Short Term Rentals and Sublets

May 2014

One of the catch phrases in vogue today is the “sharing economy.” While the details vary from business to business and the particular commodity in question, the gist is that underutilized goods, such as cars or shelter, are “shared” by the owner with others for a price.

San Francisco Bay Area tenants, landlords and residential property owners have been availing themselves of the seemingly easy profit garnered through short term rental of homes, or “homesharing” as dubbed by its proponents, through online sites. However, many individuals are learning the hard way that there may be a heavy price to pay for the profits afforded by these short term rentals.

Short Term Rentals by Tenants

Some tenants, particularly in rent controlled and eviction controlled properties, are facing evictions for allegedly violating their lease terms, which oftentimes prohibit tenants from subletting (renting out the unit), or at least prohibit subletting without the landlord’s prior consent. In such a situation, the landlord will typically serve a three day notice to cure or quit. If the tenant fails to comply, the landlord might proceed with filing an unlawful detainer action. Even in the absence of a no-subletting provision, though, some landlords may file a three day notice to quit based on the allegedly illegal use of the property, claiming that the rental violates local ordinances prohibiting short term rentals of apartments (however, this method may be riskier as the tenant may argue that subletting does not constitute grounds for illegal use under the relevant eviction control ordinance, including under San Francisco Rent Ordinance, or that the eviction is not the landlord’s primary motivation for proceeding with the eviction).

Although most cases settle, there are many instances where the landlord and tenant are unable to come to an agreement and the case proceeds to trial. If the landlord successfully demonstrates at trial that the tenant is improperly subletting, the tenant may be evicted from the unit. This can be a daunting result, especially for long term tenants of rent controlled properties, as those tenants may find themselves unable to afford a new rental at current market rates which may be several times higher than the rent that they had been paying at their old rental unit.

Short Term Rentals by Homeowners

Landlords and homeowners have also been trying to cash in on the seemingly easy income afforded by short term rentals and renting out their homes, or rooms within their home, sometimes for more than $600 a night to pay their mortgages or simply for extra cash.

Such short term rentals can be risky, though, even for landlords and homeowners, as they may be in contravention of zoning rules, or noncompliant with hotel fee and tax requirements and violating other city and state ordinances, laws and regulations, thereby subjecting the property owner to substantial financial repercussions.

Owners may proceed, thinking that there is little risk of authorities learning of unpermitted rentals and that no one will object to it. In reality, though, neighbors may complain due to the presence of strangers and increased noise level that may result from short term rentals. People may not wish to live next door to a de facto hotel. Neighbors concerned that their property value might depreciate due to the presence of short term rentals in the neighborhood may also complain to the city. If the city fines the landlord for noncompliance with zoning laws or tax or other fees imposed upon short term rentals, the homeowner or renter may end up owing many thousands of dollars in fees and penalties.

Even more problematically, in some cases, landlords have sought to evict rent and eviction controlled tenants in order to avail themselves of the high potential revenue afforded by short term rentals. Landlords sometimes proceed in a number of fashions, but one method that has drawn the attention of the San Francisco City Attorney’s Office involves use of the Ellis Act. As part of the Ellis Act eviction, the landlord withdraws the rental unit from the residential rental business. If the landlord then turns around and rents the unit as a short term rental, the landlord may be violating San Francisco’s zoning laws by engaging in commercial use of the building without going through the appropriate hearing and application process. In addition, Ellis Act evictions require that subsequent rentals of rent controlled units be at the rent controlled rate. Owners charging the rate commanded by short term rentals (which may be much higher than the rent controlled rate) may be in violation of the Ellis Act requirements.

San Francisco has commenced prosecuting some landlords for allegedly failing to comply with the necessary process for converting residential properties into use for commercial purposes and who have allegedly engaged in short term rentals at impermissibly high rental rates. Further complicating the mix is that some short term guests are now claiming that they are entitled to the full protections afforded to tenants and that homeowners are violating the law by failing to provide them with notice and court action before forcing them to vacate the premises. Ironically, homeowners may be required to provide short term renters with rent and eviction control protection available to other tenants, which is the very outcome many landlords wished to avoid by renting only to short-term renters.

Current Status of Short Term Rentals for Property Owners

The state of the law is in flux. There are currently pending in San Francisco two competing proposals regarding short term rentals. One would severely limit the ability of homeowners to short term rent, while the other would allow them more latitude. Which, if any, will ultimately be enacted remains to be seen.

The Potential Risks are Many

Given the complexities discussed above and the unpredictable state of the law, individuals wishing to engage in short term rentals would be well-advised to carefully weigh all of the possible risks and benefits before leaping into the short term rental market.

© 2014 Szeto Law Group. These materials do not constitute legal advice and are for general informational purposes only. They may be reproduced for personal use and for non-commercial distribution. All copies must include this copyright statement.
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