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 (including where they move and leave 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.
In February of 1995, saw two housing bills that would eventually become the Costa-Hawkins Rental Housing Act. State Assembly member Phil Hawkins introduced AB 1164. The assembly bill initially aimed to streamline state housing law and delete obsolete statutes. Meanwhile, State Senator Jim Costa introduced SB 1257, a senate bill that contained the nascent provisions of what would later become the Act. (Specifically, it would allow landlords to establish the initial rental rate for new tenancies, and the initial and all subsequent rental rates for tenancies in new construction and single family homes/condos.)
Eventually, Assembly Bill 1164 was amended to include much of the language of SB 1257, and along with co-author Jim Costa, became known as the Costa-Hawkins Rental Housing Act. (As enacted, Costa-Hawkins originally allowed vacancy decontrol against subsequent occupants only where the lease prohibited subletting. Not all leases had such provisions, so Costa-Hawkins was amended the following year, via AB 3244 to acknowledge the rent-control rights that subtenants may have already acquired by 1996, but otherwise eliminating the requirement of a prohibition against subletting.
Costa-Hawkins advanced what the legislature 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.