In 2023, California saw significant changes in rental laws with the introduction of Senate Bill 567, also known as the Homelessness Prevention Act, and Assembly Bill 12, which revises residential security deposit regulations. Both laws reflect the state’s effort to balance tenant protections with the realities faced by landlords. Let’s delve into the details of these bills, their impact, and potential future implications for the real estate market.
Senate Bill 567 (Homelessness Prevention Act)
SB 567 changes the rules by which California property owners may remove tenants in certain instances. Effectively, this new law directly impacts two sets of property owners:
1: Property owners and their close family members (i.e. spouse, domestic partner, children, grandchildren, parents, or grandparents) who plan to move into an occupied/leased property before the expiration of the lease term with the tenant.
2: “Fix and flip” investors planning on substantially remodeling or rebuilding an occupied/leased property for resale.
Under the current law (California Civil Code § 1946.2), after a tenant has continuously and lawfully occupied a residential property for 12 months, the landlord is prohibited from terminating the tenancy without “just cause.” In fact, the “just cause” must be stated in the written notice to the tenant for the termination of the tenancy to be effectuated. Of note, existing law distinguishes between “at-fault just cause” and “no-fault just cause,” wherein “no-fault just cause” has nothing to do with the nonpayment of rent and/or criminal activity on premises but rather is defined as:
- the intent to occupy the premises by the owner and/or the owner’s spouse, domestic partner, children, grandchildren, parents, and/or grandparents.
- the withdrawal of the residential real property from the rental market.
- the owner complying with specific government orders that necessitate vacating the real property or
- the intent to demolish or to substantially remodel the residential real property
Regarding an eviction based on an intent to occupy, the new law now requires the owner and/or the owner’s family member(s) under such a scenario to occupy (i.e., move into) the residential real property within 90 days for a minimum of 12 continuous months, and to use the property as the person’s primary residence. Historically, it was quite simple for property owners to use the “move-in” provision under the law as an excuse to evict a tenant that they did not like or as a means to increase the rent by evicting the old tenant and moving into a new tenant who was willing to pay a higher rent. There were no specific guidelines and/or restrictions in this regard. But now, a strict timeline regarding personal occupancy has been codified into law, the violations of which could result in financial exposure for the property owner, including, but not limited to, a civil monetary award to the tenant with the potential for treble damages (3-times the actual damages amount) and punitive damages.
This new law also requires an owner who displaces a tenant to substantially remodel or demolish a unit to provide the tenant with written notice that includes a description of the substantial remodel to be completed and the expected duration of the repairs or the expected date by which the property will be demolished, as well as a copy of the permits required to undertake the substantial remodel or demolition. This means that the property owner must do more than advise the existing tenant that they are being evicted due to the substantial remodeling of the property or because of the intent to demolish it. Under the new law, the property owner must provide the tenant with written notice and documents setting forth a construction timeline and copies of the permitting for said work.
Notably, the new law prescribes new enforcement mechanisms, including making an owner who attempts to recover possession of a rental unit in material violation of this new law liable to the tenant in a civil action for damages up to three times the actual damages amount, as well as punitive damages and attorney’s fees/costs. Furthermore, the new law also authorizes the California’s Attorney General, and/or the City Attorney, and/or County Counsel within whose jurisdiction the rental unit is located, to bring actions for injunctive relief against the owner who is in violation of this new law. Also, many cities and counties throughout California have different (and often more restrictive) requirements when removing tenants. As such, it is always recommended for landlords to check the rules, regulations, and laws related to the jurisdiction where the property is located for any additional guidelines and requirements.
When using any of the “no fault” grounds for removing a tenant, the tenant is entitled to relocation costs equal to one month’s rent. However, landlords should be mindful that many cities and counties throughout California have even more stringent and/or more substantial relocation costs and requirements. As such, landlords should always check to see if there are any additional jurisdictional costs and/or requirements for removing a tenant.
Further, until January 1, 2030, the current existing law prohibits an owner of residential real property from, over the course of any 12-month period, increasing the gross rental rate for a dwelling or a unit by more than 5% plus the percentage change in the cost of living, or 10%, whichever is lower, of the lowest gross rental rate charged for that dwelling or unit at any time during the 12-months before the effective date of the increase, subject to specified conditions. This new law, however, makes an owner who demands, accepts, receives, or retains any payment of rent above the maximum increase allowed liable in a civil action to the tenant from whom those payments are or were demanded, accepted, received, or retained for specific relief including, upon a showing that the owner acted willfully or with oppression, fraud, or malice, damages up to three times the amount by which any payment demanded, accepted, received, or retained exceeds the maximum allowable rent. This new law also authorizes the California attorney general and/or the city attorney or county counsel within whose jurisdiction the residential property is located to enforce the new law’s provisions and to bring action for injunctive relief.
Summary:
- Effective Date: April 1, 2024
- Main Changes:
- Caps rent hikes at 10%.
- Prevents landlords from evicting tenants without a legal cause.
- Affects property owners wishing to move into leased properties and investors planning substantial remodels for resale.
- Tenant Benefits:
- More stable rent increases.
- Greater security against evictions.
- Landlord Impact:
- Stricter rules for evicting tenants, including clear justifications and timelines for owner move-ins and remodels.
- Potential financial liability for unlawful evictions, including treble damages.
- Required to adhere to local and state-level regulations and guidelines.
Assembly Bill 12 (Residential Security Deposit Law)
Under AB 12, landlords are permitted to ask for security deposits equivalent to one month’s rent for both furnished and unfurnished dwellings. This is a notable shift given that under the current existing law, landlords can charge up to two months’ rent for an unfurnished dwelling and three months’ rent for a furnished one. This law does not take effect until July 1, 2024, allowing landlords time to make any necessary adjustments to their practices given this new approach on the security deposit amount.
Also, please note that this new law has an exception for “small landlords” (as defined), if they own no more than two residential rental properties that collectively include no more than four dwelling units that are offered for rent. Additionally, to qualify as a “small landlord,” the owner must hold the real estate as a natural person, as a limited liability company where all members are natural persons, or as a family trust. If all these conditions are met, then the “small landlord” is permitted to collect up to two months’ rent as a security deposit. Again, AB 12 does not take effect until July 1, 2024, which gives California landlords who do not qualify as “small landlords” to make necessary adjustments. In enacting this new law, the California state legislators are hoping to make housing more accessible and affordable, especially for those residents who are struggling financially. Ironically, the law also is effectuating at a time when landlords are facing multiple hardships including limited rent increases, financial risk in the form of potential damage to their property and/or unpaid rent for which there will be no compensation, increasing maintenance and operational costs, having to navigate the complexities of local and state-level regulations, and stalled and/or slowed evictions of tenants who owe back-rent since the COVID-19 pandemic. These factors, amongst others, could hamstring landlords financially and potentially lead to significant portions of the housing market falling into disrepair and causing a slowdown of development projects and community engagement. It also may cause landlords to become stricter with the screening processes of their tenants, including adopting higher income requirements and/or charging higher application fees, which can result in an even more challenging housing landscape for high-risk and/or low-income tenants. At this juncture, only time will tell.
- Effective Date: July 1, 2024
- Main Changes:
- Limits security deposits to one month’s rent for both furnished and unfurnished dwellings.
- Exceptions for “small landlords” owning limited properties.
- Tenant Benefits:
- Lower upfront costs for renting.
- Easier access to housing, particularly for financially struggling residents.
- Landlord Impact:
- Reduced financial security from smaller deposits.
- Adjustments needed for landlords not qualifying as “small landlords.”
Future Implications for Landlords and Real Estate Market
These legislative changes signify a shift towards enhanced tenant protections, potentially increasing financial and operational challenges for landlords. The limited ability to raise rents and the capped security deposits may squeeze landlords financially, especially amidst growing operational costs. This could lead to:
- A heightened focus on tenant screening processes.
- Slowed development projects and repair work on properties.
- A possible deterrence for small and first-time investors, who might find the financial risks outweighing the benefits.
Conclusion: Balancing Protection and Investment
While these laws aim to protect tenants and ensure fair housing practices, the increased financial exposure and operational complexities for landlords cannot be overlooked. This could potentially slow the entry of small and first-time investors into the real estate market as the risk-reward balance shifts. As California navigates these changes, only time will tell how these dynamics play out in the housing landscape.
For landlords, staying informed and consulting with legal professionals is crucial to navigate these new regulations effectively and mitigate potential risks. The real estate market is evolving, and adaptability will be key for both tenants and landlords in this new regulatory environment.