Who is responsible for the housing crisis in San Francisco, and what can government do to solve it? As property values have climbed in San Francisco and surrounding areas, that problem has increasingly vexed elected officials and the courts. The First District of the Court of Appeal is the most recent to weigh in, with a decision invalidating a local pro-tenant ordinance. But first, some background.

The Ellis Act is a state statute that prohibits a city or county from “compelling 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. (d)(a).) In short, the Ellis Act allows a landlord to withdraw a rental unit from the market. In 2014, San Francisco Supervisor David Campos sponsored an ordinance requiring landlords to pay a relocation benefit to tenants being displaced due to the landlord’s “repossession” of the rental unit under the Ellis Act. The payment required was 24 times the difference between the unit’s current rental rate and the “fair market value” of the unit, as calculated by a prescribed schedule. In theory, the displaced tenant was to be compensated for two years’ worth of the differential between what the tenant was paying and what the tenant would pay as fair market rent. Tenants were entitled to the payment regardless of needs or assets, and there was no requirement that the payment actually be spent on expenses of relocation.

After a legal challenge in federal district court, Northern District Court Judge Charles Breyer found the ordinance to be unconstitutional. (Levin, et al. v. City and County of San Francisco, 14-03352 (N.D. Cal., filed October 21, 2014).) Applying the standard for measuring the constitutionality of exactions in the land use context, Judge Breyer found that the required payment was not “roughly proportional” to the impact caused by repossession of the unit, and there was no “nexus” demonstrated between the required payment and the impact of the owner’s repossession. According to Judge Breyer, it was not the act of repossession that caused the rent differential which the payment sought to address. Rather, the rent differential was caused by market forces beyond the control of the landlord, including general economic conditions and the City’s decision to impose rent control, creating disparities between existing and fair market rents.

Following Judge Breyer’s decision, San Francisco enacted an amended ordinance in 2015 seeking to address flaws in the original ordinance. For example, the new ordinance required the tenant to certify relocation payments were in fact spent on relocation costs. However, the amount and method of calculating the required relocation payment – based on two years’ worth of the differential between the tenant’s old and new rent – remained the same.

As well as being challenged in federal court, the original ordinance was also challenged in state court, which resulted in an injunction enjoining the City from enforcing the ordinance on the grounds cited in Judge Beyer’s Levin decision, and also because the ordinance was preempted by state law, i.e., the Ellis Act. The City appealed from that judgment. In 2015 another lawsuit was filed in state court challenging the amended ordinance, and the trial court again enjoined enforcement of the ordinance on the basis it was preempted by the Ellis Act. That judgment was also appealed. These appeals were consolidated, and the First District filed its decision on March 21, 2017. (Coyne v. City and County of San Francisco (March 21, 2017) A145044 [pub. opn.] _____ Cal.App.5th _____.)

In Coyne, the Court of Appeal found that the San Francisco ordinance was preempted by the state law set forth in the Ellis Act, because it conflicted with the purpose of the Ellis Act, which is to allow landlords to exit the rental business. The Court cited prior authority holding that when a local ordinance imposes a “prohibitive price” on the exercise of rights provided by the Ellis Act, it is considered to conflict with the Act, and is therefore preempted.

The Court found that the relocation payment requirement by San Francisco’s ordinance in fact imposed a “prohibitive price” on the exercise of the landlord’s right under the Ellis Act to exit the rental business. The Court noted that the ordinance imposed an obligation on the landlord that is nowhere provided for or contemplated in the Ellis Act. The Court also noted that the only other decision addressing a similar ordinance was Judge Breyer’s in Levin, which found the ordinance unconstitutional. The Court stated: “We see the increased rent payment the City’s ordinances obligate landlords to pay their former tenants as a form of ransom which interferes with and places an undue burden on landlords who seek simply to go out of business.” This obligation imposes a “prohibitive price” on the ability of landlords to exercise their rights under the Ellis Act, and is therefore preempted by the Ellis Act.

Moreover, the ordinance was not saved by a provision in the Ellis Act which allows a local authority to mitigate “any adverse impact on persons displaced by reason of the withdrawal from rent or lease of any accommodations.” (Gov. Code, § 7060.1, subd. (d)(c).) The City argued that the required relocation payment was such mitigation, but the Court disagreed. The Court noted that the rent differential a tenant would be faced with is not the result of the landlord’s repossession of his or her unit, but rather is a result of “the City’s policy decision to impose residential rent control, creating a rent differential” which “causes a tenant’s rent to be artificially below market rate, a gap that can be expected to increase with the length of the tenancy.” Thus, the notion that “spiraling rents and high housing prices in San Francisco are an adverse impact of individual evictions statutorily permitted under the Ellis Act is a faulty one” and cannot be justified as mitigation for the adverse impact resulting from repossession of the unit. Indeed, “to allow the City to so enlarge the concept of mitigation that it prevents plaintiff from exercising his rights to go out of business would make the Ellis Act a dead letter except for those owners fortunate enough to have no tenants to displace.” And the laudable policy goal of preserving affordable housing arguably promoted by the ordinance may not be funded by burdensome monetary exactions imposed on property owners exercising their lawful rights under the Ellis Act.

In addition to the relocation payment, the Court “expressed its concern” regarding several other procedural aspects of the ordinance which imposed bureaucratic hurdles on landlords’ efforts to withdraw from the rental market.

In sum, the Court of Appeal agreed with the trial court that the ordinance was invalid on its face, because it conflicted with, and was therefore preempted by, the Ellis Act. As a timely epilogue to Judge Breyer’s Levin decision, the Ninth Circuit dismissed the City’s appeal of the District Court ruling as moot on March 13, 2017, on the basis that the original ordinance addressed in Levin had been amended. (Levin v. City and County of San Francisco (9th Cir. March 3, 2017) No. 14-17283 [non. pub. opn.].) The timing of the dismissal cleared the decks for the California Court of Appeal to weigh in about one week later.

The saga of the San Francisco ordinances and ensuing legal battles in both federal and state court illustrates there are no quick or easy fixes to the housing crisis. Ordinances seeking to protect tenants, well intentioned as they may be, bump up against constitutional protections of private property, as well as the right of landlords to exit the rental market set forth in the Ellis Act. What Coyne and Levin demonstrate – at least from a judicial perspective – is that the housing crisis is not created solely or even primarily by landlords, and local government cannot disproportionately burden landlords in its efforts to fix the problem.