February 14, 2020
On October 8, 2019, in an effort to address the state’s current housing crisis, California Governor Gavin Newsome signed into law the Tenant Protection Act of 2019, codified as Cal. Civ. Code §§ 1946.2 and 1947.12 (the “Act”). The Act, which only applies to residential tenancies, impacts the landlord-tenant relationship in three major ways:
- Limits on rent increases;
- Notice requirements to tenants; and
- Just cause procedures for termination of certain tenancies.
Traditionally, in California, “rent control” referred to city or county ordinances that limited the rent landlords could charge. These rent control laws determined the maximum percentage by which landlords could increase rent (e.g. 5%) and specify how often landlords could raise the rent.
1. Cap on rent increases:
On January 1, 2020, the newly enacted California Tenant Protection Act went into effect. Going forward, rent increases will be capped statewide for qualifying units at the lower of either 5% plus inflation or 10% of the lowest gross rental rate charged at any time during the 12 months prior to the increase. Additionally, rent may only be raised once over any 12 month period. The Act does not override more restrictive city and county rent controls, but it may apply to units they do not cover.
Is your property subject to rent control?
Rent control laws apply to typical rental units, like an apartment within a complex. However, not all rentals in California are subject to rent control, including but not limited to:
- Single family homes, condominiums, and units built after February 1, 1995 (many ordinances also exempt properties built after their effective date);
- Owner-occupied buildings with no more than three or four units (depending on local regulation);
- Short-term rentals (e.g. Airbnb);
- Government-subsidized tenancies; and
- Detached (“granny”) units that could not be sold independent of the main house.
2. Notice requirements:
The Act requires owners of residential real property subject to the Act to provide notice to the tenant of a rent increase as follows:
- For a tenancy commenced or renewed on or after July 1, 2020, as an addendum to the lease agreement or as a written notice signed by the tenant; and
- For a tenancy existing before July 1, 2020, by written notice to the tenant before August 1, 2020, or as an addendum to the lease agreement.
The Act specifies the precise language and font size of the notice. Owners of exempt residential property must provide tenants with written notice that the property is not subject to the Act’s rent limits and just cause requirements, stating:
“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.”
This notice must be included in rental agreements that begin on or after July 1, 2020. For tenancies that started prior to July 1, 2020, the rent agreement may but does not have to include the notice provision.
3. Evictions must be with just cause.
The Act also includes language that requires just cause for evicting a tenant who has lived in the property for more than a year, and no-fault evictions will require the landlord to reimburse their tenant for at least one month’s rent. If an eviction is based on a curable violation, such as failure to pay rent, the landlord must provide the renter with notice of the violation, setting forth the time period in which to cure the violation. However, if the violation is not cured within the time period provided in the notice, a 3-day notice to quit without the opportunity to cure may be served to terminate the tenancy. If the tenant does not vacate the unit by the date of the notice to quit, the owner may move toward an Unlawful Detainer in a court of law. The National Apartment Association list the following examples of just causes necessary to support the basis for an eviction where a tenant is “at-fault”:
- Failure to pay rent;
- Breach of a material lease term, as defined by the law;
- Maintaining, committing, or permitting the maintenance or commission of a nuisance, as defined by the law;
- Committing waste, as defined by the law;
- Written lease terminated on or after January 1, 2020 and after a written request from the owner, the renter has refused to execute on a written extension or renewal of the lease based on similar lease terms;
- Criminal activity by the renter on the property, including any common areas, or any criminal activity or criminal threat on or off the property that is directed at any owner or agent of the owner;
- Assigning or subletting in the premises in violation of the lease;
- Refusing the owner access to the unit as authorized under the law;
- Using the premises for unlawful purposes, as defined by the law;
- An employee (e.g. resident manager), agent or licensee’s failure to vacate after their termination;
- Failure to deliver possession of the unit following written notice to the owner of the renter’s intention to terminate the lease, which the owner has accepted in writing.
Other examples of just cause necessary to support the basis for an eviction where there is “no-fault” by the tenant include:
- Intent by the owner or owner-relative to occupy the unit. This includes the owner’s spouse, domestic partner, children, grandchildren, parents, or grandparents only. For leases entered into on or after July 1 2020, the owner would only be permitted to occupy the unit, if the renter agrees in writing to the lease termination or the lease includes a provision providing for lease termination based on owner or owner-relative occupancy;
- Withdrawal of the rental property from the rental market;
- Intent to demolish or substantially remodel the unit;
- Owner is complying with a local ordinance, court order, or other government entity resulting in the need to vacate the property.
The Act may have a significant impact on investment in new residential construction, especially for properties in cities and counties that do not currently have rent control laws. Owners and developers of residential real property must carefully review the Act’s provisions and adjust their leasing practices to assure compliance with the new requirements. Investors and lenders must also consider the Act’s impact on their underwriting criteria.
Rent control has the potential to reduce an investor’s return on investment and discourage investment in the construction of new residential rental properties. Yet, it remains unclear how the Act interfaces with Costa-Hawkins, and what effect the Act will have on efforts to solve California’s housing shortage.
Other considerations that landlords and/or residential developers should contemplate is how the Act will ultimately impact any post-termination procedures. Again, this determination is based on whether just cause supporting an eviction is based on “at-fault” or “no-fault.” For example, when the termination of a tenancy is based on a no-fault just cause, the tenant is entitled to relocation assistance or a rent waiver. The landlord can then decide in which manner it wants to compensate the tenant. If a landlord chooses to pay relocation assistance, the relocation fee must be equal to one month of the renter’s rent in effect as of the date that the notice of termination of tenancy was issued. The relocation fee must be paid to the renter within 15 calendar days of the service of notice of termination of tenancy. However, if it is determined by any government agency or court that the renter is at fault for the condition or conditions triggering an order to need to vacate as set forth in the law, the tenant would not be entitled to relocation assistance.