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San Francisco tenants fighting back after the landlord raised the rent by $4,800 a month

San Francisco's Painted Ladies
Andria Patino | Getty Images
San Francisco's Painted Ladies

Paul Kelly and Danielle Phillips had a good deal: They paid $1,900 a month for their 1,000-square-foot two-bedroom apartment in the Outer Sunset neighborhood of San Francisco. At the time, that was well below the $4,650 median rent for a two-bedroom apartment in the city, according to financial website Smart Asset.

Then, in January 2015, the couple's new landlord, attorney Matthew Dirkes, tripled the rent to $6,700. He gave the pair until April to comply.

Kelly, an electrician, and Phillips, a bank manager, opted to move out and to take the matter to court. They filed a lawsuit, claiming Dirkes' rent hike was a play to get them out of the house without serving them with a formal eviction.

"Let's be honest," Kelly tells San Francisco Magazine, "any person could see that he was doing this to get rid of us. He knew we couldn't pay $6,700 in rent — nobody in their right mind would pay it."

The judge sided with the landlord. According to the California Costa-Hawkins Rental Housing Act, there are no limits on rent increases for single-family homes, regardless of the landlord's motives.

"Their lease expired in April," Dirkes tells CNBC Make It. "I complied with [the laws]. I gave more than 60 days' notice. I let them know what was going on."

Dirkes also explains that he expanded the couple's lease to include the downstairs portion of the house, which included the front driveway, garage, backyard and another full bathroom, so they were going to get more for their money. "It wasn't a straight rent increase," the landlord says. "They were going to be renting the entire house. The rent increase was more, [but] it was more space."

He acknowledges that the hike put Kelly and Phillips in a tough position. "I understand they didn't have a choice. They couldn't say, 'Well, we just wanted to stay in our two-bedroom,'" Dirkes says. "But I couldn't just continue to rent the upstairs to them. Otherwise, I'm shelling out thousands of dollars every month."

At the time he purchased the house, Dirkes was living with his two children in his mother's small apartment. "I was paying rent at my mom's and also paying mortgage, property insurance [and] property taxes on the house, which, all told, came to roughly $4,500 a month," he says.

"I was losing money every month Paul and Danielle were there, but I respected that they had this lease."

"He knew we couldn't pay $6,700 in rent — nobody in their right mind would pay it." -Paul Kelly, San Francisco renter

Kelly and Phillips are appealing the court's decision. The ruling, set for this fall, could set a precedent for future cases involving rent controls and potentially affect 56,000 homes and condos in the Bay area that are "in limbo," San Francisco Magazine reports.

"If we lose this case on appeal, there will be no eviction protections at all for single-family homes and condos across the state," Joe Tobener, the couple's attorney, tells the magazine. If they win, it could present an opportunity for tenants to fight huge rent hikes.

The cost of living in the Bay Area is among the highest in the country. In San Francisco proper, it's 63 percent higher than the U.S. average, a 2015 study from Smart Asset found. In 2016, you'd have had to make $216,129 a year to afford a two-bedroom apartment.

That's partly why one Twitter employee earning $160,000 in San Francisco says he's barely scraping by and some Facebook engineers struggling with rent even asked Mark Zuckerberg for help.

Dirkes tells CNBC Make It he sympathizes with families dealing with high rents and who are forced out of their home because they can't pay.

"There are [certain] situations where … investment banks and large funds are essentially buying up properties then holding on to them with the idea to generate revenue down the road," he says.

"I think that that's something where the California State Legislature needs to step in. There needs to be protection against that type of opportunistic and predatory homeownership."

He says, though, that those instances are "a totally different situation than the one I'm in right now."

Meanwhile, millennials nationwide can take precautions by fully reading and understanding their leases. Especially now, with apartment rental approval rates the highest they've been since 2014 and millennials representing the country's largest renting population.

If you get a new landlord, be sure to review the new terms of your rental agreement. Or, if you have enough saved, you could buy a home and/or become a landlord yourself.

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