NO FREEDOM OF CHOICE FOR APARTMENT OWNERS

Ever since the state legislature enacted the costa-hawkins vacancy decontrol law in late 1995, the Rent Board and City Council have been trying to limit the freedom of choice that law gave you. First, they adopted the Domestic Partnership Ordinance to prevent you from limiting the number of people living on your property, and then they imposed the tenant harassment ordinance to limit your freedom of speech to complain when tenants violate their contracts with you, and finally they wrote a new rent control law which has many provisions which further limit your choices. Although every member of the Rent Board and City Council is “pro-choice” they are not willing to apply that concept to your right to make a new contract with your tenants. Their repeated attempts to limit the Costa-Hawkins vacancy decontrol law is an example of that.

The Costa-Hawkins Act at Civil Code Sections 1954.50-1954.53 is supposed to give rental property owners freedom of choice to set a new rent level when there is a vacancy. Civil Code Section 1954.53 (a) (which applies to apartment buildings) states the following:

“Notwithstanding any other provisions of law, an owner of residential real property may establish the initial rental rate for a dwelling or unit, except where any of the following applies:”

The opening sentence of the law states the general rule that you “may establish the initial rental rate.” It does not say that you are required to establish a new rental rate every time you have a vacancy. There may be times when you do not want to establish a new rental rate. The most obvious examples would be when you hire an on-site manager or permit a friend or relative to live in a rental unit for a reduced rent. There is also the possibility of changed circumstances.

For example, suppose that you rented a rental unit on the ground floor for $1,500 in January 2000 and registered that level with the Rent Board. The $1,500 is the new lawful rental rate. Then, suppose that the tenants who live above the ground floor unit decide that they want hardwood floors instead of carpets and became so noisy and obnoxious that the ground floor tenants vacate that unit. You end up with a vacant unit on the ground floor that should be worth $1,500 except that the tenants living above that unit create a constant nuisance. What should you do?

The obvious choice would be that you find new tenants for the ground floor unit and inform them (in a writing they sign) that the lawful rent for the ground floor unit is $1,500, but you are willing to accept $1,200 unless and until the tenants upstairs vacate and you are able to get a quieter tenant who accepts carpet and padding. That agreement would have been legal under the Costa-Hawkins Act and the old Rent Control Law, but the new Rent Control Law which became effective on December 20, 2002 closed that “loophole” of liberty.

The final two sentences of Rent Control Law Section 1804 (b) illustrate the problem:

“For tenancies commencing on or after January 1, 1999, which qualify for a vacancy rent increase pursuant to state law, the base rent ceiling is the initial rental rate in effect on the date the tenancy commences. As used in this subsection, the term “initial rental rate” means only the amount of rent actually paid by the tenant for the initial term of the tenancy.”

Do you see the difference between State and local law? Under State law, you “may” establish a new initial rental rate. Under the Rent Control Law you establish a new initial rental rate whenever you rent a rental unit to a new tenant and that rate is whatever amount the tenant actually pays.

Most property owners don’t realize the problem because they are not required to register a new rental rate every time a vacancy occurs. They are only required to register new rent levels when they are greater than the old rent levels. Many of them are still following the old Rent Control Regulations which permits them to keep the old Maximum Allowable Rent so long as they notify the tenant in writing of the Maximum Allowable Rent.

Meanwhile, the Rent Board has set a trap for the unwary by permitting tenants to file vacancy registration forms, which state the rent the tenants first paid. The Board does not automatically notify owners when one of these forms is filed. That way, the tenants can build the rent overcharges for three years and make a lot more money then they could by putting it in a bank.

This story does not cite any case numbers because it is based upon problems which arose in three different cases which may be resolved without becoming future Rent Board Stories. But this is a serious problem. And if you don’t believe it, just rent some of your units for less than the Maximum Allowable Rent and try to increase it later. Then your story can be featured in Rent Board Stories.