Legal • May 1, 2004
Landlord/Tenant Law 101: Lawful Rents
By David M. Wilson
The first two parts of this series covered Leases (March issue), and Security Deposits (April). As if these prior remarks were not complicated enough, we now must face the real dragon: authorized rents under two entirely dissimilar laws, i.e. that of California (California Civil code Sections 1950 et seq. and that of Berkeley (Rent Stabilization Regulations, Chapters 8, 10 and 11).
Prior to the 1970s, California law generally treated landlord/tenant agreements like other contracts. The lease or rental agreement (which could be oral or written) established initial and subsequent rents, which could be payable on a monthly, quarterly or most any other basis. Commercial and residential leases could include cost of living escalators, or might even give the landlord the right at any time to adjust rents prospectively. Rents could be expressed in terms of cash payments, “in-kind” payments, or barter. In short, the terms of occupancy were mostly left to the free market; the law was primarily concerned with enforcement mechanisms.
In the 1970’s several municipalities adopted rent control ordinances in response to perceived and actual abuses by landlords of tight market conditions. Berkeley’s law was among these; it essentially froze rents at existing levels, with no right in the landlord to increase them even upon vacancy. While there were certain provisions for annual general adjustments (“AGA’s”), as well as for individual adjustments, these became dead letters once the rent board was captured by the pro-tenant majority which continues in power to this day.
The courts and the legislature became the focus of landlord efforts at reform. The most significant of these was the Costa Hawkins legislation in 1995 which pre-empted local rent control laws in many (but not all) areas. This means that a landlord and tenant must familiarize themselves with both state and local law, which within regard to permitted rent levels, establish the following:
-tenancies established prior to 1995 continue to be governed by the old Berkeley law: rents are based on 1980 levels, with permitted increases for AGA’s and a few, rare individual adjustments for capital improvements, historically low rents and the like.
-tenancies established between 1996 and 1999 were allowed rent increases in accord with percentage formulas dictated by the legislature; the formulas as interpreted in Berkeley are treacherous and if not applied correctly may result in litigation before the Rent Board.
-tenancies established in or after 1999 are subject to vacancy decontrol, which means that the “initial rent” may be established by the owner. This “initial rent” must be registered with the Rent Board and becomes the base rent for so long as any one of the original tenants remains in residence. This particular provision is also fraught with peril, as when a landlord accepts rent from someone who is not an original tenant, or where the lease permits subletting, or where the original tenant invites a roommate to share space. The “roommate” conundrum is now the subject of proposals that may appear on the Berkeley ballot in November unless they are pre-empted by state legislation proposed by BPOA and other similar owner groups.
Both Berkeley and California have exemptions from rent control for new construction (in Berkeley the certificate of occupancy must have issued after 1980, in California the cutoff is 1995). Both laws also exempt single family residences which are defined units which are “separately alienable” from other units. This would include homes, condos and TICs (note that this exemption is limited to the amount of rent charged and that other requirements of the ordinance still apply when a single family home is occupied by someone other than the owner). There are also special rules in Berkeley regarding units which, though built prior to 1980, did not come on to the market until after the cutoff.
Once the initial rent for a covered unit is established (by being registered with the Rent Board), and for so long as the tenancy continues, the rent is fixed, an may be increased only as the result of the AGA or individual adjustment process. Under the BPOA settlement now set for the November ballot, the AGA process will be streamlined, with automatic annual increases in an amount equal to 65% of the increasein the cost of living index. Individual adjustments will be very problematic, with the Board being very resistant to changes even where capital improvements have been substantial, or mortgage rates increase (as is now anticipated).
The state law is still relatively new and may leave the courts room to pre-empt some of the more onerous provisions of the Berkeley. In today’s soft market, many housing providers have negotiated leases with low rent (or even no rent) in the initial month, or calendar quarter, but with automatic upward adjustments thereafter. The Rent Board in such situations calculates the average rent paid over the initial period of the lease in order to determine the base rent. This rule would seem to close the door to COL increases (even consensual ones) upon renewal of the lease term, but so far as we know the courts have not been faced with that one yet.
There is also the question of “non-rent” charges for things like parking, storage, furniture and the like. Even Berkeley recognizes an exemption for separate agreements, separately documented, for these kinds of extras, so long as they are not required as a condition to the basic tenancy. Utilities are not exempt from rent control unless they are separately metered; even if separately metered, utility charges may be passed through but may not be marked up by the landlord.
When a tenancy ends the landlord is generally free to renegotiate a new “initial rent”. However the Rent Board has done its best to trim this freedom, and has support in California law, when the prior tenancy was terminated for a so-called “owner move-in”, or where the tenant moves out because the lease term has expired and the owner has attempted unilaterally to change the terms of the lease upon renewal. Nor may an owner claim the benefits of vacancy decontrol when the building “contains serious health, safety, fire or building code violations”. Given the age of many Berkeley buildings, the language regarding code violations is troubling.
There are numerous unintended consequences of the Berkeley rent control regime, when it is applied in conjunction with that of California. One is that landlords will often seek out short term tenancies and will often avoid doing business with steady, family oriented persons who are likely to stay in the community. Another is the increasing gap between older tenancies which continue to enjoy the benefits of rents that were fixed prior to the Costa Hawkins legislation, and newer tenancies which more closely reflect the market. Yet another consequence is that Berkeley landlords are discouraged from passing on the benefits of a soft rental market to new tenants for fear of being locked into abnormally low rents once inflation returns, as it most certainly will.
On a larger plane, there is the fact that the majority of Berkeley’s voting population
is effectively insulated (by the operations of rent control) from the property taxes which are the main source of finding for the City. In short, they enjoy the benefits of costly City programs, but pay only a fraction of the costs. This is turn distorts the voting behavior of both tenants and home owners, and contributes mightily to the divisions in the body politic.
As always, readers are reminded that the above remarks are simplified for easy understanding, and that they are intended only to flag possible issues for your consideration and further investigation either by a closer reading of statues and regulations or by consulting with third party experts.