Rent Control in California: How Will it Affect Landlords

By Katie Lepore, CPA, Esq., LL.M
Miller Monson Peshel Polacek & Hoshaw

Most California landlords and tenants alike have heard “buzz” about the recent California rent control bill, AB 1482, the Tenant Protection Act of 2019, which was passed by the California legislature on September 11 and signed into law on October 8 by Governor Gavin Newsom.  The bill represents significant legislation related to housing laws and imposes more severe restrictions on landlords than before, though there are several caveats and exceptions provided for in the new law.  The law is unlikely to have a significant impact on investors owning single-family residential units, but those with multi-family properties may feel a greater impact. 

While several versions of the bill were considered, this article will focus only on the final provisions that were enacted.  This article also does not address the rent control proposition that was overwhelmingly voted down by California voters on the November 2018 ballot.

There are two main goals of the law, the first of which deals with protecting tenants from unjust evictions and the second aims to protect tenants from unjust rents. This article will review each of these in turn.  The law would be effective from January 1, 2020 until January 1, 2030, though there are some retroactive provisions as mentioned below.

Furthermore, it is important to note that as with all new laws, there is no case history or other authority than the bill itself to govern its implementation.  As time goes on, courts and other governmental agencies may shape the interpretation and meaning of the bill through rulings and regulations.

Exemptions

The law does not apply to all rental properties.  It does not apply to properties built within the last 15 years.  It also does not apply to properties where the landlord lives on site as a primary residence and shares a bathroom or kitchen facility with the tenant.  Further, it does not apply to a single-family residence that is owner-occupied so long as the owner does not rent more than 2 units or bedrooms, including an accessory dwelling unit. Additionally, dup­l­ex­es are exempt so long as the landlord lives in one of the units. 

Most single-family residences and condos will also be exempt.  For residential property that is not owner-occupied, and “that is alienable separate from the title to any other dwelling unit,” the law will not apply so long it is not owned by a real estate investment trust (REIT), a corporation, or a Limited Liability Company (LLC) that has a corporation as a member.  Therefore, it appears that a single-family residence (or condo) that is owned by an individual, trust, or LLC with only individuals or trusts as members, would not be subject to the new laws.  However, it appears that multi-family complexes would likely be subject to the new rules regardless of ownership because the title is not separate from the title to other dwelling units. 

Landlords who have a single family residence that is not owner-occupied and are not any of the previous types of owners (REITs, corpora­tions, etc.) must provide written notice that the property is exempt from the rent control laws in any leases that begin or renew after July 1, 2020 (leases that begin before that date may include this language but are not required to do so). The specific language that must be included is as follows:

“This property is not subject to the rent limits imposed by Section 1947.12 of the Civil Code and is not subject to the just cause requirements of Section 1946.2 of the Civil Code.  This property meets the requirements of Sections 1947.12(d)(5) and 1946.2(e)(8) of the Civil Code and the owner is not any of the following: (1) a real estate invest­ment trust, as defined by Section 856 of the Internal Revenue Code; (2) a corporation; or (3) a limited liability company in which at least one member is a corporation.”

Therefore, the law is aimed at institutional investors and those with larger complexes. It still may affect some “mom and pop” individual investors who own smaller multi-family com­plexes, and certainly would hurt those who have not kept rents in line with the fair market value.

New Limits on Evictions

Landlords of residential real property may not terminate a tenancy without “just cause” after the tenant has lived there for at least 12 months (prior law required a mere 60 days’ notice for such tenants).  Further, owners must now give the tenant a chance to “cure” most problems before the lease can be terminated.

Additionally, for terminations where the landlord has just cause and the cause cannot be cured, if the tenant is not at fault, the landlord must either: a) assist the tenant with relocation efforts by paying to the tenant the equivalent of one month’s rent (without regard to whether the tenant is a low-income or high- income earner), or b) waive collection of the final month’s rent from the tenant. If the landlord fails to provide such “relocation assistance,” the eviction notice is void.  Further­more, tenants cannot waive these rights under any contract or lease agreement.

If a local ordinance or rule, such as a city or county imposing their own rent control, is more restrictive than the provisions of this new law, the local rules will govern.

Just Cause

Just cause is defined in the law. There are several instances of “at-fault” just cause in which the tenant is directly at fault, and several other instances of “no-fault” just cause for which the tenant is not at fault.  Examples of at-fault just cause include: failure to pay rent; a material breach of the lease; committing a nuisance; criminal activity; assigning or sublet­ting in violation of the lease; refusal to allow the owner access to the property within certain parameters; failure to deliver possession of the property after termination; or failure to sign a lease extension with similar terms and similar duration after written request from the landlord.

Examples of no-fault just cause (triggering the relocation assistance provisions for those who rented for 12 months or more) include: the owner or a family member wants to reside on the property; withdrawal of the property from the rental market; compliance with a govern­ment order; and intent to demolish or sub­stantially remodel the property (for which “substantial” means requiring a permit from a governmental agency, not mere re-painting). 

The law does not state how long the owner or family member must live in the property or what factors would be analyzed to determine if just cause is present in any given case.  It is worth noting as well that the provision regarding an owner or owner’s family member living on the property only applies if the tenant agrees, in writing, to the termination, or if the lease allows the owner to terminate under these circumstances, for all leases beginning after July 1, 2020.  However, the new law explicitly states that if the owner added a provision to the lease agreement to comply with this rule, it is a “similar” term such that if the tenant fails to sign a renewal or lease extension with reference to this provision, it could still be at-fault just cause.  It appears that landlords may wish to amend their lease agreements now if they anticipate that they might want the option to live in the property later.

Application of Evictions

It is imperative to understand that the provisions regarding evictions, at least for at-fault just cause such as failure to pay rent or material breach, will likely apply during the lease term rather than at the termination of a lease for a term of years (assuming rules are followed to properly terminate the lease).  Therefore, most at-fault and curing restrictions outlined above will likely apply in practice to landlords who unfortunately determine they have a “bad” tenant during the lease term, or those who are renting on a month-to-month basis.  It may also affect those investors who purchase a property that already has existing tenants on the premises, making due diligence all the more important during the purchase process.  The provisions regarding no-fault just cause appear to trigger the relocation assis­tance provisions even at the end of a contractual lease unless it is the tenant who does not want to renew a similar lease, which provides at-fault just cause. 

This would appear to override contract law to a degree, such that even at the conclusion of a 12-month lease, if the landlord is the person who does not want to renew the lease, relocation assistance must be provided.  Landlords may therefore wish to rent based on an 11-month lease, or if landlords anticipate not wanting to renew at the conclusion of the 12-month contractual period, notice of termination should be given in month 9 or so to ensure the lease does not extend past the 12-month period.  For all tenants who have lived on the property for 12 months or more, a no- fault termination appears to trigger the one-month rent relocation assistance provisions without exception.  This was confirmed by the office of the bill’s main drafter.

Limits on Rent Increases

Over the course of a 12-month period, a landlord may not increase the “gross” rent more than 5% plus the cost of living (which is typically about 2-3%)1, or 10%, whichever is lower (gross rent is the amount of rent prior to any credits or discounts offered by the landlord). 

This rule is retroactive and applies to all rents that were increased on or after March 15, 2019.  In the event a landlord increased rents by more than the proscribed amount between March 15, 2019 and January 1, 2020, the rent for January 2020 going forward will be the maximum increase allowed under the new rent control laws.  However, the law explicitly states that the owner will not need to reimburse the tenant for the “overpayment” paid from March until January; he or she simply cannot continue collecting rents at that rate beginning in January. This provision appears to affect landlords even if not the owner on March 15, 2019, meaning a small number of owners who purchased a property after March 15 with existing tenants and possibly signed new leases with those existing tenants may be restricted by the low rents imposed by the seller, even if the buyer renovated after closing.

Some Takeaways

The evictions rule does not appear to be retroactive, meaning, a 60-day notice for tenants who lived on the property for 12 months should be sufficient until the bill takes effect January 1, 2020.

It is important to note that the new rules do not apply at vacancy.  When a tenant vacates a unit, the landlord may reset rents to fair market value.  To that end, landlords concerned about the bill’s provisions may wish to rent for a period of time rather than month-to-month and be careful at the termination of a lease to not let it automatically roll to a month-to-month period. Lease forms may need to be reviewed to remove such automatic provisions.  As stated earlier, if the landlord anticipates not wanting to renew a 12-month lease, notice likely should be given before the 12-month mark arrives. 

While the law is aimed at protecting tenants, it may actually provide protections to landlords in new ways.  Some experts think this will make landlords feel obligated to raise rents every year, whereas previously some years landlords may have foregone a rent increase for “good” tenants.  Now, if a landlord falls behind in raising rents in any one year, he or she may be jeopardizing the right to raise rents to fair market value in the future because the rent increase allowed is annual.  Foregoing a 5% increase in one year does not mean the owner may raise rents by 10% the next year; the 5% increase plus the cost of inflation is a “use-or-lose” opportunity each year.  It also provides a sort of cover for landlords to raise rents and justify the increase to tenants without appearing to be intentionally raising the rent on that tenant, such that the 5% plus cost of inflation has been approved by legislators as a fair benchmark of what should be charged rather than a limit on what can be charged.  Landlords can now raise the rent with simple justification that “the law” provides the rental increase guideline rather than an increase being an arbitrary number chosen by landlords (if the landlord chooses to increase by the full 5% plus cost of inflation).

Others think landlords may draft more stringent rental contracts making it more difficult for tenants to follow all the provisions of the contract, to create an “at fault” just cause in the event the landlord desires to evict the tenant.  For example, this could include changing the lease agreement to require the tenant to upkeep the grounds of the property or cover pest control, which typically are responsibilities of the landlord.  If a tenant fails to maintain the lawn, it may provide an opportunity for a landlord to evict the tenant with cause, assuming the provision constitutes a material breach.

Some investors seem to be alarmed that their real estate can no longer be owned in an LLC or else they would be subjecting themselves to rent control.  On the contrary, unless one of the members of the LLC is a corporation, an LLC has no bearing on the analysis of whether a property is subject to the new laws or not.

Conclusion

The law is brand new and there will undoubtedly be several future cases and regulations that shape its application and provide clearer guidance.  For now, the only legal source is the text of the bill itself.  If you should have any questions about your rental real estate, please contact the law offices of Miller, Monson, Peshel, Polacek, and Hoshaw, APLC.


1 The percentage change in cost of living is defined in the bill as, “the percentage change from April 1 of the prior year to April 1 of the current year in the regional Consumer Price Index for the region where the residential real property is located, as published by the United States Bureau of Labor Statistics.  If a regional index is not available, the California Consumer Price Index for All Urban Consumers for all items, as determined by the Department of Industrial Relations, shall apply.”  See: https://timesofsandiego.com/business/2019/09/14/landlords-developers-ok-with-californias-landmark-rent-gouging-law/


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