If you rent or manage rental properties in the State of California, you most likely are aware that on October 8, 2019, Governor Gavin Newsom signed Assembly Bill 1482, enacting certain residential tenant protections on a statewide basis in California. The new law, known as the Tenant Protection Act of 2019, will add new sections to California’s existing statutory rules for residential tenancies. Many specifics of the new law that are important for landlords and their property managers to understand, when looking for new investments to purchase, or when making decisions such as increasing the rent or evicting a tenant.
The new law will go into effect on January 1, 2020 and expire in 2030, unless lawmakers vote to extend it. There are two main components of the Tenant Protection Act of 2019. First, the new Civil Code §1947.12 (“CC §1947.12”) will regulate the amount that rent can be increased annually for specific dwellings in specific situations. Second, Civil Code §1946.2 (“CC §1946.2”) will set forth the circumstances under which a residential tenant in a covered unit may be evicted.
Generally, CC §1947.12 limits annual rent increases to 5 percent, plus the local rate of inflation, but it can never exceed 10%. The rate of inflation is tied to the Consumer Price Index in each metropolitan area. CC §1947.12 will apply retroactively to rent increases on or after March 15, 2019. Whatever a tenant was paying as of that date is that amount by which the increase must be based. CC §1947.12 expressly provides there is no limit on the amount of rent a landlord may first charge the tenant when renting a vacant unit. In addition, tenants are expressly precluded from entering into a sublease that would result in a total rent for the premises which exceeds the allowable rental rate. This will prevent tenants from taking pecuniary advantage of the new rent increase limits.
Certain properties are exempt from CC §1947.12. These include:
- Section 8 or other government subsidized housing.
- Units constructed as dormitories for occupancy by college students.
- Duplexes where the owner lives in one of the units.
- Units which are already subject to local rent control ordinances are exempt, provided the rent increase limits do not exceed the limits of CC §1947.12. The following California cities have rent control laws: Berkeley, Beverly Hills, Campbell, Cotati, East Palo Alto, Escondido, Hayward, Los Angeles, Los Gatos, Mountain View, Oakland, Palm Springs, Richmond, San Diego, San Francisco, San Jose, Santa Monica, Thousand Oaks, West Hollywood, and Westlake Village. For the most part, the rules will not change in these rent-controlled cities, except that CC §1947.12 will cover units that are not already covered by rent control laws. For example, in San Francisco, the local rent control law only applies to buildings constructed before June 13, 1979. Newer units that opened in the 26 years from 1979 to 2005 will be covered under CC §1947.12. A landlord of an apartment in San Francisco that opened before 1979, is capped under the provisions of the city’s law (it’s 2.6% this year). If the landlord owns an apartment building that opened after 1979 and is at least 15 years old, the rent increase is capped at 5 percent, plus inflation.
- Buildings which have a certificate of occupancy (“COO”) issued in the last 15 years are not subject to CC §1947.12. This, however, is a rolling date, which means that units with COO’s from 2006 will be covered in 2021; units with COO’s issued in 2007 will be covered in 2022, and so on.
- Residential property that is alienable separate from the title to any other dwelling unit, i.e. single-family homes, townhouses and condos, is also exempt, provided that the owner is not a:
- Real Estate Investment Trust (“REIT”) under IRC 856.
- A corporation
- A limited liability company in which one member is a corporation
Thus, landlords who hold rental property in their individual name (or in their revocable trust) or in a limited liability company are not subject to CC §1947.12. In order to take advantage of the exemption, the tenant must be given written notice that the residential property is exempt from this section using the following statement:
“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 (c)(5) and 1946.2 (e)(7) 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.”
The deadline to provide this notice is July 1, 2020. For tenancies existing prior to this date, landlords may but are not required to provide this notice in a rental agreement. For tenancies commenced or renewed on or after July 1, 2020, the notice must be provided in the rental agreement.
Just Cause Eviction
Existing law (CC §1946.1) specifies that the landlord may terminate a periodic tenancy by serving a termination notice on the tenant at least 60 days prior to the proposed date of termination, or at least 30 days prior to the proposed date of termination if any tenant or resident has resided in the dwelling for less than one year. CC §1946.2 will change this rule and require landlords of covered units to show “just cause”—such as failure to pay rent—before evicting a tenant. This applies to any tenants that have been living in a unit longer than 12 months.
There are 11 “at fault just cause” reasons to evict a tenant:
- Nonpayment of rent;
- Breach of a material term of the rental agreement that has not been corrected after written notice under CC §1161(3) (the new law requires the landlord to serve an additional 3-day notice to quit after the cure period is passed);
- Maintaining or committing a nuisance as described in CC §1161(4);
- Maintaining or committing waste as described in CC §1161(4);
- Termination of the rental agreement without renewal, i.e. the tenant refuses to sign a written extension or renewal after written request or demand from the owner.
- Criminal activity by the tenant;
- Unapproved subtenant;
- The tenant has refused to give the landlord access to the unit as permitted by law;
- Illegal use of the unit;
- Failure to vacate after termination of employment or agency as described in CC §1161(1);
- Failure to deliver possession after the tenant provides written notice of intent to vacate or makes a written offer of surrender that is accepted by the landlord.
In addition, there are four “no-fault just cause” reasons to evict a tenant.
- The owner, spouse, domestic partner, children, grandchildren, parents or grandparents intends to occupy the unit. For new or renewed leases entered into on or after July 1, 2020, the tenant must agree to this in writing.
- Withdrawal of the unit from the rental market.
- Compliance with a government or court order or local ordinance that necessitates vacating the premises.
- Demolition or substantial remodel of the unit. Cosmetic improvements do not amount to substantial remodel.
The statute also provides for relocation assistance— equal to one month of rent either paid directly to the tenant or waived by the landlord—in the event of a no fault just cause eviction. If the tenant fails to vacate after expiration of the notice, the amount of relocation assistance paid is recoverable as damages in an action to recover possession of the premises.
CC §1946.2 does not apply to the same types of properties listed above for CC §1947.12—single family homes and condos not owned by a REIT, a corporation or an LLC owned by at least one corporation—provided the same notice is provided as set forth above.
CC §1946.2 also does not apply to jurisdictions that have a just cause eviction ordinance. Currently, the cities requiring just cause for eviction are Berkeley, Beverly Hills, East Palo Alto, Glendale, Hayward, Los Angeles, Maywood, Oakland, Palm Springs, Richmond, Ridgecrest, San Diego, San Francisco, Santa Monica, Thousand Oaks, and West Hollywood.
Owners residential rentals which are subject to CC §1946.2 must provide the following notice to the tenant, either as a provision of a new or renewed lease, or as an addendum to an existing lease, or as a written notice signed by the tenant, with a copy of the tenant:
“California law limits the amount your rent can be increased. See Section 1947.12 of the Civil Code for more information. California law also provides that after all of the tenants have continuously and lawfully occupied the property for 12 months or more or at least one of the tenants has continuously and lawfully occupied the property for 24 months or more, a landlord must provide a statement of cause in any notice to terminate a tenancy. See Section 1946.2 of the Civil Code for more information.”
Takeaway Points for Owners and Property Managers
Owners and property managers of residential rental units which are exempt from the rent control limits of CC §1947.12 and or the just cause requirements of CC §1946.2 should provide tenants with either a lease addendum or notice signed by the tenant containing the provision set forth in the law (see above). As for owners of residential rental units which are subject to the just cause requirements of CC §1946.2, their tenants should be given a lease addendum or notice containing the above quoted language requiring just cause evictions as well as a provision permitting the owner to terminate the lease for an owner or family to move-in.
In the case of a unit that would be covered by CC §1947.12’s rent increase limits but for the age of the unit, owners and property managers are advised to verify when the COO was issued and determine if the unit could become subject to CC §1947.12 at some point prior to the sunset date in 2030.
If a landlord has issued a rent increase after March 15, 2019 for a covered unit, care should be taken to verify the rent increase is allowable under CC §1947.12. If not, rent should be adjusted on January 1, 2020. The risk for the landlord of not doing so is the potential loss of ability to evict a tenant for non-payment of rent. Fortunately for landlords, the law expressly provides that in the event the rent was increased by more than the amount permissible, the new rental rate shall take effect on January 1, 2020 and the owner shall not be liable to the tenant for any corresponding rent overpayment.
Finally, CC §1946.2 does not have a roll back provision, therefore it appears that 60-day eviction notices served pursuant to CC §1946.1 prior to January 1, 2020 are legally valid. In addition, given that CC §1946.2 applies to tenancies of 12 months or more, periodic tenancies less than 12 months presumably can still be terminated on 30 days’ notice without stating a cause. Continued monitoring of the development of case law is critical as the new law goes into effect.