A common method of converting rent-controlled apartments into for-sale condominiums in San Francisco has been upheld in a lawsuit filed by apartment tenants who alleged an unlawful business practice. The First District Court of Appeal ruled that the tenants had no right to bring the lawsuit.

The situation with a six-unit apartment building on Francisco Street is a familiar one. The landlord sold the building to four limited liability companies (LLCs) and one married couple. Prior to the close of escrow, the purchasers executed a tenancy in common (TIC) agreement, which gave each buyer an undivided percentage interest in the property. The TIC agreement also provided each owner with the exclusive right to occupy one unit. Because there were five buyers and six units, the agreement provides for one of the LLCs to occupy two units. The married couple sought to live in their purchased unit, while the LLCs intended to remodel their units and then sell them.

In April 2004, the new owners invoked the Ellis Act, which permits the owners of rental residential properties to go out of the rental business. The tenants were served with eviction notices. Apparently, a partner in one of the LLCs had informal talks with two of the tenants about buying back their units, but nothing came of the discussions.

Two months later, the tenants sued. They argued that the new owners committed an unlawful business practice because they had violated the Subdivided Lands Act (Business and Professions Code § 11000 et seq.). Under that law — which is unrelated to the Subdivision Map Act in the Government Code — a property owner must notify the state real estate commissioner of an intention to sell subdivided interests and obtain a "public report" before creating the interests and offering them for sale. The Francisco Street tenants argued that the property owners failed to follow this procedure, amounting to an unlawful business act under the state's Unfair Competition Law.

San Francisco Superior Court Judge Charlene Mitchell ruled for the tenants and issued an injunction prohibiting the new owners from selling their interests in the building — and from evicting the tenants under the Ellis Act — until the owners complied with the Subdivided Lands Act. However, a unanimous three-judge panel of the First District, Division Three, overturned the lower court.

The issue for the First District was not whether the property owners violated the Subdivided Lands Act. Rather, the issue was whether the tenants had standing to file the lawsuit under the Unfair Competition Law.

When they approved Proposition 64 three years ago, voters limited who has standing under the law. A person has standing only if he has suffered injury and lost money or property as a result of the unfair competition.

The alleged unfair competition in this case was a violation of the Subdivided Lands Act. But, as Presiding Justice William McGuiness noted, "The Subdivided Lands Act is not intended to protect tenants but instead exists to protect purchasers of units in subdivisions from fraud, misrepresentation, or deceit."

"The tenants are not among the class of persons the Subdivided Lands Act was intended to protect, and they have suffered no harm as a result of any violation of its provisions," McGuiness wrote.

The tenants' threatened loss was due to their eviction under the Ellis Act, and there was no evidence the owners violated that act the court found.

"In short, there must be a causal connection between the harm suffered and the unlawful business activity," McGuiness wrote. "That causal connection is broken when a complaining party would suffer the same harm whether or not a defendant complied with the law."

The First District noted that the tenants would still face eviction if the property owners complied with the trial court's injunction and met the conditions of the Subdivided Lands Act. Allowing tenants to block Ellis Act evictions based on violations of unrelated laws "frustrates the purpose of the act, which is to permit landlords the right to go out of the rental business," the court concluded.

The tenants have asked the state Supreme Court to review the case.

The Case:
Daro v. Superior Court, No. A111947, 07 C.D.O.S. 6563, 2007 DJDAR 8448. Filed June 6, 2007.
The Lawyers:
For the property owners: Andrew Zacks, Zacks, Utrecht & Leadbetter, (415) 956-8100.
For the tenants: Stephen Collier, Tenderloin Housing Clinic, (415) 771-9850.