Ninth Circuit upholds San Francisco ordinance regulating landlords’ handling of tenant buyouts

California’s ongoing housing crisis continues to pose a serious threat to this state’s economic well-being. I have previously noted in my blog the efforts made by the state government at the very end of its last legislative session to ameliorate this troubling situation. A number of Silicon Valley jurisdictions have also tried to address the housing needs of their communities through the use of rent control measures, which I have also discussed in this blog.

In the Bay Area, San Francisco is notorious for its tenant-friendly approach to rent control. Over the years, articles have appeared in this blog about various developments in the City’s program. Most recently, I reported that its onerous tenant relocation payment law was struck down by the courts. Earlier this month, however, the Ninth Circuit Court of Appeals handed a victory to the City with regard to its restrictions on certain tenant buyouts by landlords.

Under San Francisco’s rent control regime, which applies to most rental units built before 1979, a plethora of constraints on rental increases and evictions have been impressed upon landlords.   While no-fault evictions for limited purposes (e.g., owner move-ins and removal of units from the market allowed under the Ellis Act) were subject to regulation under San Francisco’s rent control ordinance, no such checks existed prior to 2014 with respect to tenant buyouts, where the landlord offers to pay the tenant to vacate the unit.   As a result, tenant advocates asserted that, without legislative intervention, tenants were subject to abuses and unfair tactics in connection with these buyouts, which resulted in a negative impact on the stock of affordable housing.

In 2014, as a result of this advocacy and outcry, San Francisco enacted a new ordinance entitled Tenant Buyout Agreements. This new law imposed a variety of notice and reporting requirements on landlords who sought to pursue these arrangements, as well as restrictions on condominium conversion in certain circumstances. From the landlords’ point of view, these obligations created substantial barriers to entering into these buyout agreements, which further restricted their rights as property owners.

As a result, a group of San Francisco landlords calling themselves the San Francisco Apartment Coalition filed litigation against the City and County of San Francisco in state court to challenge several provisions of the ordinance. Specifically, this lawsuit contended that (1) the requirement that landlords give tenants information about tenants’ rights organizations who can assist them in buyout discussions violated the landlords’ First Amendment rights by making the negotiation process prohibitively burdensome, (2) the creation of a searchable database of buyout agreements violated the landlords’ constitutional privacy rights, and (3) the 10-year ban on condominium conversion in the event the buyout involved certain classes or numbers of tenants infringed on the landlords’ liberty of contract. After San Francisco successfully removed the lawsuit to federal court, U.S. District Judge Phyllis Hamilton ruled in favor of the City and dismissed the lawsuit with prejudice in 2015, rejecting plaintiffs’ arguments on the constitutional validity of the ordinance and finding that amending the complaint would be futile.

On appeal to the Ninth Circuit, U.S. Circuit Judge Carlos Bea, writing for a unanimous three-judge panel in an opinion dated February 8, 2018, concluded that the ordinance did not violate either the state or federal constitution, and affirmed the District Court’s decision in favor of the City. In evaluating whether the ordinance was consistent with constitutional requirements, Judge Bea noted that the court would not, “as we must not, evaluate the policy merits of the ordinance.”  Enumerating the plaintiffs’ constitutional claims against this ordinance, Judge Bea concluded that the plaintiffs had offered “assertions but no authority which suggests the ordinance runs afoul of either constitution”—the disclosure requirement did not restrict protected speech or violate the plaintiffs’ First Amendment rights, the creation of the database did not violate the plaintiffs’ right of privacy under the California Constitution, and the 10-year ban on condominium conversion did not violate the plaintiffs’ liberty of contract.

Given the totality of the City’s victory in this case in spite of the court’s clear avoidance of the issue of whether the ordinance was a good law, there are a couple of lessons that can be taken away from this case. First, the best place to address the merits of the social policy of laws such as this one is in the legislature and/or at the ballot box, not in the courts. Second, in litigating laws like this one, it may be better to challenge the law as applied rather than to bring suit against the law on its face, unless you have a slam-dunk winner of a facial challenge; in comparison, the plaintiffs in this case seemed to be armed only with platitudes rather than definitive legal authority.