeles said, “For the next year, it will be, for landlords, a bureaucratic mess.”

Even so, the certification program in Berkeley was prompted, said Tannenbaum, by landlord complaints, “not from owners of hundreds of units but from people who had bought small places for investment properties or retirement. When they went to up their rents, these owners faced a fascist-type regime that didn’t understand what the owners’ real costs were.

“We wanted a state policy like Berkeley’s, because a community that goes as far out as Berkeley should be curtailed and moderated.”

Berkeley moderated? Considering Berkeley’s radical politics, the term might seem like an oxymoron, but McConnell said, “We are taking steps to be more moderate, and that’s why, I think, many owners are taking a wait-and-see attitude toward the Ellis Act.”

The fact that Berkeley also requires owners to pay a $4,500-per-unit relocation allowance and a $100-per-unit filing fee while giving the city six months’ notice undoubtedly also serves as a deterrent. But McConnell observed, “Most of the owners want to stay in the business.”

As Michael Katz of Katz & Block, a Los Angeles law firm specializing in evictions, put it:

“I think the Ellis Act is a good thing, because a landlord should be able to go out of business. So I agree with the act. I don’t agree with relocation fees or cities preventing owners from putting (apartment) buildings (emptied under the Ellis Act) to other uses.

“So it doesn’t make economic sense in many cases (to file under the Ellis Act), because making something is better than making nothing.”

That old saying, “Where there is a will, there is a way” is true even in Santa Monica, though. Mordoh of the Apartment Assn. of Greater Los Angeles said, “I hear there is a growing black market in Santa Monica of owners just buying out their tenants.”

The way it works: “If it costs $2,000 (as a relocation allowance), the owner offers the tenant $2,500, and the owner can empty the building without using Ellis. It avoids the bureaucratic nonsense, and it becomes a personal matter between the owner and the tenant.”