CITY HALL — The owners of an apartment and hotel property in the Wilmont district could be allowed to evict 19 tenants under the Ellis Act and turn the units into hotel rooms despite having previously waived their right to do so, a state appellate court ruled this week.

Issued on Monday, the decision was a loss for City Hall, which argued that the owners of the Embassy Hotel Apartments, located at 1001 Third St., were legally bound to continue operating the units as rent-controlled dwellings.

The decision by the Second District Court of Appeals stems from a settlement agreement reached to resolve a prior dispute between City Hall and the Embassy’s owners. That dispute, over Embassy’s alleged failure to pay the tax on hotel stays and a disagreement about how Santa Monica’s rent control law should apply to the property, was resolved in October of 2000 with a settlement that allowed half of the Embassy’s 38 units to be operated as hotel rooms but required half the rooms to be maintained as apartment units subject to rent control.

With their unanimous decision, the three-judge panel reversed a trial court’s earlier ruling and determined the 2000 settlement’s requirement that half the units remain rent-controlled apartments was “unenforceable” because of the state law known as the Ellis Act, which bars cities from compelling landlords to remain in the rental housing business.

“Clearly we’re disappointed with [the decision] and we don’t agree with the court’s opinion,” said Stephen Lewis, public information manager for Santa Monica’s Rent Control Agency.

He said it would be up to the agency’s five-member board to determine whether to appeal.

The decision ends a case that began in 2008 after Embassy’s owners applied for an Ellis permit to remove the 19 units from the rental market. City Hall rejected the application, citing the 2000 court settlement agreement.

Tony Oliva, an attorney with the firm Allen Matkins who represented Embassy’s owners in the case, applauded Monday’s decision.

“We’re certainly pleased. We think the decision was correct as a matter of law,” he said. “Our goal is to continue to work with the city, not to work against the city.”

It’s unclear exactly what changes will take place at the Embassy. Oliva declined to discuss his clients’ plans for the property, but indicated the decision will enable them to invest in the building.

“It’s a real jewel in Santa Monica and it’s magnificently preserved. That’s why we have pursued this — because we want the ability to continue to care for this building in the way we have.”

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