THE BOARD’S VACANCY DECONTROL TRAPS

It has been nearly ten years since the California State legislature gave residential rental property owners the right to make new contracts with new tenants when they have a vacancy. Although both the State and Federal constitutions guarantee individuals the right to make contracts and prohibit the government from “impairing obligations” of contracts, that right has been so disfavored by the courts since Herbert Hoover lost the election that the right to make a contract only exists if and when the government creates it.

In 1995, the California State legislature (which was controlled by for a short period of time by the Republicans) gave California residential rental property owners the right to exercise vacancy decontrol by enacting the Costa-Hawkins Rental Housing Act which is found at California Civil Code Section 1954.53. The relevant part of that Law states: “(a) Notwithstanding any other provision of law, an owner of residential real property may establish the initial rental rate for a dwelling or unit. . ..”

I emphasized the word “may” above because the law indicates that you have a choice when you get a vacancy. You “may” chose to establish an “initial rental rate” or you may not choose to do so. It is a “pro choice” law, but not a type that the liberals favor. The Rent Control Board wants to “control” all elements of rental housing as much as they can. And so the Board and the City Council proposed an amendment to the Rent Control Law on November 2002. In that amendment, the following sentences were added to the end of Section 1804 (b):

“. . . 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.”

Notice how the local law defines the State law term “initial rental rate” in a manner that requires that the first rent “actually paid” is the new “initial rental rate” whether you choose that result or not. This is not a problem most of the time because owners usually rent to new tenants and charge a higher rate. But this is not always true. Here are a few examples, when you might decide NOT to set a new rental rate.

For example, you might rent one of your units a friend or family member and decide not to charge the full rent the market might permit you to charge. Or, you might have a rental unit become vacant at a time when your building (or the nearby area) is subject to noisy construction activity. Or, the vacant apartment may be temporarily undesirable because noisy tenants live upstairs from the vacant unit and have loud parties late at night. Or you might want to rent to an on-site manager who pays rent and renders services in addition to the rent.

Consider the following fact pattern. You hire an on-site manager who pays $800 rent and renders services worth $400 per month. Then the manager decides that he/she does not want to perform services any more. You cannot make him perform services because the 13th Amendment of the U.S. Constitution, which outlawed slavery, prohibits “involuntary servitude” (except for landlords who must remain in the rental housing business unless they pay the City and tenants thousands of dollars to go out of business under the “Ellis Act”). In that event, what is the lawful rent?

The answer to that question depends on what provision of the Rent Control Law is applied. As explained above, the amended Rent Control Law at Section 1804 (b) says the rent is $800 because that is the rent the “tenant” actually paid. But Section 1801 (f) defines rent as follows:

“Rent. All periodic payments and all nonmonetary consideration including but not limited to, the fair market value of goods or services rendered to or for the benefit of the landlord under an agreement concerning the use or occupancy of a rental unit and premises including all payment and consideration demanded or paid for parking, pets, furniture, subletting and security deposits for damages and cleaning.”

The situation would be confusing enough, but the Rent Board also adopts general rent adjustment Regulations each year which do not permit owners to take general rent adjustments for one year after the initial rental rate is set. This does not usually cause problems, but consider the following fact pattern.

You rent a unit for $1,600 in January 2005. The Board’s Regulations do not permit you to implement the September 2005 general rent adjustment. The tenant moves out on January 2006 and the rent is still $1,600. You decide NOT to set an “initial rental rate” and rent the unit to a new tenant for $1,600.

What happens to the September 2006 general rent adjustment? Answer: you lose it because you put a new tenant in the unit who first paid $1,600. Therefore, if you do not increase the rent between the tenancies, you lose TWO general rent adjustments (2005 and 2006.)
These Regulations create a trap for the unwary because many apartment owners believe that they “may” establish a new rental rate under the Costa Hawkins State law but do not believe that they “must” do that every time they have a new tenancy. This problem does not usually arise immediately. It arises as an “excess rent” case or when they attempt to evict the tenant for non-payment of rent. Then the tenant attorney argues that the tenant cannot be evicted because you did not properly register the new initial rent level OR because you gave an unlawful rent adjustment in September 2006 and have collected “excess rent.”

Now, add to the degree of confusion and difficulty: consider a situation where an owner rented a three bedroom unit to three “roommates” back in January 2001. It is now July 2008 and one of the original roommates is still there and has no intention of leaving. The other two “roommates” are being replaced on a regular basis and they are benefiting from the rent the first “roommate” paid in January 2001 AND they are not supposed to pay any rent increases during the first year of their tenancy. What happens then? I don’t know the answer to that last question, but the fact situation described above is a “work in progress” and I do not know for certain how it is going to turn out. If you have a similar situation, let me know about it. Others may want to support you in getting the problem resolved.

Bad things happen when local Rent Control Board’s attempt to define and apply State laws that are supposed to limit their power. And if you don’t believe it, compare the Costa-Hawkins Act to Rent Control Law Sections 1804 (b) and Section 1801 (f). Or keep reading this column.