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Update to Price Gouging Prohibitions in Disaster Zones

California's 2017 wildfire season – which caused at least 47 deaths, and destroyed approximately 1.4 million acres of land and 11 thousand structures – was unprecedented at the time, both in scope and destruction. Following the 2017 wildfire season, the pricing of consumer goods and services – which is normally best left to the marketplace under ordinary conditions – experienced abnormal market disruptions, both at the state and local-levels. This led to increased complaints of unlawful "price gouging" for goods and services offered in markets affected by wildfires, including rental housing. 

As a result, in January, 2018, the California Committee on Public Safety introduced Assembly Bill (AB) 1919, which amends §396 of the CA Penal Code (California's price gouging statute). 

AB 1919 went into effect on January 1, 2019, and applies to owners/landlords of residential homes, as well as owners of multifamily and hotel properties. Following is a summary of a number of significant restrictions on residential landlords' ability to increase rents following a disaster under the new law.

PRIOR LAW DID NOT COVER NEW RENTAL UNITS

Under prior law, following a declared state of emergency (either at the State or local level), an owner/landlord could not increase an existing tenant’s rent by more than 10% for a period of 30 days following the declared state of emergency. The prior law did not, however, cover new rental units coming on line during or immediately following a declared state of emergency, nor did it address when (i) a declared state of emergency was extended, or (ii) the Governor or another local authority extended the prohibition on price gouging during a declared state of emergency (both of which happened in each of the past two California wildfire seasons).

Following the 2017 wildfires, these "loopholes" resulted in numerous complaints of unlawful price gouging, with owners of residential housing exploiting the marketplace/displaced residents by increasing existing tenants' rents by up to 35% following the expiration of the initial 30-day period, or relocating from their homes and offering the same as rental housing at well-above market rent prices. AB 1919 seeks to close such loopholes.

NEW LAW LIMITS THE INCREASE OF RENT ON NEW AND EXISTING UNITS

Under the new law, following a declared state of emergency, an owner/landlord cannot (i) increase an existing tenant's "rental price" by more than 10% of the then-current rent, or (ii) increase the "rental price" advertised or offered to prospective tenants by more than 10% of the "rental price" advertised or offered to prospective tenants prior to the declared state of emergency, in each case for a period of 30 days following the declared state of emergency or for any period of time that such declaration is extended.

The statutory definition of "Rental Price", which provides guidance on the various caps on rent increases, is as follows:

  1. For housing rented within one year prior to the declaration of emergency, the "Rental Price" is the actual rent paid by the existing or prior tenant.
  2. For housing not rented at the time of the declaration, but rented, or offered for rent, within one year prior to the declaration, the "Rental Price" is the most recent rent offered before the declaration.
  3. For housing rented at the time of the declaration but which (i) becomes vacant during the declaration, and (ii) is subject to any local ordinance/rule that establishes a maximum amount that a landlord may charge a tenant [e.g., rent control], the "Rental Price" is the greater of (A) the actual rent paid by the prior tenant, or (B) 160% of the "Fair Market Rents" (FMRs) established by the U.S. Department of Housing and Urban Development (FMRs for all counties are posted on the HUD website).
  4. For housing not rented and not offered for rent within one year prior to the declaration, the "Rental Price" is 160% of fair market rent per HUD.

Note that the new law allows owners/landlords to increase the cap on rent increases from 10% to 15% under certain circumstances, including if such owners/ landlords incur costs for furnishing previously un-furnished rental units.

Note also that the new law prohibits vendors or suppliers of building materials (i.e., lumber, construction tools, windows, and anything else used in the building or rebuilding of property) from increasing the cost of such materials by more than 10% for a period of 30 days following a declared state of emergency (with certain exceptions for actually-incurred costs).

In addition, the new law prohibits contractors working on residential or commercial projects from increasing prices for any repair or reconstruction services (i.e., any services performed by a licensed contractor for repairs to residential or commercial property of any type that is damaged as a result of a disaster) by more than 10% for a period of 180 days following a declared state of emergency (again, with certain exceptions for actually-incurred costs).

PENALTIES

Failure to comply with §396 of the Penal Code is a misdemeanor offense and can result in various penalties, including fines of up to $10,000 and up to one year's imprisonment, in addition to injunctive relief and civil penalties.

CONCLUSION

Given the recent increase in wildfires throughout the state, commercial landlords and investors/developers of multifamily or hotel properties that are active and/or interested in becoming active in wildfire-prone California markets (e.g., Napa, Sonoma, Butte, Lake, Mendocino, Nevada and Yuba Counties, based off of prior declared states of emergency), should be cognizant of the new limits imposed on rent increases by AB 1919.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IX, Number 59

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About this Author

Jed Bonner Real Estate Attorney
Associate

In his real estate practice, Jed Bonner represents his clients’ best interests from both a legal and business perspective, taking a comprehensive yet efficient approach to his complex transactional work. Primarily, Jed works on the leasing, acquisition/disposition, financing (representing lenders and borrowers) and development of office, retail and mixed-use, multifamily, industrial, and data-center properties throughout the country. In addition, Jed has represented clients in structuring and executing successful business venture vehicles, including in the commercial real estate and...

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