The owners of apartment buildings in the City of West Hollywood cannot avoid the city's rent control ordinance by relying on 1980s-era approvals to convert the buildings to condominiums, an appellate court has ruled.
The owners of two buildings received approval from the state Department of Real Estate to convert the units to condominiums that could be sold separately. They received this approval before West Hollywood incorporated in 1984. However, the Department of Real Estate's "public report" — a disclosure to potential buyers — expired after five years. The owners have received new public reports twice, but only after lengthy periods when no public reports were available. Those lapses were the key part of the case.
In 1991, the state Supreme Court ruled in City of West Hollywood v. Beverly Towers, Inc., 52 Cal.3d 1184 (see CP&DR Court Cases, April 1991), that the city could not impose its requirement for a conditional use permit prior to the conversion of the buildings to condominiums. And because the units were condominiums, the city could not apply its rent control ordinance. But in the case at hand, a unanimous three-judge panel of the Second District Court of Appeal held that the property owners' protection under Beverly Towers ended when the public reports lapsed.
"It is obvious that the application of Beverly Towers contemplates a legitimate enterprise to develop and sell residential property," Justice Charles Vogel wrote. "Here, however, respondent owners have been engaged in a charade to continue in the apartment rental business, not an enterprise to convert and sell apartment units as condominiums."
The city sued the owners of the two apartment buildings in 2000, alleging that they were charging rents in violation of the city's rent control law. The city asked the court to bar the excessive rents and order refunds to tenants. The city also sought a declaration that at least one condominium unit had to be sold before an owner could seek an exemption to the rent control ordinance allowed under the Costa-Hawkins Rental Housing Act (Civil Code §§ 1954.50 – 1954.535). None of the units had ever been sold, although apparently one unit in each building was sold after the city filed its lawsuit.
A trial court judge ruled for the property owners, but the appellate court reversed the decision.
The property owners argued that the public report was a minor, ministerial item, and that the Department of Real Estate's approval of renewed public reports without requiring a city use permit meant that the owners were not required to comply with the local law. The appellate court rejected both arguments.
The public report is a critical document. A developer who sells a unit without obtaining a public report is subject to criminal sanctions, and the buyer has the right to void the contract, according to the court.
As for the state agency, the court ruled that the property owners' failure to comply with the city ordinance was not a basis for the Department of Real Estate to deny a public report. "The reality is that City had no input into the process when respondent owners requested renewals of the public reports. City therefore had no opportunity to argue the pertinent legal point: the prior expirations of the first public reports now required respondent owners to comply with City's regulations enacted after incorporation," Vogel wrote.
The court remanded the case to the trial court for further proceedings.
The Case:
City of West Hollywood v. 1112 Investment Company, No. B154786, 03 C.D.O.S. 982, 2003 DJDAR 1221. Filed January 30, 2003.
The Lawyers:
For the city: T. Peter Pierce, Richards, Watson & Gershon, (213) 626-8484.
For the property owners: Michael Anderson, Law Offices of Rosario Perry, (310) 394-9831.
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