California has passed statewide rent control this month (AB 1482), ignoring the will of the people who voted 62% to 38% against a different piece of rent control legislation (Proposition 10) just under a year ago in November of 2018.
While Prop 10 sought to repeal Costa-Hawkins, which would have allowed individual cities in California to enact their own forms of rent control, the AB 1482 form of rent control creates a just cause requirement for tenancy terminations and an annual cap on rent increases.
This law was signed by Governor Newsom on October 8, 2019 and goes into effect on January 1, 2020.
So what does AB 1482 mean for you as a California landlord? We're going to break it all down right here for you.
The Parts Of The Bill
This bill has four different parts which can be summarized as follows:
- At-fault just cause tenancy termination.
- No-fault just cause tenancy termination.
- Rent caps.
- Required notices.
If your property is not exempt from AB 1482, you will need just cause in order to terminate a month to month tenancy or at the end of a lease period. There are two different types of just cause which we will dive into later.
You will also have a cap on how much you can raise the rent and a limit on the number of times you can raise it in a 12 month period.
Finally, you will have to provide a notice to your tenant, either as a change in terms of tenancy or as a part of their lease, informing them of whether or not the property is under rent control.
Who Does It Affect?
This is the biggest point of confusion for most landlords. The good news is, this only affects multi-family properties that are at least 15 years old, with some exceptions.
That's right, most single-family homes and condos are not affected by this law!
This law also does not apply to temporary housing, short term rentals, dormitories, non-profit/religious housing and a few others. We will focus on the implications of this law for long term residential rental property owners, i.e. apartments, condos, and single family homeowners.
Specifically, the properties that are exempt from this law are those that are alienable separate from the title to any other dwelling unit, provided that the owner is not a REIT, a corporation or an LLC where a member is a corporation AND, the proper notice is provided to the tenants in the required timeframe.
“Alienable separate from title” covers most single family homes and condos. If the property is a duplex and the owner lives in one of the units, it is also exempt.
However, if you own a duplex or larger, you are subject to rent control starting next year.
At-Fault Just Cause Tenancy Termination
Once your tenant has lived in the property for 12 months, they are protected under just cause. You can’t just give a 30 or 60 day notice to your tenant to vacate for any reason like you’ve been able to in the past
If your tenant adds someone to the lease, then the longest staying tenant has to have been in the property for 24 months before they are protected under just cause tenancy termination.
Leases or month to month tenancies can be terminated for the following just cause reasons:
- Default in rent payment.
- Breach of a material term of the lease.
- Committing a nuisance.
- Committing waste.
- Refusal to sign a new lease.
- Committing a crime in the property.
- Subletting the property.
- Refusing the landlord’s legal right to entry.
- Failure to move out after the tenant’s written notice of move out has expired.
If you are ending the tenancy for one of these reasons, you need to first issue a three-day notice to cure. If you move to evict the tenant for committing one of these offenses without the required three-day notice to cure, the termination will be void.
Once the notice to cure expires, you can issue a three-day notice to quit with no option to cure.
No-Fault Just Cause Tenancy Termination
This has the same 12 month requirement before the tenant is protected, but the following are considered no-fault just cause tenancy terminations:
- Intent to occupy the property by the owner or their spouse, domestic partner, children, grandchildren, parents or grandparents.
- Withdrawal of the rental property from the market.
- The owner complying with an order issued by the government.
- A local ordinance that requires the property to be vacated.
- Intent to demolish or substantially remodel the property.
So what’s the difference between at-fault and no-fault? Relocation assistance.
If the tenancy is ended for a no-fault just cause reason, the owner must help the tenant relocate with financial assistance in the form of one month’s rent. This can either be a payment to the tenant or by waiving the last month’s rent.
The payment must be given to the tenant within 15 days of the notice to vacate or the waiving of last month’s rent must be given to the tenant in writing before the last month’s rent comes due.
If you don’t comply with this portion of the law, your termination notice is void and your tenant can remain in the property.
The other major portion of this law is the new rent cap requirements. First, you can only raise the rent twice per every 12 months. If you normally keep your tenants on a 12 month lease, this won’t really affect you. If you like to keep your tenants month to month, you have to pay attention to how often you are raising the rent to keep from violating this law.
Second, you are capped at how much you can raise the rent by for every 12 month period.
That cap is 5% max plus CPI with a not to exceed of 10%.
CPI is the consumer price index and can be found for your area here.
If the CPI increased by 3% from April to April over the last 12 months, your max rent increase would be 8%.
This is particularly alarming if you have significantly under market tenants.
You are now limited on how much you can raise the rent. You may think that’s ok because you “don’t need the money” or you have great tenants that you are happy to keep the rent low on. But what happens if something happens and you suddenly need more money? You won’t be able to raise the rent on your existing tenants to cover your new expenses. You also won’t be able to kick them out and re-rent at market rates.
You could just sell the property in that case, but good luck finding an investor that wants to buy a rent controlled property with under-market tenants.
All that leaves you to do is quickly raise the rent now before the law goes into effect on January 1, 2020, right?
Think again. The law has a reversion clause that goes back to March 15, 2019. If you have raised the rent more than the limit between March 15, 2019 and January 1, 2020, you have to decrease the rent to the cap limit on January 1. So if you quickly raise it more than the limit now, you are just going to have to decrease it in a little over 2 months.
The California legislature was one step ahead of you, unfortunately.
Whether you are under rent control or not, you are required to provide specifically worded clauses in no less than 12 point font in your lease or as a notice to your tenants by July 1, 2020.
For rent controlled properties, the clause must read as follows:
“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.”
For non-rent controlled properties, the clause must read 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.”
If you have a non-rent controlled property and you don’t do this by July 1, 2020, guess what? You’re under rent control. Do not get caught sleeping on this.
What Can You Do?
1. Hire a property manager (shameless plug).
While AB 1482 is the most significant, California is passing several other laws that also go into effect on January 1, 2020 making it more and more difficult to stay compliant while owning and managing rental property in California.
A property manager should be up to date on all of these new laws and help you navigate the tricky California rental property landscape.
2. Issue a 60 day notice to vacate that expires before the first of the year so that your difficult or under market tenants will be out before this law goes into effect.
Keep in mind that while there is a reversion clause for rent increases, there is no such reversion for no-reason tenant terminations.
Assemblyman David Chiu, the bill's author, has admitted that there's nothing that can be done about tenancy terminations that will already be over by the time the law takes effect.
Since you can’t raise the rent to protect yourself, this is your only recourse and you have merely a matter of days to take action. If you issue a 60 day notice to vacate in November and it expires in January, you are too late. Your tenants will be protected under just cause, assuming they’ve been in your property for over 12 months.
- Stop using 12 month leases. If you instead do 10 or 11 month leases, you will keep yourself from getting stuck with just cause tenancy terminations in the future. That habitually late paying tenant or trouble maker can be asked to leave at the end of the 10 or 11 month lease with no need to deal with the just cause requirements of this law.
- If you are exempt from this law, TAKE ACTION NOW! The legislature slammed this bill through in a matter of a few short months less than a year after the people of California said NO. What makes you think they won’t remove the single family and condo exemption next year? What about the year after? They have already shown their ability to use reversion clauses so that by the time you are aware of the law it’s already too late.
Here at Mesa Properties, we are strongly advising all of our owners that are currently exempt from this law to let us raise their rents to market and keep them there because we know that in the very near future, they will be affected. It is our duty to act in the landlord’s best interest and staying ahead of future laws that negatively affect them is one way we do that.
Questions on all this or what you can do? Give us a call and we would be happy to discuss options and strategies with you.