Q: Landlords are getting saddled with higher costs. With everything going up, can you talk about passing costs onto tenants? Also, RUBS, where units with more tenants pay a higher share of utilities. Seems sensible to me.
We have a great deal of empathy for housing providers facing rising costs while being constrained in how much they can raise rents. While inflation has become a much-covered topic, the numbers are deceiving. The Consumer Price Index (CPI) takes into account certain consumer staples and does not adequately reflect the climbing costs landlords incur, such as appliances, what contractors are demanding for repairs, building materials, property taxes, and indeed, utilities.
Despite these hardships, we have to be careful in raising rents because Big Brother is watching, tenants have plenty of recourse to air out their grievances, and there is no shortage of tenants’ attorneys looking to find mistakes and even the score.
Let’s first talk about RUBS, an acronym for “Ratio Utility Billing System.”
Submeters are not feasible for many old, tired multifamily buildings. Retrofitting utility meters is an expensive, complex undertaking, and so RUBS has been touted as a cost-effective, fair alternative to submeters.
Under this system, the property’s utilities – water, sewage, electricity, trash collection, waste management, and gas – are proportionally divided based upon a formula that takes into account factors like square footage, number of bedrooms in a unit, and the number of household members. There may be other considerations such as washing machines and dryers in individual units, for example, that are calculated.
In theory, this system seems equitable. Think of dining out with several friends and there is an awkward moment when the bill comes and everyone is trying to figure out how much to pony up. One person suggests splitting the bill evenly, but what if one of your friends didn’t drink the wine that was flowing? What if another one didn’t have much of an appetite and only ordered a salad? Maybe there’s a vegetarian who doesn’t feel comfortable paying for the table’s calamari. Once the gathering is over and everyone pays an equal share of the bill, rest assured that someone in the group will leave with the feeling that they paid too much for what they actually consumed.
The logic behind RUBS, then, is that everyone pays their fair share of the utilities they consume.
It’s also been said that the system encourages residents to practice conservation and report maintenance issues such as running toilets and leaky faucets. Those opposed to RUBS have taken exception to the numbers, saying that there is little evidentiary support that the use of ratio utility billing systems has put a dent in the consumption of utilities. Certainly, though, no one can dispute that we all tend to use more on someone else’s dime.
Ever been to a hotel or an Airbnb and left the room with the lights on and the air conditioner blasting? This type of wasteful behavior is happening in rental units when there is no financial incentive to conserve.
Despite the advantages of these consumption-based programs, it has rubbed tenants and policymakers the wrong way.
Tenants and their advocates say that charges are confusing and unpredictable, and not tied to individual usage. Moreover, fees from third-party billing services are often passed on to tenants.
When submeters are installed and maintained by the landlord, the landlord merely acts as a conduit, and any utility payments made by the tenant to the utility provider are, in the vernacular of the courts, “rendered to and for the benefit of that utility provider”. But in a master-metered building where the landlord uses a ratio utility billing system and payments are made directly to the landlord, the question becomes whether those payments are for the benefit of the landlord.
We don’t want to get bogged down in case law, but suffice it to say that there are some cogent arguments being made against RUBS in the courts. Litigation in Santa Monica and San Diego, in particular, have made it on our radar. The overarching agenda for policymakers throughout California is to keep people housed. Unpredictable, fluctuating utility costs fly in the face of this goal of housing stability.
In an era when political rhetoric falls squarely on the side of tenants, the necessity of housing people will trump the needs of landlords looking to streamline the collection of utilities.
Closer to home
Many municipalities, housing providers, landlords, and tenants are left in the dark when it comes to ratio utility billing systems. The powers that be in Mountain View, for example, determined that RUBS was out of step with the city’s rent control law, the Community Stabilization and Fair Rent Act (CSFRA), reasoning that utility fees paid to landlords are considered a part of rent and thus, subject to rent increase limitations. Mountain View’s stance is outlined in this memo.
We have no reason to believe that other municipalities will not embrace this logic. In some cities, the definition of rent in their rent stabilization ordinances may be broad enough to encompass utilities when it is paid directly to the landlord.
Take Oakland, for instance. It defines rent as:
“Rent” means the total consideration charged or received by an owner in exchange for the use or occupancy of a covered unit including all housing services provided to the tenant.
In our view, then, the rendering of utility payments to landlords will be considered rent in some rent-controlled locales and any rent increases will be scrutinized by local rent boards if the tenant objects and files a petition challenging a rent hike. Landlords are left in the dark when it comes to their local rent board’s rules and regulations about RUBS.
You may be wondering whether you can convert to RUBS midstream by changing the terms of the tenancy or keep it simple by instituting RUBS at the inception of a new tenancy. It is certainly easier to not upset the applecart and wait until unit turnover to start a new utility billing system but in some cases, you may be able to impose a RUBS program on an existing tenancy.
This will depend on a number of Considerations: what type of unit you have – single-family home/multi-unit, where the property is located, whether it is subject to a local “rent control and just cause eviction ordinances, and other interrelated factors. If you are contemplating RUBS when a tenant is already implanted, it is imperative to seek proper counsel to see if this is viable and if so, how to make the transition with the least complications and in a manner that the tenant understands and accepts. We have to nail the communication to avoid any blowback from a tenant who feels bamboozled.
We know of housing providers who are RUBBING tenants, and they are walking on eggshells in certain rent-controlled jurisdictions like Santa Monica with other cities likely to take their example.
In many cases, there are errors on the part of the landlord and there is no consequence when there is a rent hike. The owner and the tenant co-exist in harmony. The passive tenant acquiesces to the master-metered owner and agrees to chip in more to pay the utilities.
But if there is any acrimony in the rental relationship, disgruntled tenants are inclined to squawk about convoluted utility accounting, among other grievances. Many landlords find that when things are going good, they are going great, but when things are going bad, it’s awful.
For instance, a couple lives in a residence and has an illegal in-law unit in the back, they’ve collected $1K a month in rent for 10 years, there is a disagreement with the resident occupying the illegal unit, the rental relationship sours, and complains to the rent board. The owners can now be on the hook for $120K.
The quintessential point: In a harmonious rental relationship, errors can be overlooked by the tenant, but if this relationship goes south and the tenant raises hell, there may be significant liability.
Pass-throughs may be a more viable path for landlords to recoup costs
When we first began practicing law 27 years ago, there were only three ordinances to contend with in the Bay Area, namely San Francisco, Berkeley, and Oakland. Now there are 17 with more municipalities expected to add to that number.
We are hard-pressed to go through them all now, but suffice it to say that in some locales, rent boards are open to hearing a landlord’s request to raise the rent to realize a reasonable return on their investment or that an increase in expenses justifies a rent increase. In some cases, landlords can also “bank” rent increases, meaning if they don’t take advantage of an allowable rent increase, they can use it later on.
The rules surrounding rent increases are complicated. Overlay this with COVID-era protections and it becomes all the more vexing, making it imperative to consult an attorney whenever a rent increase is contemplated.