Price Gouging After Natural Disasters: Limitations on California Post-Disaster Price Increases for Residential Landlords

Alejandra Mendez, Esq. and Jamie Sternberg, Esq.

 

Updated February 2019

 

If a state of emergency is declared, and if the state of emergency results from an earthquake, flood, fire, riot, storm, drought, plant or animal infestation or disease, or other natural or manmade disaster, California Penal Code §396 generally prohibits price gouging (i.e. generally price increases of more than 10%). It applies to rental housing and prices for consumer food items or goods, goods or services used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building materials, transportation, freight, and storage services, or gasoline or other motor fuels. The price gouging restrictions generally apply for 30 days after the state of emergency is declared, but may be extended by the person or entity declaring the state of emergency. This law affects both rent increases and vendor charges to landlords after a natural disaster.

In September 2018, AB 1919 amended California Penal Code §396, making changes specific to residential landlords. California Penal Code §396 (e) and (h) specifically prohibit residential landlords from increasing rental prices for rental housing (including space in a mobilehome park or campground) with an initial term of a year or less, beyond specified amounts.

The prohibition applies to amounts actually charged, advertised or offered to tenants. It applies to existing tenants, new tenants and prospective tenants.

Landlords may not defend against price gouging allegations by claiming that the rental price increase was based on:

  • the length of the rental term;
  • the inclusion of additional goods or services (other than a 5% increase if the rental housing was previously rented or offered for rent unfurnished, and is now being offered for rent fully furnished); or
  • the fact that the rent was offered by, or paid by, an insurance company or another third party, on behalf of the tenant.

It is unlawful for a landlord to evict a tenant while a state of emergency is in effect, to rent or offer to rent to another person at a rental price greater than the evicted tenant could be charged. It is not unlawful to continue an eviction process that was lawfully started before the state of emergency was declared, and it does not prohibit a landlord from evicting a tenant for any lawful reason.

 EXCEPTIONS

 There are exceptions to the 10% cap if the landlord can prove that the increase:

  • “is directly attributable to additional costs for repairs or additions beyond normal maintenance that were amortized over the rental term that cause the rent to be increased greater than 10 percent”; or
  • the increase was contractually agreed to by the tenant before the state of emergency was declared.

WHAT BASELINE RENT IS USED TO CALCULATE THE 10% CAP?

AB 1919 added Penal Code §396(j)(11) to clarify how the rental cap would be calculated.

  • For existing tenants: the actual rent paid by the tenant at the time the state of emergency was declared;
  • When a unit is vacant because previous tenant was evicted: Amount that could be charged to old tenant
  • If the rental housing was not rented at the time the state of emergency was declared, but was rented or offered for rent during the one year period before the state of emergency was declared, the baseline rent is the most recent rental price offered before the state of emergency was declared;
  • If the rental housing was not rented and was not offered for rent within one year before the state of emergency was declared, rent can be set at 160% of the fair market rent established by HUD.
  • If the rental housing becomes vacant while the state of emergency is in effect, and if a local governmental entity has an ordinance, rule, regulation or initiative measure that establishes a maximum rent, then the landlord may charge the greater of (1) 160% of the fair market rent established by HUD, or (2) the rent paid by the previous tenant.

The amounts above can be increased by 5% if the rental housing was previously rented or offered for rent unfurnished, and is now being offered for rent fully furnished.  This amount cannot be increased for any other good or service, including (but not limited to) gardening or utilities currently or formerly provided in connection with the rental.

DAILY RENTALS

Housing advertised, offered, or charged at a daily rental rate at the time a state of emergency is declared, and if the landlord continues to advertise, offer or charge a daily rental rate after the state of emergency is declared will be limited to:

  • The actual rent previously paid by the tenant, if the housing was occupied by a tenant at the time the state of emergency was declared;
  • The most recent rental price offered before the state of emergency, if the housing was offered for rent within a year before the state of emergency, but was vacant at the time the state of emergency was declared.

Housing advertised, offered, or charged at a daily rental rate at the time a state of emergency is declared, and if the landlord chooses to then advertise, offer or charge on a periodic lease agreement after the state of emergency, will be limited to 160% (+10%) of the fair market rent established by HUD.

The 5% increase for previously unfurnished units, now offered furnished, applies to the daily rental units.

 MOBILEHOME SPACE RENT

Mobilehome space rent increases are limited after a state of emergency is declared.

  • For existing tenants protected by rent control, the amount authorized by any local rent control ordinance;
  • For new tenants in a space protected by rent control, the amount of rent last charged for a space in the same mobilehome park +10%;
  • For new tenants in a space not protected by rent control, the amount of rent last charged for the space +10%.

SUMMARY

The chart below summarizes the most relevant portions of the price gouging law for most residential landlords:

Type of Tenancy Increase Allowed
Existing Tenant Remains in Possession Rent at the time the state of emergency was declared + 10%*

 

Existing Tenant Vacates New tenant @ old tenant’s rate at the time the state of emergency was declared + 10%*
Existing Tenant Evicted New tenant can’t be charged more than amount that could be charged to old tenant + 10%*
No Tenant, and unit advertised, offered or rented in previous year Price offered at the time the state of emergency was declared + 10%*
No Tenant, and not advertised, offered or rented in previous year 160% of HUD FMV + 10%*

 

Furnished (when previously unfurnished) +5% (plus increase allowed above)
Mobilehome Space Rent
Current tenants with rent control Amount set out by rent control
New tenants with rent control Amount of rent charged for a space in the mobilehome park at the time the state of emergency was declared +10%
New tenants without rent control Amount of rent last charged for that space before the state of emergency was declared +10%
Furnished (when previously unfurnished) +5% (plus increase allowed above)

 

*Additional rules apply for units advertised, offered or rented at a daily rate; units previously provided unfurnished and will now be offered furnished; units which become vacant after a state of emergency is declared, and are subject to a local ordinance, rule, regulation or initiative measure.

AB 1919 also added Government Code §8588.8 directing the Office of Emergency Services to create a website with information about Penal Code § 396 of the Penal Code, including information for property owners about the effect of states of emergency on rental prices.

Landlords who use a revenue management system that automatically adjust rents (such as YieldStar or Rainmaker LRO) should monitor it closely, or not utilize that feature, after a state of emergency is declared, to avoid unintentionally violating California Penal Code §396.

Local laws may provide additional protections against price gouging.

Additional Resources:

  • A State of California Department of Justice FAQ regarding price gouging is available at https://oag.ca.gov/consumers/pricegougingduringdisasters. Note that questions on the FAQ indicate that the price gouging restrictions may apply anywhere in the state where there is increased demand as a result of the declared emergency, even outside of the city of county where the emergency or disaster occurred.
  • California Attorney General often issues press releases regarding new states of emergency and price gouging. New press releases can be searched at https://oag.ca.gov/media/news.
  • KTS maintains a spreadsheet of the states of emergency, applicable dates, expiration dates, extension dates and websites with information about those states of emergency. It is available for $250. To request the spreadsheet, contact Jamie Sternberg at (619)744-0863 or jamie.sternberg@kts-law.com.
  • KTS offers a Price Gouging Summary Sheet with many frequently asked questions and it is available for $100. To request the summary sheet, contact Jamie Sternberg at (619)744-0863 or  jamie.sternberg@kts-law.com.
  • A copy of current California Penal Code §396 is in the downloadable pdf. It shows the changes made by AB 1919. A copy of Government Code §8588.8 also in the pdf version.

Kimball, Tirey & St. John LLP is a full service real estate law firm representing residential and commercial property owners and managers. This article is for general information purposes only. Laws may have changed since this article was published. Before acting, be sure to receive legal advice from our office. If you have questions, please contact your local KTS office. For contact information, please visit our website: www.kts-law.com. For past Legal Alerts, Questions & Answers, and Legal Articles, please consult the resource section of our website.

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