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Judge rules San Francisco lifetime lease ordinance not a taking, but potentially unconstitutional

A federal judge left intact a single claim that San Francisco is unconstitutionally conditioning condo conversion approval on a requirement that property owners first offer tenants a lifetime lease.

SAN FRANCISCO (CN) — A San Francisco housing law requiring building owners to offer a lifetime lease to their tenants before they can convert their rental unit into a condo isn’t a taking of private property under the Fifth Amendment, though it could still be an unconstitutional condition of getting a condo conversion approved, a federal judge ruled Tuesday in a lawsuit brought by an Ohio couple challenging the provision as an incursion on their property rights.

The case concerns multi-unit buildings bought jointly by several people who collectively own the building and share a single mortgage, what’s known as a tenancy-in-common, or TIC. San Francisco has a notoriously lengthy and expensive process to convert a TIC into condominium — where each person owns his or her own piece of the building — due to a lottery process that allows only 200 units to be converted citywide each year.

Ohio residents Peyman Pakdel and Sima Chegini bought a tenancy-in-common interest in a six-unit building in San Francisco’s Russian Hill neighborhood in 2009, signing an agreement with the other owners to to take all necessary steps to convert the building to condominiums.

The couple has had a tenant in their unit since 2010, but intended to move in when they retired. The city of San Francisco upended their plans in 2013 by passing an ordinance that put a 10-year halt on the city’s unpopular condo conversion lottery and allowed about 2,200 tenancy-in-common owners to convert their interests into condos under an “expedited conversion program” that also gives tenants the right to take a lifetime lease for the unit they rent.

Pakdel and Chegini offered their tenant $100,000 to move out, but he refused. Pakdel and Chegini rejected the tenant’s counteroffer to purchase the unit for $1.03 million and forged ahead with participation in the program, agreeing to provide the tenant with a lifetime lease, a deal he took in May 2017. One month later, the couple decided they wanted to move in to the unit and asked the city for an exemption to the lifetime lease provision. The city denied the couple’s belated request, resulting in the lawsuit.

"The tenant is still living in the unit,” their attorney Jeffrey McCoy of the Pacific Legal Foundation said in an email to Courthouse News. “The Pakdels would still like to retire to San Francisco, whether it is in the unit they now own or a similar one. But whether they can will depend on the outcome of the case.”

In March 2020, a Ninth Circuit panel upheld U.S. District Judge Richard Seeborg’s dismissal of the couple’s lawsuit, finding they failed to fulfill an administrative prerequisite to apply for an exemption before the condo conversion was complete.

The U.S. Supreme Court reversed that decision and reinstated the case in a 7-page per curiam opinion that found property owners need not exhaust administrative remedies to sue a government for unlawful taking. The only requirement is that the government decision be final, the high court wrote. It also suggested that the Ninth Circuit re-evaluate the case in light of its ruling in Cedar Point Nursery v. Hassid that a regulation requiring farm owners to allow union organizers on to their properties to meet with workers constituted a per se physical taking.

Now, over a year later, Seeborg dismissed the couple’s regulatory and physical takings claims.

“Plaintiffs have an uphill battle to state a plausible claim for a private taking. They have not met their burden,” Seeborg wrote in his Tuesday ruling. He found the city’s actions “were clearly rationally related to the purpose of preventing tenant displacement” and were not merely intended to take private property from one person and give it to another without benefiting the general public.

Seeborg also ruled the law isn’t a regulatory taking under a four-factor test laid out in Penn Central Transportation Co. v. City of New York that balances economic impacts of the regulation, the extent to which it interferes with investment-backed expectations, and the character of the government action. The judge found the lifetime lease did not significantly diminish the value of the property, and that the Pakdels were well aware that their condo conversion could be approved at any time after they offered their tenant the lease.

“Indeed, it would be unreasonable for them to have believed they could avoid the lifetime lease requirement once they submitted their application,” he wrote.

Alliance for Justice, a progressive judicial advocacy group that filed an amicus brief in the case, said Tuesday that they were pleased that Seeborg dismissed the Pakdels’ regulatory and physical takings claims.

“Alliance for Justice is pleased to see this ruling from Chief Judge Seeborg dismissing claims that tried to take advantage of the Supreme Court’s anti-union ruling from last year,” a spokesperson said in an email, referring to Cedar Point. “Nobody deserves to lose their home just because their landlord hopes to make more money. We will continue to watch this case and hope for a ruling that fully protects tenants’ rights.” Alliance for Justice and other organizations on the brief were represented by Democracy Forward.

Seeborg allowed the Pakdels to file another amended complaint. He also ruled in their favor on their claim that the city compelled them to offer their tenant a lifetime lease as an unconstitutional condition of obtaining approval for their condo conversion.

“[I]n this hypothetical, plaintiffs would be compelled to offer the lifetime lease not by their choice to apply for [the expedited conversion program], but simply by the fact that they had a tenant in the first place. This is a difficult question that would ultimately turn on a variety of considerations, but for the sake of surviving a motion to dismiss, plaintiffs have plausibly averred that this would constitute a taking,” he wrote.

McCoy, the Pakdels' attorney, said that while he’s disappointed with some aspects of Seeborg’s ruling, his finding on their unconstitutional condition claim aligns with the Supreme Court’s holding that the government cannot condition a permit on an applicant giving up a constitutional right.

“As the district court here recognized, the city would not be able to impose a lifetime lease requirement directly on the Pakdels, and the city cannot condition that requirement on the granting of a condominium conversion application,” McCoy said. “We are confident that we will able to show that the lifetime lease requirement is disproportional to any alleged impacts of converting the property to condominiums and is the requirement is an excessive condition in order to mitigate those alleged impacts.”

Jen Kwart, spokesperson for City Attorney David Chiu, said the city still expects to prevail on the unconstitutional condition claim. “We are pleased with the court’s ruling. We have long argued that the city’s ordinance balances the need to have an efficient condo conversion program while also preventing tenant displacement. The court addressed the unconstitutional conditions claim as a matter of pleading sufficiency, and not on its merits. We are confident that San Francisco will establish that the requirements of this voluntary condominium conversion program did not constitute an unconstitutional condition.”

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