What You Should Know About "Cash-For-Keys" Tenant Buyouts

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In California, a "tenant buyout" or "cash for keys" agreement occurs when a landlord offers a tenant a sum of money to vacate the rental unit. These agreements are frequently used as an alternative to formal evictions, offering financial advantages to landlords, especially in rent-controlled areas where market rents far exceed controlled rents. Landlords are often willing to pay thousands, or tens of thousands, of dollars to remove rent-controlled tenants, knowing they can quickly recoup that investment through market-rate rents from new tenants.

In rent-controlled cities like San Francisco or Los Angeles, tenants are particularly protected from arbitrary evictions. Even where the landlord has a legal ground to evict (such as the owner is moving in), so long as the tenant is not "at-fault," the landlord must comply with strict legal requirements, most notably the requirement to pay "relocation assistance" money and the right of a tenant to move back to the unit under certain conditions. A tenant buyout, however, allows landlords to bypass these restrictions, such as those under the Ellis Act (which removes rental units from the rental market) or owner move-in evictions, which limit rent increases for re-rented units post-eviction.

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It's not only the big rent-controlled cities where tenant buyouts are pursued. California has the Tenant Protection Act -- statewide tenant protections requiring "just cause" for evictions for qualifying properties. Tenant buyouts often arise when a landlord is selling the building. That's because, most often, a building sells for higher when lower rent-paying tenants move out and the new owner can charge market rates without blinking.  

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So, in general, if a landlord can get rid of a tenant with a cash-for-keys buyout and recoup the money (through a higher sales price for the building) or by charging higher rents from a new tenant, they will view it as a sound business decision.

Tenant Buyouts Can Also Benefit Tenants if Tenants Are Properly Informed

Are buyouts never good for tenants? Many tenant rights advocates and attorneys make the broad argument that these buyouts unfairly disadvantage tenants and always advise against them. For uninformed tenants, that's generally sound advice.

However, I have a different and broader perspective. While these agreements certainly can and often do favor landlords, they can also greatly benefit tenants if properly assessed and aggressively negotiated. Depending on the circumstances, cash-for-keys buyout agreements can be mutually advantageous. While these agreements may lead to legal disputes or allegations of unfair practices, especially in areas that enjoy strong tenant protection laws, they are not inherently harmful or illegal. And after all, we're in America. Tenants should be free to make their choices. The key is to make sure that choice is well-informed. When the terms are fair, and tenants fully understand their rights, a cash-for-keys buyout agreement can make sense for tenants, too. But, as a tenant, how do you know if you're informed? Here are some points to keep in mind...

​A Landlord's Repeated Efforts to Persuade a Tenant into a Cash-for-Keys Buyout Agreement Could be Grounds to Sue for Harassment

Landlords often use high-pressure tactics or intimidation to push tenants into accepting buyout offers, which can lead to claims of harassment or retaliation. That alone could be grounds for a lawsuit.

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For instance, if the landlord frequently called or texted you to convince you to accept a buyout, each incident could constitute harassment under California Civil Code section 1940.2. This law carries penalties of up to $2,000 per incident. (Additionally, many local rent ordinances include anti-harassment protections that increase the potential penalties.) 

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A Lot of Landlords Commit Fraud During the Buyout Process

In addition to harassment, landlords often make false statements to induce tenants into accepting cash-for-keys buyout offers. These landlords will make their tenants believe they have no other choice but to accept a buyout. For example, landlords who are selling the property will often falsely lead tenants to believe that the sale of property means tenants must vacate (which is not true). Or a landlord may falsely claim he (or a buyer) intends to do an owner move-in (which is a legal basis to evict if the owner actually moves in and follows legal procedure), but then no owner moves in. This gamesmanship effectively strongarms a tenant into agreeing to a buyout but likewise provides a basis to sue the landlord for fraud (among other claims) -- and typically for a lot more money than the buyout offer. 

Beware of Procedural Mistakes by Landlords

In certain jurisdictions, landlords must comply with specific procedural rules when offering tenant buyouts. For example, in Los Angeles, landlords must provide tenants with a disclosure of their rights before presenting a buyout offer. A landlord's failure to follow the rules gives tenants certain rights and should not be ignored during buyout negotiations where tenants need as much leverage as they can get.

Understand that the Potential of a Lawsuit Against a Landlord Strengthens a Tenant's Bargaining Power in Negotiations with the Landlord

As explained, cash-for-keys offers are not illegal. And plenty of landlords follow the law during the process of offering and negotiating. However, during my consultations with tenants who are weighing the benefits of a buyout offer, I am struck by how often I learn that their landlords also engaged in acts that would justify a lawsuit for wrongful eviction and other tenant rights claims. In other words, my consultations routinely cover more than simply how much cash is appropriate to move out. When tenant lawyers (like me) get involved in negotiations and show how a tenant has the grounds for lawsuit, landlords tend to become more motivated to complete the buyout agreement and avoid a lawsuit. Therefore, assuming there's validity in your claims, the value of your buyout can significantly increase when it becomes clear the landlord violated the law before or during the buyout attempt.

By effectively outlining the potential liability a landlord faces, you elevate a cash-for-keys buyout negotiation for simply moving out to a further negotiation addressing additional compensation not to sue.

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Make Sure the Math Makes Sense

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One of the finer points often not discussed, but very important, is that buyout cash is generally considered taxable income. I'm neither a tax lawyer nor CPA, and do not want to quote specific numbers with respect to prospective tax liability a tenant may face. Those numbers depend on a tenant's tax bracket. In general, however, unless a cash-for-keys settlement incorporates compensation for items that are not taxable events, it's best to assume a percentage of your buyout will be taxed. If negotiated to include compensation beyond a buyout, however, it is possible to avoid some or all taxes. But it is wisest to err on the side of caution and assume it's all taxable. 

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Additionally, if an attorney like me gets involved in negotiating and drafting up agreements, you have to account for the attorney's fee (which for me depends on the extent of the negotiation) that will cut into that your total buyout cash as well, albeit generally much less than taxes amount. 

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All said, when it comes to the "dollars and cents" of a cash-for-keys buyout offer, you need to factor in that a percentage of cash is coming out (at least for taxes) and make sure the cash that ends up in your pocket is ultimately enough.

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Also Remember: You Will Now Pay Market Rate for Housing After You Move Out

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Additionally, if you agree to a cash-for-keys deal and move out, you will now of course have to find alternative housing. This is where the particular circumstances for a tenant really come into play. For a tenant who needs an equivalent sized unit in the exact same neighborhood, that tenant needs to factor in the new increased monthly rent he or she will incur. But that may not be exactly your situation. Maybe your life circumstances mean that you don't mind, or in fact want, to move to a different area (where rents are a little cheaper). Maybe downsizing to a one-bedroom isn't a bad idea in your case. Maybe you're open to taking on a roommate. Maybe you're moving in with family. Or maybe you have simply have some big expenses and simply need a chunk of cash right now. 

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The point is there is nuance to whether a cash-for-keys buyout makes sense for a tenant. I'm not a financial advisor, but I can help you weigh out the decision. Maybe it makes sense for you. Maybe it doesn't. The point is that as an attorney, I don't like to make the blanket statement that it's never a good thing for a tenant. 

BOTTOM LINE: Do NOT Agree or Sign Anything Agreement Without At Least Talking to Tenant Lawyer First 

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An initial legal consultation with me is free, so there's no reason not to first confer with a tenant lawyer. Remember, they're very well may be a basis to assert other legal claims, which would boost your leverage. This is why it's critical to schedule a consultation with a tenant rights lawyer before negotiating or accepting any buyout. My initial consult is free and without strings attached. I can assess your options and weigh in on whether the landlord may have violated the law in some respect so you can make an informed decision. 

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