Value-add, core and core-plus real estate investors should be aware that on October 8, 2019 California Governor Gavin Newsom signed the Tenant Protection Act of 2019 – Assembly Bill 1482 into law (the “Act”). The Act both imposes a statewide rent increase cap of 5 percent plus inflation per year for the next 10 years and also provides residential tenants with “just cause” eviction protection. Owners of, and investors in, multi-family and single-family residential real estate should carefully review their investment strategy, rental rate and leasing strategy, lease forms and notices to tenants in light of the new requirements imposed by the Act.
Owners of residential real property will be prohibited from, over the course of any 12-month period, increasing existing gross rental rate by more than (i) 5 percent plus the percentage change in the cost of living or (ii) 10 percent, whichever is less. In determining the existing gross rental rate, any rent discounts, incentives, concessions or credits will be excluded.
The rent control provision will become operative on January 1, 2020 and applies retroactively to rent increases occurring on or after March 15, 2019 if a landlord has raised the rent beyond the permissible amount between March 15, 2019 and January 1, 2020.
Owners are permitted to establish new rent at any amount upon a tenant vacancy, but see our discussion of “just cause” evictions below.
Exemptions from the Rent Cap
Among other exemptions, the Act’s rent cap will not apply to the following:
- Affordable Housing. Deed-restricted affordable housing for persons and families of very low, low or moderate income, as defined in the Act;
- Student Dormitories. Student dormitories maintained in connection with any higher education institution within the state for use and occupancy by students attending the institution;
- New Construction. Housing that has been issued a certificate of occupancy within the previous 15 years;
- Single-Family Homes and Condominiums. Single-family residences, provided that the owner is not (1) a real estate investment trust, (2) a corporation or (3) a limited liability company in which at least one member is a corporation;1 and
- Owner-Occupied Duplex. A duplex in which the owner occupies one of the units as the owner’s principal place of residence at the beginning of the tenancy, so long as the owner continues in occupancy.
The Act also imposes just-cause eviction protections that would make it more difficult for landlords to simply terminate a lease in order to increase rent. Once a tenant has occupied the residential real property for 12 months, the owner may terminate the lease only for “just cause.” “Just cause” is divided into two categories: at-fault and no-fault.
- At-Fault Just Cause. This would include a tenant’s default, breach of material term of the lease, committing waste or—if under a lease that terminated on or after January 1, 2020—refusing to extend or renew the lease for an additional term of similar duration with similar provisions.
- No-Fault Just Cause. This includes the owner doing any of the following:
- Intending to occupy the property (or have it occupied by the owner’s spouse, domestic partner, children, grandchildren, parents or grandparents). For leases entered into after July 1, 2020, this no-fault just cause applies only if (1) the tenant agrees, in writing, to the termination or (2) a provision of the lease allows the owner to unilaterally terminate the lease for this cause (i.e., if owner intends to occupy the property);
- Withdrawing the property from the rental market;
- Complying with a government order or local ordinance that requires vacating the property; and
- Intending to demolish or substantially remodel the property.
For a termination based on a no-fault just cause, a landlord is obligated to provide relocation assistance in the form of either, at the landlord’s election, (i) a direct payment of one month’s rent or (ii) waiving the rent for the final month.
Exemptions from the Just-Cause Eviction Requirement
The properties described above as being exempt from the rent cap are also exempt from the just-cause provisions. In addition, the following categories of residential housing are exempt from just-cause requirements:
- Dormitories owned and operated by K-12 schools;
- Transient and tourist hotel occupancy as defined under applicable state law;
- Housing accommodations in a nonprofit hospital, religious facility, extended care facility, licensed residential care facility for the elderly or an adult residential facility (24-hour-a-day nonmedical care and supervision of adults) as defined under applicable state law;
- Housing accommodations in which the tenant shares bathroom or kitchen facilities with the owner who maintains their principal residence at the property; and
- Single-family owner-occupied residences, including a residence in which the owner-occupant leases no more than two units or bedrooms, including an accessory dwelling unit or a junior accessory dwelling unit.