Setting Rents in California’s New State of Emergency

February 19, 2019

 

 

On August 1, 2018, Jerry Brown declared that what was once “fire season” is now the new normal in California. The increasing frequency of wildfires in populated regions of the state has caused the governor to issue 10 declarations of emergency due to fire

 

in 2017 and 12 declarations of emergency due to fire in 2018. These declarations not only empower emergency response to bring relief to those affected, and raise awareness of fire safety and climate change, but also have statewide effects under California Penal Code § 396, the state’s anti-price gouging law.

 

Penal Code § 396 states that after a declaration of emergency, by the Governor, President of the United States, or other authorized official or body, the prices for many goods and services, including rental housing rented for a year or less, cannot rise more than 10% over the price that was charged immediately prior to the emergency. This limitation applies throughout California, not merely in the regions or counties where the fires or other disasters are located.

 

By default, § 396 limits price increases for 30 days following the initial declaration of emergency. However, a declaration of emergency may specifically state that § 396 will have a longer effect. For example, on December 4, 2017, Governor Brown’s declaration of emergency for the Thomas Fire in Ventura County provided that § 396 would last six months, until June 4, 2018. This extension was not limited to Ventura County and was interpreted to be in effect statewide.

 

Emergency declarations may also be issued in succession. Because of each declaration’s statewide effect, the result is to effectively extend the overall state of emergency beyond 30 days. As another example, a series of wildfires between July 6, 2018 and August 9, 2018 in various counties caused the general state of emergency to last nearly 90 days, until September 7, 2018.

 

In addition to the officially declared state of emergency, the Governor also has the power to issue executive orders to modify the proclamations afterward. The Governor used executive orders four times in 2018 to extend § 396 for months at a time. However, unlike the declarations of emergency, the executive orders (so far) have limited the extension of § 396 only to the specific counties stated in the order. This makes differentiating between declarations of emergency and executive orders very important.

 

Some tenant advocates have been citing the Governor’s executive orders as evidence that a statewide moratorium on rent increases remains in effect. This appears to be a dramatic overstatement of the effects of the Governor’s orders. First, the executive orders use specific rather than general language, identifying particular counties where § 396 remains in effect. The implication of naming specific counties expresses the intention to exclude all other counties – expressio unius est exclusio alterius. If the executive order was intended to have statewide effect, the language would have matched the original proclamation.

 

If each executive order had a statewide effect, there would be no need for successive executive orders for multiple counties. For example, Executive Orders B-57-18 and B-59-18 extended the price gouging limits on certain counties to November 8, 2019 and May 31, 2019, respectively. If B-57-18 capped rent increases statewide until November 8, 2019 statewide, there would be no need for B-59-18 (issued later) extending § 396 in different counties for a shorter duration – the extension until May 31, 2019 would be entirely redundant, with no effect. Therefore, even the Governor himself clearly conceived each Executive Order as being confined to specified counties.

 

Violation of Penal Code § 396 is a misdemeanor punishable by imprisonment in county jail for a period not exceeding one year, or by a fine of not more than ten thousand dollars ($10,000), or by both that fine and imprisonment. It is also considered a form of unfair business practices, with separate liability under § 17200 of the Business and Professions Code. Scrupulous landlords who wish to minimize liability and exposure should carefully scrutinize each declaration of emergency and calendar the anticipated date when the state of emergency will lapse. Declarations of emergency and the governor’s executive orders are available online from the governor’s website. Unfortunately, because of proliferating declarations, determining precisely when § 396 is and is not active is not always easy.

 

For example, below is a timeline illustrating the declarations of emergency issued in 2018:

 

Because declarations of emergency had already been issued in December 2017, California was already in a state of emergency all the way through June 2018. There was a brief window of nearly one month until the next declared emergency on July 6, 2018, which rolled through several successive declarations until September 7, 2018, and then a longer window until the Camp fire in November 9, 2018. Thus, California landlords were subject to Penal Code § 396 for approximately nine of the twelve months of 2018 and was in effect somewhere in the State over the entire year via extensions by executive order.

 

Identifying when California is in an emergency under Penal Code § 396 is one thing – determining the “price” of rental housing under § 396 is another. Previously, § 396 did not distinguish between rental housing, essential survival goods, and building material, but effective in 2019, § 396 was amended to clearly explain how the law should be applied to rental housing so that more landlords would feel confident adding units to the market without also being accused of price gouging.

 

The price calculations break down like this:

*If the units were previously rented unfurnished, the “price” may be 5% higher if rented furnished.

 

 

Penal Code § 396 defines price gouging as an increase in price greater than 10% during an emergency. Thus, according to § 396, a 2 bedroom unit in Alameda County previously rented for $2,000 in 2013 and vacated in 2017 could not be rented for more than $3,711.84 following an emergency in 2019 (10% more than 160% of $2,109, FMV for USHUD 2019.) If the same unit was vacated in 2018, the rent could not be more than $2,200 (10% of the rent paid by the last tenant.) If the same unit was rented prior to the emergency for $3,500, and then vacated, it could not be rented more than $3,850 (110% of the prior tenant, and greater than FMV for USHUD 2019.)

 

Although the numbers may vary with the United States Department of Housing and Urban Development’s fair market index, in general it is in the landlord’s best interest to keep their properties at or close to market rate, since a recently vacated unit will be locked into the previous tenant’s rental rate for a year in the event of an emergency.

 

The Anti-Price Gouging Law places a lot of responsibility on landlords to be aware not only of local events, but also statewide disasters. Any landlord considering a rent increase over 10% should confirm that there have been no emergency declarations at least in the past 30 days by visiting the governor’s press releases (https://www.gov.ca.gov/2019/). Government Code § 8588.8 now also requires the Governor’s Office of Emergency Services (https://www.caloes.ca.gov/) to publish information regarding the limitations on rent increases on rental housing upon the declaration of an emergency. At the time of this article, no emergency had yet been proclaimed in 2019, and so it is still unknown precisely what information will be provided to landlords by the government about compliance with Penal Code § 396.

 

If an emergency has been declared, especially in a county where you own property, consult with an attorney before terminating any tenancy, and to confirm when and if you can raise your rents to market rate without incurring liability under Penal Code § 396.

 

© 2019 Fried & Williams LLP.  The information contained in this article is general in nature. For advice on any particular matter, please consult with our attorneys because the facts of your situation may be unique and the law changes from time to time.

 

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