The Costa-Hawkins Rental Housing Act is a California state law that exempts certain kinds of residential rental units from rent control ordinances and allows landlords to reset the rental rate on rent-controlled rental units where they become vacant or where the last rent-controlled tenant no longer permanently resides at the unit or moves, leaving behind subtenants.
In 1995, the California legislature wanted to address the growing discontent of landlords with the imposition of local rent control laws in cities throughout California. At the time, there were “moderate” rent control ordinances, which restricted rent increases on occupied units, and “strict” rent control ordinances, which actually set the rental rate of vacant units on the open market.
Rent control ordinances had long been held to be a valid exercise of a city’s “police power” to regulate the health and safety of their residents. (See, Birkenfeld v. City of Berkeley (1976) 17 Cal. 3d 129.) In 1995, five California cities (Berkeley, Santa Monica, Cotati, East Palo Alto and West Hollywood) had “strict” rent control ordinances (i.e., “vacancy control”). With similar legislation looming for San Francisco, state legislators took action.
State Assembly member Phil Hawkins introduced Assembly Bill 1164 (with State Senate Member Jim Costa as a co-author), which advanced what they saw as a “moderate approach to overturn extreme vacancy control ordinances [that] unduly and unfairly interfere with the free market”. The new bill was seen as a tool to facilitate the purpose of local rent control laws – promoting safe and affordable housing for renters, while also encouraging the development of new rental units. The Costa-Hawkins Rental Housing Act (Cal. Civ., §1954.50, et seq.) prohibited vacancy control and exempted certain kinds of units – e.g., new construction, single units with separately alienable title, like single-family houses and condos – from rent control.
Costa-Hawkins had been largely successful at achieving its goals, but, by 2001, it became clear that it had failed to account for a “loophole”. Because Costa-Hawkins exempts dwelling units “alienable separate[ly] from the title to any other dwelling unit”, owners of apartment buildings were obtaining permits to convert the apartments to condominiums, while never actually completing the process. The buildings assumed the character of condominiums – units exempt from rent control – but were still, in fact, occupied by renters, not owners.
In 2001, the California legislature closed the loophole (see, S.B. 985) by requiring that a subdivider actually sell the condominium units to obtain the state law protection from local rent increase limitations.
Costa-Hawkins is not a model of clarity, and there is spare case law to provide guidance, making for an exciting battleground for landlord-tenant disputes.