The cost of housing is rising in many parts of California. Real estate investors view this as good news, of course, because higher property values and higher rent often mean greater returns on investments. The state government is seeking to balance property owners’ and tenants’ interests. It is hard to dispute that rising housing costs often outpace people’s earning capacities. Whether California’s new “rent control” law is the right way to address the problem, however, is likely to remain a contentious issue for some time. The new law caps annual rent increases and establishes additional standards for evictions. Prospective California real estate investors should be aware of how the new law could affect them.
What Is Rent Control?
The term “rent control” refers to laws that limit landlords’ authority to raise the rent and evict tenants in various situations. In California, rent control laws have existed for some time at the city and county levels in Los Angeles, the Bay Area, and the Sacramento area. California’s new law, which will go into effect at the beginning of 2020, is the first such law to apply statewide.
New York City probably has the most well-known rent control law in the country. Television shows set in Manhattan often cite “rent control” to explain characters’ improbably-large apartment. Rent control laws can range from fixed ceilings on rent, with no further increases; to limits on how much a landlord may increase the rent from one time period to another. Most jurisdictions have laws that establish eviction procedures. Rent control laws may add further limitations on landlords’ authority to evict tenants.
Is Rent Control Constitutional?
A residential lease is a contract between two parties: the property owner and the tenant. The property owner offers the use of their property by the tenant as their residence, with all the privacy rights associated with residential property, in exchange for rent payments. Rent control laws restrict property owners’ ability to collect rent in accordance with local market conditions. It is worth asking whether this violates the Fifth Amendment, which states that “private property [may not] be taken for public use, without just compensation.”
The U.S. Supreme Court has not ruled on the constitutionality of rent control laws for decades. It ruled in a 1986 decision that a Berkeley, California rent control ordinance was not preempted by federal antitrust law. In 2012, the court denied certiorari in an appeal by New York City property owners after the Second Circuit affirmed the dismissal of their lawsuit. The plaintiffs had challenged New York City’s rent control law under the Takings Clause, the Due Process Clause, and other constitutional provisions. A new lawsuit, filed in July 2019, makes similar challenges against the latest New York City law. Bona Law has a strong interest in following such lawsuits, as it is known for its litigation against government authorities.
California’s New Rent Control Law
The Governor of California signed AB 1482 into law on October 8, 2019. California real estate investors should note the following two provisions of the bill:
– Once a tenant has occupied a property for twelve months, the landlord may not “terminate the tenancy without just cause,” which may include default in rent payments, other material breaches of the lease, or use of the premises for illegal activity, among other reasons. Reasons that are not based on fault may include the owner’s intent to occupy the premises as their primary residence, or removal of the property from the rental market.
– During any twelve-month period, a landlord may not increase the rent by more than either the greater five percent “plus the percentage change in the cost of living,” or ten percent.