Governor Newsom Signs Tenant Protection Act of 2019: What Residential Landlords Need to Know About the Capped Rent Increases and New Eviction Protocols

On October 8, 2019, California Governor Gavin Newsom signed important legislation that will affect many landlords and tenants of residential property across the state. The two biggest impacts created by the Tenant Protection Act of 2019 (AB 1482) will be: (1) imposing a percentage limit on annual rent increases (capped at 5% of the gross rental rate plus the change in cost of living, not to exceed 10%); and (2) introducing a just cause requirement for terminating tenants who have occupied a property for 12 months or more.

After fierce debate in Sacramento, the final statutory language incorporates a number of exemptions, including: housing that has been issued a certificate of occupancy within the previous 15 years; housing restricted by a regulatory agreement or deed with a government agency; duplexes with at least one unit occupied by the owner; and single-family homes, townhomes, or condos that are not owned by a REIT, corporation, or LLC with at least one member that is a corporation.

The changes will require landlords of all types, from institutional to individual, to carefully consider property management procedures, asset rehabilitation plans, and even corporate ownership structures.

More Details about the Cap on Rent Increases in new Civil Code section 1947.12

In passing statewide legislation to cap rent increases, California follows Oregon, which passed a similar law in February 2019, but allowed rent increases up to 7% plus inflation. California's provision requires analysis of any rental rate increases after March 15, 2019, despite going into effect on January 1, 2020. If an owner increased the rent by more than the new cap, the applicable rent on January 1, 2020, shall be the rent as of March 15, 2019, plus the maximum allowable increase under the legislation. Importantly, Section 1947.12(b) includes a provision that allows owners to re-establish the initial rental rate when all of the prior tenants move out (thus preserving Costa-Hawkins Rental Housing Act's vacancy decontrol provisions), but subsequent increases are subject to the cap.

To clarify their intent, the bill's authors included a finding and declaration that "the unique circumstances of the current housing crisis require a statewide response to address rent gouging by establishing statewide limitations on gross rental rate increases." (§ 1947.12(k)(1).) Stating that "this section should apply only for the limited time needed to address the current statewide housing crisis" [§ 1947.12(k)(2)], the bill will automatically sunset on January 1, 2030.

Additional Details about the Just Cause Eviction Procedures in new Civil Code section 1946.2

The legislation requires written notice of the just cause for termination of certain tenancies, and just cause is broken down into two categories.

"At-fault just cause" is defined in section 1946.2(b)(1) to include, among other reasons:

• non-payment of rent;
• material breaches of lease terms after notice and an opportunity to cure;
• criminal activities on the property, or criminal threats against the owner or owner's agent; or
• improper assignment/subletting of the space.

"No-fault just cause" is defined in section 1946.2(b)(2) to include termination based on:

• intent to occupy the unit by certain family members of the owner, provided that any leases entered into after July 1, 2020, include a lease provision permitting such termination;
• withdrawal of the property from the rental market;
• compliance with a government order or local ordinance that necessitates vacating the property; or
• intent to demolish or substantially remodel the property.

In order to terminate a tenant based on no-fault just cause, the owner must elect to either: (A) pay tenant an amount equal to one month's rent within 15 days after notice; or (B) waive the rent for the final month of the tenancy. Failure to do so voids the notice of termination. Terminating owners are also required to notify tenants of their right to payment or rent waiver.

A Word of Caution To Ensure Compliance

Although both sections 1946.2 and 1947.12 include exemptions for individual properties (including single-family, townhomes, and condominiums) that are not owned by REITs, corporations, or LLCs with corporate members, tenants must be provided with specific notice that they are not eligible for these protections.

Owners and property managers are cautioned to carefully review the provisions of the Tenant Protection Act of 2019 to ensure compliance with new language requirements for leases and termination notices. Investor and development partners should also consider potential impacts and strategies to navigate the new legislation.