[REN #954] COVID-19: New CA Tenant Protection Law Increases Foreclosure Risk for Landlords

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COVID-19: New CA Tenant Protection Law Increases Foreclosure Risk for Landlords, Real Estate News for Investors Podcast Episode #954

Some California landlords say a new tenant protection law increases their risk of foreclosure, although the new law is better than the one it replaces. Governor Gavin Newsom signed AB-3088 on August 31st just hours before previous eviction moratoriums expired. Because it includes an emergency clause, it went into effect right away, protecting tenants for another five months.

Newsom approved the COVID-19 Tenant Relief Act of 2020 after “feverish” negotiations by lawmakers and landlord groups. They hammered out AB-3088 as a compromise bill while the clock ticked down on the deadline. Without a deal, the Sacramento Bee says, as many as four million California tenants would have been at risk of eviction, for unpaid rent. (1) The bill extends the eviction moratorium through January, but it’s no longer a “blanket eviction moratorium,” it requires the payment of some amount of rent, and it sets the bar much higher for tenants who need help.

“Less Burdensome” for Landlords

If you are a landlord, you may think that tenants are getting the better deal, but the California Apartment Association describes AB-3088 as “less burdensome” than the bill it replaces, AB-1436. (2) The CAA says that under the old bill, tenants would have been allowed to skip rent payments without any proof of financial hardship and without fear of eviction, thereby encouraging them to not pay rent. It would have also allowed them to withhold rent until April of next year. The CAA described the old bill as something similar to a government-sanctioned rent strike. 

Passage of AB-3088 came as a great relief, although it’s far from perfect. The association’s CEO, Tom Bannon, says the new bill will limit tenant protection to people who are truly harmed by COVID-19. It also has a shorter time frame for the postponing of rent payments, and it gives landlords the ability to evict tenants who are causing trouble as well as those who choose to “game the system.” 

Minimum Rent Payment for Tenants

Under the compromise bill, tenants must pay at least 25% of their rent for the next five months. As of February 1st, they will owe all their back rent and they must start paying their full rent payments. That includes any rent not paid from March through August, under the previous eviction moratorium. Landlords can sue for back rent in small claims court beginning in March of next year, but they cannot evict tenants on that basis alone. To keep tenants honest, tenants will have to meet new standards of proof that they have been financially impacted by the pandemic.

Courthousenews.com says, “Tenants will have to swear to pandemic-related financial distress under penalty of perjury, and ‘high-income’ renters making at least 130% of a county’s median income will have to submit actual proof they lost their job or income.” (3)

Some Evictions Allowed

The bill also allows the “just cause” eviction of some tenants including those who have the means to pay the rent, but are refusing to do so. Landlords can also evict tenants that cause problems related to the rental property. The CAA’s Debra Carlton told Courthousenews.com, “We’ve had cases… where a tenant threatened to behead a landlord, where tenants were throwing huge parties and inviting tons of other people. There are tenants who are using their units as Airbnb and not paying the landlord.”

Democratic Senator Steven Bradford, who co-authored the bill, says, “It will keep tenants and landlords viable and afloat for the next six months.” That includes five months of tenant protection and another month before legal proceedings can begin. But Republican Senator Andreas Borgeas says, it doesn’t do much to help landlords deal with their own financial obligations. He says, “There’s probably going to be contract, private property, and federal preemption issues. This thing is fraught with problems.” He did vote in favor of the bill but says the rent delays “must” end in January.

 Anti-Foreclosure Protection

The bill does provide some foreclosure protection for landlords. A press release out of the governor’s office says it extends anti-foreclosure protections to small landlords and it provides new accountability and transparency provisions for small landlords who request forbearance.

Property owner, Gustavo Gonzalez, feels that landlords are getting the short end of the stick. He has two multi-family properties in San Jose. Some 20% of the tenants are not paying rent. He told ABC7 News, “What it’s going to do is put a lot of mom and pops in foreclosure or in a very difficult position to pay their bills. Especially if you have a large group of tenants who are not paying at all.” He says, “What they should have done is figure out a way to get more funds to help support the tenants with their payments so we can continue to pay our bills, mortgages, property taxes, but instead they said 25% is the best we can do.” (4)

“Landlords Left Out to Dry”

The executive director of the Apartment Association of Greater Los Angeles, Daniel Yukelson, told The Real Deal, “This law will have devastating effects on small property owners and leave them holding the bag.” He says, “Clearly, landlords were left out to dry.”

The CAA’s Bannon believes it’s the best temporary solution, given the circumstances. He told The Real Deal, “This at least creates a path for cooperation between landlords and tenants affected by Covid.” And there are other battles to fight right now including some ballot measures.

Upcoming Battle Over Prop 21

One is Prop 21. It would replace the Costa-Hawkins Rental Housing Act which protects all single-family homes from rent control. Prop 21 would allow local governments to enact rent control for single-family homes so long as they are more than 15 years old. Property owners with two or fewer properties would be exempted.

This is one of the reasons RealWealth recommends owning rental property in more landlord friendly states like Texas, Ohio, Alabama and Florida. You can get more data on these metro areas at newsforinvestors.com. Under the invest tab, you’ll find a list of cities that offer high cash flow, low taxes, and landlord friendly laws. 

Links:

(1) Sacramento Bee Article

(2) CAA on AB-3088

(3) Court House Room News Article

(4) ABC7 Report

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