By Robert McCormick
On October 8th, Governor Gavin Newsom held a ceremonial bill signing for AB 1482, the much heralded Tenant Protection Act of 2019, that enacts significant California state-wide rent control and tenant protection measures. This new law surprisingly arrives just one year after housing developers raised more than 70 million dollars to defeat Proposition 10, the ballot initiative that would have removed the existing statewide ban enacted in 1995 under the Costa-Hawkins Rental Housing Act that protects a landlord’s right to raise rent to market rate on a dwelling unit once a tenant vacates and bars municipalities from expanding rent control to units built after February 1, 1995 or single-family rentals. The impetus for the new law, according to its proponents, is to protect renters from excessive rent increases characterized as “rent-gouging” and arbitrary evictions, both of which proponents argued have added to the growing homeless populations in the State. According to one of the new law’s lead authors, Assembly Member David Chiu (D-San Francisco), “Millions of California renters are just one rent increase or eviction away from experiencing homelessness.”
The new law includes two basic tenant protective measures.
Rent Increase Cap
The first measure, embodied in Civil Code Section 1947.12, prohibits an owner of residential real property over the course of any 12 month period from increasing the gross rental rate charged for a dwelling unit by more than 5% plus an inflation factor over the lowest gross rental rate charged for that unit in the immediately preceding 12 months, such increase in any event not to exceed a hard cap of 10 percent or to involve more than two incremental increases over that 12 month period. The inflation factor is equal to the percentage change in the cost of living which is to be calculated using the applicable regional Consumer Price Index. This rent increase cap does not apply to the establishment of the initial rental rate for a new tenancy in which no tenant from a prior tenancy remains in lawful possession. This means that a landlord can still substantially raise the rent on a rent-controlled unit that is vacated which was one of the key provisions that gave the real estate industry some comfort. Unfortunately the term “gross rental rate” is not fully defined in the statute, which will likely result in future disputes as to what costs and pass-throughs are to be included. Practitioners should carefully review the rent provisions and definitions included in their residential lease forms and consider not including utility charges and other uncontrolled expenses in a general definition of “rent.”
This new rent increase cap does not apply to (i) housing restricted as affordable housing, (ii) dormitories, (iii) new housing defined as housing that has been issued a certificate of occupancy within the previous 15 years, (iv) single family residences provided the tenants are properly noticed of the exemption and the property is not owned by a corporation, limited liability company (where at least one member is a corporation) or a real estate investment trust or (v) duplexes in which the owner occupies one of the units. It should be noted that the 15 year grace period is a rolling calculation such that in 2020 it applies back to 2005 but in 2021 it will apply back only to 2006 and so on. It is also important to note that this rent cap also does not apply to housing subject to rent or price controls enacted though a public entity’s valid exercise of it police powers consistent with the Costa-Hawkins Rental Housing Act, thereby preserving the existing rent control laws enacted by local governments.
Although the cap provision becomes operative January 1, 2020, in order to address potentially excessive rent increases recently imposed by landlords in anticipation of this new law, the cap applies retroactively to all rent increases occurring on or after March 15, 2019 and guidelines are provided for how rent increases during that period are to be addressed. As mentioned above, tenants of single family residences are to be provided a specified written notice if the property they occupy is exempt from the new law, and for tenancies commenced or renewed after July 1, 2020, the required notice must be included in the rental agreement so practitioners should be prepared to timely undertake this redrafting of their form documents. In addition the new law requires that an owner provide notice of any rent increase to the tenant as provided in Civil Code Section 827.
Just Cause Termination Requirement
The second measure, embodied in Civil Code as Section 1946.2, prohibits an owner of residential real property from terminating a tenancy without “just cause,” where the tenant has continuously and lawfully occupied the property for 12 months, or in the event of an addition of an adult tenant before the existing tenant has occupied for 24 months, the requirement for occupancy is extended to 24 continuous months for at least one of the tenants or 12 continuous months for all the tenants.
Just cause has two forms. The first category of just cause is comprised of “at fault” causes. These include: default in payment or rent; breach of “material” term of lease; tenant-created nuisance or waste; or use of the premises for unlawful purposes or commercial activity by tenant. Importantly, at fault just causes also include the refusal of a tenant to allow the owner lawful entry as well as the tenant’s refusal at end of lease term to sign an extension or renewal of the lease on similar terms, subject to compliance with the requirements of this new law.
The second category of just cause is comprised of “no-fault” causes which include owner move-in situations where the owner or owner’s family intends to occupy the property, and if the lease is entered into after 7/1/2020, either the tenant agrees to vacate or there is a provision in the lease that allows the owner to terminate in such situation. Again, this requirement should be added to residential lease forms. No fault causes also include situations where the owner intends to withdraw the property from the rental market; when a governmental agency requires vacating; or the owner intends to demolish or “substantially remodel” the property as further defined. The substantially remodel exception allows owners to acquire and improve properties and to require existing tenants to vacate to accommodate such work which, however, must be more than cosmetic. We can expect this dividing line between substantial and cosmetic to become an area of future contention.
In addition to excluding the same types of properties as are exempted from the rent cap described above, the just cause requirement also does not apply to the following: transient and tourist hotel occupancy, housing accommodations in a nonprofit hospital, religious facility or extended care, elderly or adult residential facilities; single family, owner occupied properties in which no more than two bedrooms/units are rented, including accessory dwelling units; and owner occupied dwellings if the owner and tenant share a bathroom or kitchen. In addition, it does not apply to residential real property subject to a local ordinance requiring just cause for termination adopted on or before September 1, 2019, and if adopted after that date, which is more protective, in which case the local ordinance will apply.
In the case of a no-fault just cause termination, the owner is additionally required to either assist the tenant in relocating by providing direct payment equal to one-month’s rent or waive payment of rent for the final month, and the owner has to provide notice regarding this requirement as part of the termination process
As with the rent increase cap, the just cause measure includes notice requirements including specified language to be provided to the tenant of a single family residence in written form or in the rental agreement informing the tenant of the exemption of the property they occupy from these protections. In addition, owners of properties that are subject to the just cause requirement are required to provide their tenants with a notice in specified language and no less that 12-point type regarding the just cause termination protections applicable to the property. For a tenancy existing prior to July 1, 2020, this notice may be in a separate writing or addendum delivered to the tenant no later than August 1, 2020, but for tenancy that is commenced or renewed after July 1, 2020, the notice must be given in the form of an addendum to the lease. With respect to termination notices, the applicable just cause is required to be stated in the written notice to terminate which must be given pursuant to paragraph (3) of Section 1161 of the Code of Civil Procedure. With respect to certain just cause terminations that are curable, AB 1482 further requires that the owner give a notice of violation and an opportunity to cure prior to issuing the notice of termination via a 3-day notice to quit in the event the cure is not timely accomplished. Once again, lease forms being utilized in this context will need to be updated to incorporate these requirements. This just cause provision applies effective January 1, 2020.
It should be noted with respect to assisted housing developments and deed restricted affordable housing units, that special provisions apply regarding the establishment of initial rental rates for these properties.
Finally, it should also be noted that AB 1482 expressly provides that any waiver of the rights provided to tenants under the new law is void as contrary to public policy. This prohibition should discourage creative drafting to try to blunt the new protections.
AB 1482 includes a provision that states that it is the intent of the Legislature that the new laws apply only for the limited time needed to address the housing crisis, and that they do not intend to expand or limit the authority of local governments which traditionally control the domain of residential rent laws. This is why the new law contains a ten year sunset provision, ending on January 1, 2030. The length of this period was the subject of last minute negotiations. Its extension to ten years was a significant modification sought by those real estate business interests which eventually accepted the compromised bill, because it would potentially provide long term certainty and predictability needed by those considering the development of new housing projects with respect to rents. However, because of the deference given to existing local programs, rent control in California has not been simplified and will now be a mosaic of local and state laws which will likely result in some initial confusion as the new law is applied. From the perspective of affordable housing advocates, the rental cap is too high as it exceeds the rate of rental increases being experienced in the state. As a result, the new law may not have that much effect as a rent control measure. The new law also does not address the housing supply issue, and we can expect further proposals to address these shortfalls in the coming years. Within the realm of unintended consequences, one outcome that can be visualized is that landlords may consider the rent increase cap, which is annual not cumulative, as an incentive to automatically implement the allowed increases in order to not fall behind, thereby providing a new incentive for landlords to increase rents every year. One thing we can be sure of, given the complexity of AB 1482, is that it will be subject to further refinement in the future.