Reading Legislative Intent into Costa-Hawkins: Burien, LLC v. Wiley, Cal. Court of Appeal, 2nd Appellate Dist., 5th Div. 2014

“[T]he court is not prohibited from determining whether the literal meaning of a statute comports with its purpose or whether such a construction of one provision is consistent with other provisions of the statute.”

In Burien, LLC, the Court of Appeals of California, for the Second District, dealt with the Costa-Hawkins exemption from rent control for dwelling units with new certificates of occupancy.

As followers of know, the general rule for periodic (“ongoing”) tenancies in California is that the landlord can increase the rental rate to market rate on (usually) 60 days’ notice. A dozen cities in California provide an exception in the form of rent ordinances. In those cities, “covered units” have rent increase limitations that generally key rent increases to increases in cost of living.

In 1996, California enacted the Costa-Hawkins Rental Housing Act, which established exemptions for certain categories of units that local rent control laws would not inhibit. Specifically, Costa-Hawkins exempts units from rent control that have a certificate of occupancy issued after February 1, 1995, that were already exempted under local rent control when Costa-Hawkins came into effect, or where the dwelling unit is “alienable separate from the title to any other dwelling unit”. (The latter was amended in 2001, to impose further restrictions on condominium units.)

The court in Burien, LLC addressed a novel issue where an apartment building, protected against rent increase limitations under the Los Angeles Rent Stabilization Ordinance, was later converted into condominium, with a new “certificate of occupancy” based on a “change in use”, in 2009

Of course, the apartments already had a certificate of occupancy. The defendant in Burien, LLC had been living in the building since 1981. However, when the landlord purchased the building, converted it into condominiums, and obtained a new certificate of occupancy in 2009, it asserted that the newly issued certificate fell within the Costa-Hawkins exemption for dwelling units with “a certificate of occupancy issued after February 1, 1995”. (Cal. Civ., §1954.52(a)(1).)

The landlord’s argument sought to assert the exemption’s semantics over its substance. It was, of course, technically accurate that, while the apartment in question was previously rent-controlled from 1981 through 2008, as the landlord obtained a new “certificate of occupancy” in 2009, the new certificate was clearly issued after 1995. However, after acknowledging that it was authorized to disregard plain language in favor of harmonizing the exemption with its broader purpose, the court considered that, e.g., the rent ordinances of Los Angeles, Oakland and San Francisco specifically extend the exemption only to new certificates of occupancy, and concluded that it was reasonable to apply the exemption only to the first certificate of occupancy that created new residential units. In other words, the California Legislature meant for the §1954.52(a)(1) exemption to apply to either new construction or repurposed buildings. In either case, the landlord is increasing the supply of residential dwelling units, and she should be rewarded for doing so. But a mere “change” in use – from one kind of residential unit to another – does not achieve the goal of the exemption.

And this legislative intent was reaffirmed by the 2002 Amendment to Costa-Hawkins. Prior to 2002, wily landlords were using the third exemption from rent control in Costa-Hawkins – for separately alienable units – to obtain all the permits for conversion of rent-controlled apartment buildings to condominiums, availing themselves of the “separately alienable” exemption, but never actually alienating – i.e., never actually selling the condominiums to owner-occupiers, as an affordable housing alternative. They achieved the best of both worlds – multi-unit dwellings, occupied entirely by renters, but without rent increase limitations.

The California Legislature closed this “loophole” in a 2002 amendment to Costa-Hawkins, by withholding the exemption from condominiums, unless the condominium unit was sold separately to a “bona fide purchaser for value” or else the subdivider sold every other unit except one, and she lived in that unit for at least a year.

The court in Burien, LLC stressed that the 2002 amendment would have no purpose if a landlord merely had to obtain a pretextual “certificate of occupancy” based on a condo-conversion: if a landlord received a new certificate of occupancy, based on a change in use, she would necessarily meet the exemption under the landlord’s interpretation of §1954.52(a)(1), without either the bona fide purchaser requirement or the one-year-residence requirement of §1954.52(a)(3)(B)(ii).

Costa-Hawkins is not a model of clarity; but the Court of Appeals elucidated the first exemption, by holding that a certificate of occupancy must be the first certificate of occupancy that approves a building for its first residential use.

Burien, LLC V. Wiley (2014) 230 CAL. APP. 4TH 1039