AB 2364

Page 1

Date of Hearing: May 8, 2018

ASSEMBLY COMMITTEE ON JUDICIARY

Mark Stone, Chair
AB 2364 (Bloom) – As Amended May 3, 2018

As Proposed to be Amended

SUBJECT: RENTAL CONTROL: WITHDRAW FROM ACCOMMODATION

KEY ISSUES:

1) IN ORDER TO ADDRESS REPORTED ABUSE OF THE ELLIS ACT WITH RESPECT

TO THE PIECEMEAL RETURN TO THE RENTAL MARKET OF DIFFERENT UNITS
IN A SINGLE PROPERTY, SHOULD IT BE ESTABLISHED THAT THERE IS ONLY
ONE WITHDRAWAL DATE FOR THE OVERALL PROPERTY, AND THAT IF ANY
UNIT IN THE BUILDING IS RETURNED TO THE RENTAL MARKET, THEN THE
WHOLE BUILDING IS DEEMED TO BE BACK ON THE MARKET AND THUS
REGULATED BY THE ELLIS ACT?

2) IN ORDER TO STRENGTHEN ENFORCEMENT OF THE ELLIS ACT, SHOULD THE

CAP BE LIFTED ON PUNITIVE DAMAGES THAT A TENANT MAY SEEK FOR
BEING DISPLACED BY AN ILLEGAL ELLIS ACT EVICTION?

SYNOPSIS

The Ellis Act is the 1985 state law that allows landlords to exit the rental market by evicting the
tenants without cause, as long as sufficient notice is given and certain procedures are followed.
Under the Act, a landlord's authority to evict even extends to rent-controlled properties in cities
where the tenants would otherwise be protected by rent control or just-cause ordinances.
Supporters, including the City of West Hollywood and the Western Center on Law and Poverty,
contend that this creates a powerful incentive for owners to leave the rental market only
temporarily in order to evade eviction protections and terminate long-term below-market
tenancies. Statistics show that Ellis Act evictions have sharply increased in just the past few
years, and make a compelling case that the statute is not necessarily being used as intended. In
response to these reports of potential abuse, the bill tries to close an important loophole in the
law by expressly establishing that the date of withdrawal for the accommodations as a whole, for
the purposes of calculating key restrictive time periods, shall be the last date of withdrawal of
any extended tenancy. In addition, the bill clarifies that the Act is not intended to permit an
owner to return to the rental market anything less than all of the accommodations at issue.
Therefore, if the landlord returns any unit in the building back to the rental market, then the bill
acts to deem the entire property to back on the market, thereby obligating the landlord to comply
with all requirements of the Act.

The bill makes several other modest changes to the Ellis Act, including extending the penalty
period for violations of the Act from a 2-year window to a 5-year window, and eliminating the
cap on punitive damages that a tenant can seek for being illegally displaced under the Act.
Proposed amendments are technical and clarifying, including establishing the bill shall be
applied prospectively only, and not interfere with any pending withdrawal filed with a public
entity prior to January 1, 2019, the operative date of the bill. With these amendments, it is
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believed that the California Apartment Association, California Building Industry Association,
California Business Properties Association, California Chamber of Commerce, and Civil Justice
Association of California no longer oppose the bill and will adopt an official "Neutral" position
once all the amendments go into print. At the time of this analysis, it was believed that the
California Association of Realtors and several other regional apartment associations remain
opposed to the bill, even as proposed to be amended. This bill previously passed out of the
Assembly Housing and Community Development Committee by a 5-2 vote.

SUMMARY: Makes a number of revisions and changes to the Ellis Act, the state law that
allows landlords of rent-controlled properties to exit the rental market by evicting the tenants, if
certain procedures are followed. Specifically, this bill:

1) Provides that if the property is offered again for rent within five years (increased from two
years) of the date the property were withdrawn from rent or lease, then certain provisions
govern. Among the applicable provisions changed by this bill are that:

a) The property owner is liable to any tenant who was displaced by that action for actual and
exemplary damages, but the suit must be brought within one year (decreased from three
years) of the date when the withdrawn accommodations are offered again for rent or
lease.

b) Requires the owner to offer to reinstitute the agreement or lease on the same terms and at
the same rent in effect at the time of displacement to that displaced tenant or lessee.

2) Provides that if the property is returned to the rental market within 10 years from the date of
withdrawal, the owner must first offer the returned unit to the tenant displaced by the
withdrawal, if the tenant has advised the owner in writing within 30 days of the displacement
of his or her desire to consider an offer to renew the tenancy and has furnished the owner
with an address to which that offer is to be directed.

3) With respect to the owner's offer in 2), requires the owner to offer to reinstitute the
agreement or lease on the same terms and at the same rent in effect at the time of
displacement to that displaced tenant.

4) Removes the cap on the amount of punitive damages that a displaced tenant may recover
against an owner of accommodations for violations of 2) or 3) above.

5) Clarifies that none of the above provisions relating to enforcement of the Act precludes a
tenant or public entity from pursuing any alternative remedy under the law.

6) Provides that any amended local ordinances, regulations, or rules implementing these
provisions shall be prospective only and shall have no effect on a withdrawal for which the
notice of intent to withdraw the accommodation has been filed with the public entity prior to
January 1, 2019.

7) Clarifies that the owner may elect to extend the tenancy on any other rental unit up to one
year after date of delivering the notice of intent to withdraw to the public entity.
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8) Provides that the date of withdrawal for the accommodations as a whole for the purposes of
calculating the time periods described above shall be the last date of withdrawal of any
extended tenancy.

9) Provides that it was not the Legislature's intent, in enacting the Ellis Act, to permit an owner
to withdraw from rent or lease, or return to the rental market, less than all of the
accommodations withdrawn pursuant to the Act.

EXISTING LAW, the Ellis Act:

1) Prohibits a public entity, by statute, ordinance, or regulation, from compelling an owner of

any residential real property, except for a residential hotel meeting specified requirements, to
continue to offer rental units for rental housing. (Govt. Code Section 7060 et seq. All further
references are to this code unless otherwise stated.)

2) Provides authority for a public entity to regulate the subsequent use of the property and
mitigate any adverse impacts on people who are displaced by the withdrawal of a property
from the rental market. (Section 7060.1.)

3) Authorizes a public entity having a system of rent controls to require the following when the
owner of a rental property subject to rent controls has exercised his or her Ellis Act rights:

a) If the property is returned to the rental market within five years following the filing of the
notice of intent to withdraw or within five years after the property’s withdrawal, the
rental unit must be offered at the lawful rent in effect at the time any notice of intent to
withdraw the accommodations is filed with the public entity, plus annual adjustments
available under the system of control. (Section 7060.2 (a).)

b) If the property is offered for rent within two years from the date the property was
withdrawn from rent or lease, then the following apply:

i) The property owner is liable to any evicted tenant for actual and exemplary damages,
but the suit must be brought within three years of the withdrawal of accommodations
from rent or lease.

ii) The public entity may also sue the property owner for exemplary damages for the
displacement of tenants and lessees; and

iii) The property owner must offer former evicted tenants the right of first refusal to
reoccupy the property pursuant to a reinstituted rental agreement where the tenant has
advised the owner of this entitlement within 30 days of the tenant’s eviction from the
premises when the property was first withdrawn. (Section 7060.2 (b.)

c) If the property is returned to the rental market within 10 years from the date of
withdrawal, the owner must first offer the returned unit to the tenant displaced by the
withdrawal where the tenant has requested the offer within 30 days after the owner had
notified the public entity of an intention to offer the property again for rent. The owner
of the accommodations shall be liable to any tenant or lessee who was displaced by that
action for failure to comply with this requirement, for punitive damages in an amount
which does not exceed the contract rent for six months. (Section 7060.2 (c).)
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d) If the accommodations are demolished, and new accommodations are constructed on the
same property, and offered for rent or lease within five years of the date the
accommodations were withdrawn from rent or lease, the newly constructed
accommodations shall be subject to any system of controls on the price at which they
would be offered on the basis of a fair and reasonable return on the newly constructed
accommodations, notwithstanding any exemption from the system of controls for newly
constructed accommodations. (Section 7060.2 (d).)

4) Provides that in rent-control jurisdictions, the rent control ordinance may require owners to
give notice before withdrawing the building from the market. The owner must provide 120
days’ notice — or one year’s notice in the case of tenants who are disabled or more than 62
years old, provided they have lived in the accommodations for at least one year prior to the
date of delivery to the public entity of the notice of intent to withdraw — before terminating
the tenancy. (Section 7060.4 (b).)

5) States that it is the intent of the Legislature in enacting the Ellis Act to supersede any holding
or portion of any holding in Nash v. City of Santa Monica, 37 Cal.3d 97 to the extent that it
conflicts with this chapter, so as to permit landlords to go out of business. Further clarifies,
however, that the Act is not otherwise intended to, among other things, permit an owner to
withdraw from rent or lease less than all of the accommodations, as defined. (Section
7060.7.)

FISCAL EFFECT: As currently in print this bill is keyed non-fiscal.

COMMENTS: The Ellis Act (Chapter 12.75 of Division 7 of Title 1 of the Government Code,
commencing with Section 7060) is the 1985 state law that allows landlords to exit the rental
market by evicting the tenants without cause, as long as sufficient notice is given and certain
procedures are followed. Under the Act, a landlord's authority to evict even extends to rent-
controlled properties in cities where the tenants would otherwise be protected by rent control or
just-cause ordinances. As a result, the Act is susceptible to abuse by unscrupulous actors who
may see an incentive to "game the system" and use the Act to evict good tenants who would not
otherwise be so easy to remove. As noted by the City of West Hollywood, a chief proponent of
this bill: "The law allows owners to re-enter the residential real estate market and offer the units
for rent at market rates after just 5 years of the property being withdrawn from the rental market.
This creates a powerful incentive for owners to leave the rental market only temporarily in order
to evade eviction protections and terminate long-term below-market tenancies."

In response to reports of potential abuse of the Ellis Act, this bill seeks to make a number of
modest changes to the Ellis Act, including extending the penalty phase for violations of the Act
from a 2-year window to a 5-year window, and eliminating the cap on punitive damages.

Recent data highlights increased rate of Ellis Act evictions. Recent statistics clearly show that
Ellis Act evictions have been on the rise in the past decade. In 2016, a Los Angeles Times
analysis of housing data revealed that 1,137 rent-controlled units in Los Angeles were removed
from the market in 2015—a number that has almost tripled since 2013. During that time, the
researchers found the number of evictions from rent-controlled units has doubled. As the Times
investigation noted, many of these recent evictions were carried out by developers who
purchased the buildings with the intention of demolishing them to construct pricier housing. At
least 51% of the Los Angeles properties removed under the Act in 2013 had been purchased
within the previous year. (Ben Poston and Andrew Khouri. "More rent-controlled buildings are
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being demolished to make way for pricier housing." Los Angeles Times (April 2, 2016).
Available at: http://www.latimes.com/local/california/la- me-apartments-demolished-20160402-
story.html.)

In March 2017, the Anti-Eviction Mapping Project (AEMP), in partnership with Los Angeles’s
Coalition for Economic Survival, released an interactive time-lapse digital map detailing the
accumulation of Ellis Act evictions in Los Angeles from the beginning of 2001 to the end of
2016. Their map, based upon Rent Board data, shows 21,200 evictions across all of Los
Angeles. Their analysis showed that while there were only 102 Ellis Act evictions filed in 2013,
that number has more than tripled with 352 filed in 2016 alone.

Similarly, the AEMP, in partnership with the statewide tenant rights organization Tenants
Together, analyzed San Francisco Ellis Act evictions filed between 2009 and 2013, finding that
also 51 percent of Ellis Act evictions occurred within the first year of property ownership and
that 78 percent transpired within the first five years. In 2013 in San Francisco, 60 percent
occurred within the first year of ownership and 79 within the first five years. Thus, in both Los
Angeles and San Francisco, AEMP concluded that Ellis Act evictions are clearly linked to real
estate speculation.

Background on the Ellis Act. In Nash v. City of Santa Monica (1984) 37 Cal.3d 97, the
California Supreme Court upheld the power of a city, in the context of a land use ordinance, to
require a residential real property owner to obtain a removal permit, under specified criteria,
before the owner could demolish his or her rental property and cause its removal from the
marketplace. SB 505 (Ellis), Chapter 1509, Statutes of 1985, preempted a local government's
authority to compel a rental property owner to stay in the rental housing business by prohibiting
a local government from enacting or implementing any law to compel a residential real property
owner to offer, or continue to offer, the property for lease or rent.

The Act only applies when an owner seeks to remove all the units within a building or all units
on a property with a building containing three or fewer units from the market, and only has real
effect in cities or counties with rent control and just cause evictions. The Act authorizes local
governments to place restrictions on how property owners can utilize the Ellis Act to withdraw a
property from the rental property market. An owner can be required to give tenants 120 days'
notice that the property is being withdrawn from the rental market. Tenants who are over 62 or
disabled must receive one year's notice, provided they have lived in the accommodations for at
least one year.

A number of restrictions apply to situations where owners offer units for rent within certain time
frames (2 years, 5 years, and 10 years) after removing a property from the rental market pursuant
to the Act. For example, if an owner reintroduces a property for rent within five years of having
withdrawn it, he or she is required to re-rent a unit at the rent control amount at the time the unit
was withdrawn (i.e. the same amount as it would have been had the landlord continued to rent
the property).

This bill establishes a single withdrawal date for a given property and eliminates one method
of gaming the system. According to the author, current law indicates there is only one
withdrawal date for the purpose of calculating the amount of allowable rent when an apartment is
subsequently re-offered for rent. However, other parts of the Act governing the lease termination
date seem to allow for multiple withdrawal dates. Unfortunately, there is no clear provision that
specifies that there is only one date that applies if the property is put back into the rental market.
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As a consequence, the author contends, some landlords are taking advantage of the ambiguity in
the law and removing units from the rental market, only to reintroduce them for rent in a
piecemeal fashion in order to avoid the Act’s restrictions and evade rent control laws. According
to proponents, some landlords also apply different withdrawal dates to different units and claim
that returning one unit to the market does not obligate the landlord to re-offer any other units to
former tenants. If unchecked, this allows a landlord to effectively withdraw less than all the
units from the rental market and, in fact, never actually leave the rental market at all, while still
having successfully evicted all the tenants. The author elaborates:

This confusion has led at least one court of appeal to find that a landlord could apply
different withdrawal dates to determine the rental amount when re-renting a unit. This
allowed the landlord to choose a date outside the window of time when the Act’s rent
restrictions apply, despite having returned multiple other units on the property to the
rental market at an earlier time. The landlord never actually left the rental market but
nevertheless was able to evict all the tenants and re-rent all the units at market rates. This
is a gross distortion and subversion of the purpose of the Ellis Act. AB 2364 seeks to
remedy this by creating one clear and concise exit date, the last tenant to leave. In
addition it increases penalties and the time frame for those penalties.

Accordingly, this bill seeks to close the loophole and prevent landlords from using this
piecemeal approach to game the system and try to subvert the Ellis Act. First, the bill expressly
establishes that the date of withdrawal for the accommodations as a whole, for the purposes of
calculating the time periods in Section 7060.2, shall be the last date of withdrawal of any
extended tenancy. (See proposed new paragraph (6) of Section 7060.4 (b).) In addition, the bill
amends Section 7060.7 (d) to clarify that the Act is not intended to permit an owner to return to
the rental market anything less than all of the accommodations at issue. Therefore, if the
landlord returns any unit in the building back to the rental market, then the bill acts to deem the
entire property to back on the market, thereby obligating the landlord to comply with all
requirements of the Act.

This bill extends existing penalty provisions under the Act to cover properties withdrawn and
then later returned to the rental market within a five year period, rather than two years.
Existing law, Section 7060.2 (b), specifies a number of procedural protections and liability
provisions that apply when a landlord for residential purposes re-offers accommodations for rent
or lease within two years of the date the accommodations were previously withdrawn from rent
or lease. In order to strengthen the law and cut down on potential abuses, this bill extends the
penalty/liability period from two years to five years, measured from the date the
accommodations were withdrawn from rent or lease. To balance this, the author has listened to
opponents' concerns and taken an amendment to require that any lawsuit brought by a tenant
seeking damages for being illegally displaced from the property must be brought within one year
(rather than three years) of the date when the withdrawn accommodations are offered on the
market again for rent or lease.

To strengthen enforcement, this bill uncaps punitive damages in civil lawsuits for certain
violations of the Act. Existing law, Section 7060.2 (c), provides that a property owner is liable
to a tenant who has been displaced from an apartment through actions that fail to comply with
the Act, including, among other things, failure to first offer the unit to the tenant displaced by the
withdrawal of accommodations at the same rent in effect at the time of the tenant's displacement.
Under existing law, however, punitive damages are capped at an amount that does not exceed the
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contract rent for six months. According to proponents, because the potential windfall to the
landlord is so great for illegally evicting a rent-controlled tenant and re-renting the same
accommodations later for much higher rent, the cap on punitive damages is an insufficient
deterrent to misconduct. Accordingly, this bill deletes the cap on punitive damages, which are
available to the displaced tenant in addition to exemplary and actual damages suffered.

In addition, proposed technical amendments clarify that nothing in Section 7060.2 precludes a
tenant or public entity from pursuing any alternative remedy available under the law. This
operative language already appears in the section in more than one location, so the proposed
amendment is considered purely technical cleanup. The amendments appear below:

On page 4, delete lines 34 and 35.

On page 5, line 9, delete "Nothing in" and delete lines 10 and 11.

On page 5 line 33, insert "(g) Nothing in this section precludes a tenant or public entity
from pursuing any alternative remedy available under the law."

Final amendments and removal of some opposition. The April 30 amendments to the bill were
intended to finalize a compromise with the California Apartment Association, the California
Chamber of Commerce, and other opponents that would address their concerns and cause them
to remove their opposition. Unfortunately, that set of amendments inadvertently missed a few
things, which were then included within the May 3 amendments. The May 3 amendments
restore existing law to subdivision (a) of Section 7060.2, and no longer extend the period (from
five years to 10 years) that a landlord must wait to re-rent a property at market rate after an Ellis
Act closure.

In addition, the bill clarifies that these provisions shall be applied only prospectively and shall
have no effect on a withdrawal for which the notice of intent to withdraw was filed prior to the
effective date of this bill, should it become law. Unfortunately, the wrong date was stated in the
April 30 amendments and was not corrected in the May 3 amendments. The necessary corrective
amendment is:

On page 5, line 32, delete "July 1, 2018" and insert "January 1, 2019"

With these final amendments, it is believed that the California Apartment Association, California
Building Industry Association, California Business Properties Association, California Chamber
of Commerce, and Civil Justice Association of California no longer oppose the bill and will
adopt an official "Neutral" position once all the amendments go into print.

Many other apartment associations strongly opposed the extension of the period that landlords
must wait before charging market rate once again. Now that the author has amended that
provision out of the bill, it is not entirely clear to what extent some of these apartment
associations remain opposed to the bill, even as proposed to be amended.

ARGUMENTS IN SUPPORT: The bill is supported by Western Center on Law and Poverty
and California Rural Legal Assistance Foundation, who submitted a joint letter stating:

One concern when SB 505 (the Ellis Act) was introduced was that landlords could
potentially abuse the bill to make a mockery of local rent control laws and good cause
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requirements by “going out of the rental business,” only to go back into the business of
rental housing after evicting tenants. As noted in the Senate Judiciary analysis of the
April 18, 1985 version of SB 505, opponents (including our organizations and the City of
Santa Monica) argued that “this bill could permit property owners to take a unit off the
market and evict the tenant under the pretext of going out of business, and then relet the
property as a new rent 6 months later.”

The original version of SB 505 allowed a landlord to say "I'm going out of the business in
Apartment 101, but I'm staying in business in Apartments 103 and 105." To selectively
use the Ellis Act to leave the business apartment-by-apartment flies in the face of the
sponsor’s intent for the bill. The Judiciary Committee analysis also states: “The source of
this bill … asserts that a property owner should have the right to conduct his personal
affairs and cease rental operations without restriction when he no longer wishes to bear
the responsibilities of being a landlord. In many cases … the rental of property involves
not only the very considerable potential of personal liability, but also the continued
expenditure of time and resources in the management of the property.” [Emphasis added.]

These stated concerns – liability, time, resources, and management – make sense when a
property owner truly “goes out of business.” They do not support allowing landlords to
evict some tenants and not others, or to evict tenants and leave the units temporarily
vacant in order to raise the rent when re-rented. As the bill moved, amendments to SB
505 were made to try to address some of the opponents’ concerns. Landlords were
required to close the entire property. Landlords re-entering the rental market after a short
period were subject to penalties.

Unfortunately, over the years, circumstances have changed and have eroded the original
compromises made in SB 505. The very concerns we expressed as SB 505 was being
considered have now come to pass. Thus, contrary to the balancing of interests attempted
in SB 505, local rent stabilization and eviction protection ordinances are subverted. As
you are well aware, the next stop for many families evicted from a rent-stabilized unit is
homelessness.

In closing, we would point out that your bill prevents abuse of the Ellis Act procedures to
undermine local ordinances, while still allowing a property owner to use the Ellis Act as
intended -- to exit the rental market -- in good faith. While we recognize that a landlord
might change his or her mind, the decision to displace a family from their home should
not be made on a whim. The consequences for a landlord who may regret exiting the
rental business are no less drastic than a tenant family’s loss of their home. This bill
addresses the unintended consequences of the Ellis Act while permitting landlords with a
genuine desire to exit the rental business to do so.

ARGUMENTS IN OPPOSITION: In opposition to the April 30 version of the bill, the

California Association of Realtors state: "AB 2364 weakens the Ellis Act, discouraging rental
property owners from returning rental units to the market if economic circumstances improve.
C.A.R. must oppose AB 2364 as it will exacerbate the affordable housing crisis by keeping
much-needed rental units off the market even longer."

The Apartment Association, California Southern Cities, and three affiliated associations, in
opposition to the previous version of the bill, write:
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Rental property owners should not be punished for the State’s housing problems. Rental
property owners did not cause California’s housing shortage or affordability problems.
According to the nonpartisan Legislative Analyst’s Office 2015 Housing Report,
California’s housing problems stem from years of population growth combined with
inflation in housing development costs, high government development impact fees, taxes,
and regulatory burdens, government prioritization of business development over housing
development, and government yielding to NIMBY policies. Rental property owners
should not be punished for the years of government mistakes and inaction. Current Ellis
Act laws already severely limits how when owners may remove from and bring property
onto the rental market. Further restrictions will only serve to keep units off the market.

Previous related legislation. AB 982 (Bloom) of 2017 would have extended the term for
withdrawal of accommodations under the Ellis Act to one year for all tenants and lessees without
regard to age or disability. This bill died in the Assembly Committee on Housing and
Community Development.

AB 423 (Bonta) of 2017 would have exempted residential hotels in the City of Oakland from the
Ellis Act beginning January 1, 2018. This bill failed passage on the Assembly Floor.

SB 1267 (Allen) of 2016 would have required a tenant with a custodial or family relationship
with a pupil enrolled in a primary or secondary school to be give one-year's notice before being
evicted under the Ellis Act. This bill died in the Senate Transportation and Housing Committee.

SB 364 (Leno) of 2015 would have allowed the city and county of San Francisco to prohibit, by
ordinance or ballot measure, a rental housing owner from removing a building from the market
pursuant to the Act unless all owners in the property have held their ownership interest for at
least five years. This bill failed passage in the Senate Transportation and Housing Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

AIDS Healthcare Foundation

California Rural Legal Assistance Foundation
City of West Hollywood
Western Center on Law and Poverty

Opposition (to the previous version of the bill)

California Apartment Association

California Building Industry Association
California Business Properties Association
California Chamber of Commerce
Civil Justice Association of California
Apartment Association of Greater Los Angeles
Apartment Association of Orange County
Apartment Association, California Southern Cities
California Association of Realtors
East Bay Rental Housing Association
North Valley Property Owners Association
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San Diego County Apartment Association

Santa Barbara Rental Property Association

Analysis Prepared by: Anthony Lew / JUD. / (916) 319-2334