Rental Housing Price Gouging in California

May 2, 2019

 

            The rental housing in the United States has seen incredible changes in the past 10-15 years.  Every year, we marvel at how much people are willing to pay for smaller and smaller homes to rent and to buy.  For example, in San Francisco, the average rent is $3,693 a month, with one bedrooms averaging $3,304 a month and 2 bedrooms renting for $4,494 a month, according to Rentjungle.com. 

                           

            Rents are a little bit better in Oakland.  That same Rentjungle.com website has  Oakland rents averaging $2,527 a month.  If you can find them, Oakland renters wanting to live in that City can expect  to pay $1,761 a month for a studio, $2,503-$2,330 a month for a one bedroom and $3,251-$3,191 for a two bedroom.  And those are the everyday rents.  What would happen to housing costs in the event of an emergency or catastrophe?

 

            We have all heard of cases where unscrupulous people try to take advantage of the desperate public during times of emergency by suddenly raising prices on essentials such as food, water and housing, not just in California, but all over the country, after disasters hit.  For example, after a tornado hit the town of Joplin, Missouri in May 22, 2018, a landlord there announced to all of his tenants that their rents was going to be raised.  One tenant was told his rent would be increased from $475 per month to $595 per month, a 25% increase.  Two other renters were told by the same landlord that their rents were being increased from $475 to $550 a month, a 16% increase. 

 

            At the end, a total of 13 renters who received such rent increase notices filed complaints with the State of Missouri Attorney General office.  After investigating, the Attorney General filed suit against the offending landlord for price gouging.  In its suit, the Attorney General asked the court to (1) issue a permanent injunction prohibiting the defendant landlord from engaging in unlawful, unfair and deceptive practices,  (2) to require the defendant to pay full restitution to those consumers who were harmed, in addition to (3) paying a civil penalty of $1,000 per violation of the law, (4) pay the State an amount equal to 10% of the total restitution ordered, as well as to (5) pay all court and investigation costs.  That case is still pending. 

 

            Closer to home, California has earthquakes, droughts, wildfires and floods.  Immediately following the North Bay wildfires of 2017, some landlords raised their rents 80% or more.  Following the worse wildfires in California State history in the summer of 2018,  Governor Jerry Brown issued a state of emergency in the counties of San Diego, Santa Barbara and Siskiyou.  California Attorney General Xavier Becerra immediately followed with a consumer alert reminding California citizens that price gouging during a state of emergency is illegal under Penal Code Section 396. 

 

            The Attorney General's warning went unheeded, and his office soon received numerous complaints of price gouging. The Attorney General's Office responded by filing and serving  complaints upon the offending landlords. 

 

            Following the Santa Rosa Fires, a San Francisco real estate agent and Novato landlord was charged by the California State Attorney General office with three counts of price gouging for spiking the rent of her Novato property in October 2017,just days after the Governor issued an order against exorbitant rent increases in the wake of the wildfires.  Renting out a 6 bedroom, 3 bath house for $5,000, the landlord suddenly hiked the price up to $9,000 a month in October of 2017.  A day later, she dropped the price to $7,000 a month, then a few days after that to $5,800 a month.  Since all three price increases were above the threshold for what is considered price gouging during a state of emergency, the result was three separate misdemeanor charges, with potential penalties of 1 year in jail and/or a $10,000 fine.   The landlord's problems may not end there, as violators of the Ordinance are also subject to civil enforcement actions, which include civil penalties of up to $5,000 per violation, injunctive relief and mandatory restitution.

 

What is a "state of emergency?" 

 

            It is an official declaration suspending normal governmental and constitutional procedures in responses to an earthquake, flood,, fire, riot, storm, drought, infestation, disease or other natural or manmade disaster.  Depending on the size of the disaster, the president, governor, or local city or county governing official can make the declaration.  The declaration remains in effect for 30 days, and may be extended for additional 30 day periods as necessary.  

 

            Once a state of emergency is declared, California Penal Code Section 396 will apply.  In its text, that statute recognizes that after disasters, "some merchants have taken unfair advantage of consumers by greatly increasing prices for essential consumer goods and services.  While the pricing of consumer goods and services is generally best left to the marketplace under ordinary conditions, when a declared state of emergency or local emergency results in abnormal disruptions of the market, the public interest requires that excessive and unjustified increases in the prices of essential consumer goods and services be prohibited...."  

 

            Barring justification, an excessive increase is an increase of more than 10% above the price charged by the person in question for the same goods or services immediately before the declaration of emergency.  Most household goods that people buy for use primarily for personal, family or household purposes are protected, such as food and drink, emergency supplies, medical supplies, construction materials.  Cars and motor homes requiring DMV registration are NOT covered by the price gouging statute   Cal. Penal Code Section 396©.

 

            The statute was amended in 2017 after California wildfires destroyed a significant number of homes and rental units.  Under the 2017 amendments, after a declaration of emergency, a landlord cannot increase the rent more than 10% from the unit's pre-disaster base rental price.  However, this base price can vary depending on the lease and whether the unit was previously vacant.

 

            In addition, a landlord cannot evict tenants during the emergency (unless the eviction was already underway) and then re-rent or offer to rent to new tenants for more than the evicted tenant could be charged.  These rules also apply to spaces in mobile home parks and campgrounds.  (Cal. Penal Code Section 396(j)(11)(A-D).        

 

            Further, AB 1919 proposed by Healdsburg Assemblyman Jim Wood clarifies the existing statute to make it a criminal misdemeanor to raise rents more than 10% after a state of emergency has been declared.   Under that new AB, "rental price" of housing means  (A) for housing  rented one year prior to the time of the proclamation or declaration of emergency, the actual rental price paid by the tenant.  For housing not rented at the time of the declaration or proclamation, but rented, or offered for rent, within one year prior to the proclamation or declaration of emergency, the most recent rental price offered before the proclamation or declaration of emergency.  (B) For housing not rented and not offered for rent within one year prior to the proclamation or declaration of emergency, 160 percent of the fair market rent established by the United States Department of Housing and Urban Development.  This amount can be increased by 5% if the housing is offered for rent fully furnished.    

 

Other Anti-Gouging Ordinances

 

            Can these anti-gouging ordinances affect rents during times of non emergencies?  Can they slow rising rents in California?  Oakland Mayor Libby Schaaf praised the actions, stating, "When there's a fire, you pass an anti-rent gouging ordinance.  The state has a fire.  It's called the housing crisis."   Support for rent cap ordinances is building.

 

            For example, Los Angeles mayor Eric Garcetti wants the state legislature to approve an anti-price gouging rent cap.  State Senator Scott Weiner states his fellow legislators are discussing similar bills as a way of dealing with the 3.5 million housing shortage over the next 10 years. 

 

            Similarly, there has been a movement to pass legislation which would amend already existing rent control laws, and codify regulations where there are no rent control laws to try to control what some deem to be runaway rent increases.   Such legislation aims to set a maximum allowable increase in rents - at a level that targets only the most outrageous hikes and leaves alone reasonable landlords who are not gouging their tenants.  Under the proposals, if an increase exceeds the ceiling, offending landlords can face a "runaway rent tax", which is a penalty tax levied upon te landlord.  All revenue generated by this tax would be used by the local municipality to create more affordable housing.  Tenant advocates claim it would be a win-win for renters, while fair minded landlords would face no averse effects.   

 

            On the other hand, landlord advocates oppose such ordinances, calling them a form of tenant welfare that is paid to only a small group of people. 

 

This article was featured in SFAA's April 2019 Magazine. 

 

© 2019 by Fried & Williams LLP.  All Rights Reserved. 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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