My longtime tenant recently discovered that a newly placed tenant across the hall is paying $200 less than him in monthly rent, so he asked for a rent reduction. May I agree to a temporary rent reduction? What about offering him a rebate instead?
Despite what may have been stated at a recent SFAA membership meeting, the law is very clear on this subject: A landlord who grants a rent reduction due to market conditions makes that reduction permanent. This means that future rent increases must be based off of the lowered amount, which becomes the new base rent. In addition, the landlord is precluded from withdrawing or canceling the reduction at a later time.
A rent reduction may only be rescinded or canceled if the following is legitimately true: The tenant requests a temporary reduction based upon an economic hardship that is specific to that tenant or the tenant’s household situation. For example, the tenant is laid off or is ill, or encounters unexpected expenses to care for a member of the tenant’s home. In those instances, the landlord and tenant should clearly document the hardship and should spell out, in a signed writing, the amount of the reduction, why the reduction is being granted, and the length of time for the reduction.
Rebates and incentives are also very dangerous. About 15 years ago a large apartment operator in San Francisco offered incoming tenants “rent coupons” that they could use each month to lessen their rental obligations. For instance, Tenant A’s lease states that rent is $1,200 per month, although similar apartments were not renting for that high of a price. To induce Tenant A to sign the lease at this level, the landlord offered $1,200 worth of coupons for the first year of the tenancy, so in essence Tenant A could submit a $100 coupon with each monthly rental payment, thereby really only paying $1,100 out of her pocket during year 1. The landlord discontinued the coupon program when the rental market improved. Hundreds of affected tenants then pursued a class action case against the landlord. The Rent Board held that, using this example of Tenant A, initial base rent was legally $1,100 per month for every year of the tenancy because the coupon incentive was to be permanently built into the rental obligation and could not be legally withdrawn.
Other landlords have been held liable when they offer a free month of rent or engage in other gimmicks to effectively lower the tenant’s initial rent obligation only to later take away the incentive once market conditions pick up. Indeed, if you offer a month’s free rent for a one-year term, the Rent Board could say that the value of that month is then amortized over the 12-month period of the initial term and lowers the base rent for all future months by that amount. 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 would justify and then enticing tenants to sign the lease by using temporary gimmicks.
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 particular need or hardship. A soft rental market, like the one we are beginning to see now, is never a justification for a temporary reduction in rent. So, if you do grant a reduction or offer an incentive in order to keep a tenant from moving due to a change in the marketplace, you make that reduction or the value of the incentive a permanent adjustment of the base rent.