What to Know about Rent Reductions in a Rent-Controled Jurisdiction

During the initial days and months of the COVID-19 pandemic, our clients, desperate to get vacant apartments rented in a slow market, yet knowing the pandemic was temporary, and a market recovery imminent, were racking their brains for creative solutions to get their vacant units rented, while avoiding permanently low base rents.

We heard all sorts of ideas from free months’ rent to cash lease signing bonuses to gift card rewards.

While we knew from experience that the San Francisco Rent Board would see any of these incentives as affecting the base rent, it was hard to explain all the reasons why to our clients and why they should just rent their units at a lower price or negotiate a permanent lower rent with an existing tenant.

Now that we are all coming up for air, I wanted to take the time to properly explain. 

According to the Rent Board, an owner who grants a rent reduction due to market conditions makes that reduction permanent.  This means that future rent increases must be based on the lowered rent amount, which automatically becomes the new base rent.  In addition, the owner is likely precluded from withdrawing or canceling the reduction later.

A rent reduction may only be rescinded or canceled if the resident requests a temporary adjustment based on an economic hardship specific to that resident’s personal or household situation.  For example, a tenant may be laid off from work, fallen ill, or encountered unexpected expenses to care for a household member.  In those instances, the owner and resident should clearly document the hardship and spell out in a signed document the reduction amount, why the reduction is being granted and the reduction duration. 

While we granted several temporary rent reductions for our clients in this manner, some tenants, knowing they could vacate the premises and find a similar apartment for a permanently lower base rent in the COVID market, were unwilling to sign these temporary reduction documents.

In those cases, we made the reduction permanent in order to avoid having another vacancy during a slow market.  A tenant asking for a permanent rent reduction has the option to move into a similar apartment at current market rates and lock that rate in permanently.  Therefore, it made sense to grant the permanent rent reduction, which many times wasn’t as low as the COVID market would dictate because the current tenant was willing to pay a bit of a premium to avoid moving.  In addition, the landlord avoided turnover expenses.

Rebates and incentives are also very dangerous when given to dissuade a tenant from leaving in a weak rental market, or to entice new tenants to sign a lease at an unattractive rent. 

About 25 years ago, a large apartment operator in San Francisco offered incoming tenants “rent coupons” for use each month to lessen their rental obligations.  For example, Tenant A’s lease stated that rent is $1,200 per month, although similar apartments were not renting for as much.  To induce the tenant to sign at this rate, the landlord offered $1,200 worth of “rent coupons” to be used each month in $100 increments over the year lease. Tenant A could then remit a rent coupon and $1,100 payment in order to meet their monthly rent obligation. 

The landlord discontinued the coupon program when the rental market improved.  Affected tenants than pursued litigation in protest.  The Rent Board held that, in using the example of Tenant A, the initial base rent was legally $1,100 per month, and therefore all subsequent rent increases were based off this amount. 

Other property owners have been held liable when they offer a free month rent or engage in other gimmicks to lower the resident’s initial rent obligation in order to get a lease signed.  Indeed, if you offer a month’s free rent for a one-year term, the Rent Board will say that the value of that month is amortized monthly over the one-year term, which lowers the monthly base rent.  As one judge put it, you cannot evade rent control by setting up a lease with a starting rent higher than what the current market supports then provide discounts to entice tenants to sign a lease.  The value of other incentives like cash rebates or gift cards can also be determined to affect the base rent. The Rent Board policy is therefore quite clear.  Rent rebates or reductions may only be lawfully rescinded, canceled or withdrawn if the rebate or reduction is given because of a tenant’s economic need or hardship.  A soft rental market is not justification for a temporary rent reduction.  If you do grant a reduction or offer an incentive to entice a new tenant into a tenancy or retain an existing tenant, you risk making that reduction or the value of the incentive a permanent component of the base rent.

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