California seeks to bind landlords – Update

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rent-controlled properties ellis act
Photo: Felix Lipov

A new law working its way through the California legislature would make it more difficult for owners of rent-controlled properties in the state to remove those properties from the rental market.

***Update***

The bill’s sponsor, Alex Lee (D) San Jose, declined to bring it to the Assembly floor for a vote by the January 31 deadline. This means that the measure will not advance in the 2022 session of the legislature. It may be reintroduced next year, giving the bill’s sponsors time to gather support. Multi-year campaigns to pass legislation are not uncommon in California. For example, SB-10 was presented several times before it was passed.

Getting out

In 1986, the Ellis Act was passed by the California legislature to allow landlords to withdraw rent-controlled properties from the rental market if they wish to do so. Prior to this act, certain cities in the state had passed ordinances requiring landlords to continue offering their rent-controlled properties for rent regardless of their desire to retire from the business.

A typical user of the Ellis Act would be a landlord who wants to demolish his building in order to construct a different commercial property, who wants to convert the building to condominiums for sale or who wants to change the building into a hotel.

The Ellis Act creates a process that the property owner must follow before he can withdraw his property from the rental market:

The Act requires that the landlord evict all of the residents of the building he is withdrawing from the rental market.

The landlord must provide 120 days notice to his residents of his intent to withdraw the property from the rental market. If any resident is over 62 or disabled, then one year’s notice is required for those residents.

The Act allows local ordinances to require that the landlord pay relocation assistance to displaced residents.

The Ellis Act has a number of provisions that make it painful for landlords to change their minds and return the building to the rental market:

Units that were vacant at the time when the notice of intent to withdraw was issued cannot be rented for two years.

Residents who were displaced by the withdrawal of the building must be offered their units back if the return to the rental market is made within 10 years of the withdrawal.

If the return to the rental market is made within 5 years of the withdrawal, then the units must be offered to the displaced residents at the original rent.

Only after holding the building off the rental market for 10 years, can the landlord rent its units to anyone he chooses at market rates.

Tenants’ rights groups have long opposed the Ellis Act and have sought to have it replaced. An effort to do this was made in 2014, but the proposed bill failed to pass.

Enter AB 854

AB 854 was introduced by Assembly member Alex Lee (D) San Jose. He has stated that the intent of bill is to deter “(p)roperty speculators (who) have abused the Ellis Act to evict people and flip units for profit.” It has two major provisions making it more difficult to remove rent-controlled units from the rental market:

The first provision is that all owners of the property must have held their interest in it for 5 continuous years before issuing the notice of withdrawal of the building from the rental market.

The second provision is that the owner of a property that was withdrawn from the rental market may not withdraw another rent-controlled property from the rental market for a period of 10 years after the notice to withdraw the first property was issued. This provision applies regardless of whether the owner owned the second property at the time that the first property was withdrawn.

The bill also contains a provision that all owners of the property which is being withdrawn from the rental market shall have their names released to the public.

Moving on

AB 854 was introduced in February 2021 and is moving through the legislative process in the State Assembly. It has been read twice on the Assembly floor and has been passed out of both the Assembly Housing and Community Development Committee and the Assembly Appropriations Committee. At this point, the California State Senate has taken no action on the bill.

It is impossible to know if AB 854 will become law. However, investors in rent-controlled property in California would be well advised to pay attention to its progress through the legislature.

The measure is being opposed by the California Apartment Association.