Leasing: Setting Sail for 2025

By: Terry R. Dowdall

AB 2782 (Stone) passed with 42 votes in the Assembly, as reincarnated from failed SB 999 (Umberg), previously as defeated in the Assembly Housing and Community Development Committee.

Background: The reintroduction of a bill that was previously killed is known as a “Jail Break.” The controlling party set a negative precedent by allowing a bill killed in policy committee to be inserted into another bill that bypassed the committee process to be passed on the Floor with a bare minimum of votes. WMA and our allies (CMPA, the California Association of Realtors, and the Security Investment Company) worked this bill tirelessly, and that is a significant large reason why AB2782 the bill passed with a bare majority instead of a supermajority.

A Snapshot of AB 2782: Leases exempted by Civil Code §798.17 can no longer be offered after February 13, 2020. The “§798.17 lease” is valid if entered into before February 13, 2020, even if extended or assigned thereafter; that “798.17 lease” remains exempt until January 1, 2025 (unless the court grants an injunction requested by WMA  to prevent AB2782 from taking effect, as discussed below). If AB2782 is not enjoined, then on January 1, 2025, rent adjustment terms in “§798.17 leases” are nullified while the lease continues (at the option of the park owner). Leases exempted based on the self-contained exemptions in the rent control ordinance (“RCO”) however, continue on unaffected by AB2782.

Park Owners and Leases: AB 2782 nullifies the state-law exemption of “798.17 leases” from an RCO. Again, on the other hand, AB2782 has no effect on long-term leases exempted by self-contained exemptions in the RCO (“local exemption lease”). A local exemption is separate from state law (798.17) requiring cities or counties to exempt “798.17 leases.” And, management may have other legal options to be explored with counsel. Spend 15 minutes with your attorney; it is well worth it.  Counsel may advise that AB 2782 has no effect on local exemptions from rent control. A local exemption is separate from state law requiring cities or counties to exempt “798.17 leases.”

For “798.17 leases“ as of January 1, 2025, counsel may advise charging the last rental rate under the lease and turning to the rent-control ordinance for determining time and amount of increases after January 1, 2025. Counsel may suggest other options as determined by evaluation of rights provided by the RCO. Remain mindful that California is home to more than 500 local governments, 90+ rent control laws, and thousands of mobilehome parks. Each one varies.

No single strategy is necessarily right for everyone. The strategies discussed herein reflect the views of the author; come January 1, if AB 2782 is not enjoined, confusion is likely to reign over the status of long-term leases, where they can be rescinded for failure of consideration (i.e., loss of the “rent control” exemption), and what effect the RCO local ordinances that independently recognizes exempt long-term leases might continue to have in light of AB 2782.  That is why it is vital for the reader to obtain legal counsel as soon as possible, before January 1.

January 1, 2025 is right around the corner. Seek advice early.

WMA Challenges Sunsetting of “798.17 Leases”: WMA recognizes that mutually agreed-upon leases have been very carefully considered, thoroughly negotiated, and backed-up with costly concessions, “gifts of value,” and other long-term consideration. In December, 2022, WMA and the owners of Sandalwood Estates sued California to stop AB2782, and allow “798.17 leases” entered into prior to February 13, 2020 to continue to be exempt. The thrust of the challenge is that to AB2782’s which retroactive elimination of the “rent control” exemption in existing destroys long-term leases across the entire state, unconstitutionally is impairment impairs the obligations of of contracts under the Federal Constitution, the violation of a protected constitutional guarantee. AB 2782 destroys long-term contracts that were legal when entered. AB2782 eviscerates them ex post facto, thus inexplicably destroying the long term stability of mobilehome residents. AB2782 essentially criminalizes conduct which was previously lawful conduct.

The court rejected an early attack attempt by the State to have WMA’s suit dismissed (Superior Court Judge Christopher E. Krueger, presiding). At present, WMA is seeking a preliminary injunction to maintain the status quo: i.e., stop AB2782 from taking effect on January 1, 2025.

Current status:  a decision of the court whether to grant a preliminary injunction against enforcement of AB 2782 is currently pending. In the meantime, What are the options? Permutations? What strategy should management consider? It depends on the type of long-term lease.

A Brief Digression:  There are 2 types of long-term leases:

–  first, there is the long-term lease which is exempt from rent control because mandated by Civil Code §798.17 (“798.17 lease”);

– second, there are long-term leases enjoying self-contained exemptions in the rent control ordinance that—independent of state law—exempts long-term leases (“local exemption lease” with no reliance on the state law exemption).

If granted, the injunction would allow existing “798.17 leases” to remain in place and enforceable until final judgment. Regardless whether the injunction is granted, exempted leases allowed by the local rent control local law (the “local exemption leases”) continue in effect are not affected by AB2782. Local exemption leases also remain enforceable if the injunction is denied. Here’s the distinction: AB2782 wipes out the state exemptions in the “798.17 leases” on January 1, 2025; but AB2782 has no effect on local self-contained exemptions.

“Self-Contained exemption” Leases Are Not Affected :  Many owners erroneously believe that all long-term leases expire January 1, 2025. Wrong. The local self-contained exemption in the RCO is not affected by AB 2782. “Local exemption leases” remain enforceable in accordance with the RCO’s self-contained exemptions.

Many “local exemption leases” became authorized well before 1986 (when Civil Code §798.17 took effect). “Local exemption leases” also exist in rent accords, memoranda of understanding, or local law that excluded regulation of long term tenancies on mutually agreeable terms. While there are over 500 local governments in California, there are less than 100 rent control laws, and each is different. Check carefully to see whether you have a “798.17 lease,” or a “local exemption lease.”

If the Injunction Is Granted: If granted, AB 2782 (and 798.17 rent lease increase nullification expiration set for January 1, 2025) will be enjoined from taking effect by court order. If enjoined, AB 2782 will be held in abeyance until trial a final judgment. (subject to any possible interstitial modification).Trial is set for August 4, 2025. The injunction will otherwise continue until trial, which is tentatively scheduled for latter part of the year. Interstitial modifications may be pursued by either side, including the possibility of motions attacking the injunction, modifying it, canceling it, or for summary judgment seeking immediate and final invalidation of AB 2782. Prior to trial, cross-motions for summary judgment are also possible in an effort to resolve the dispute over AB 2782’s constitutionality on the basis of the parties’ briefs and evidence (i.e., without a trial).

So, members with “798.17 leases” should stay informed for further developments. Members with “local exemption leases” should stay informed of all local developments regarding modifications of rent control ordinances including reduction of heavy taxpayer burden with long-term accords which reduce staffing and cost.

If the Injunction Is Not Granted: If not enjoined, AB 2782 will take effect January 1, 2025 as to “798.17 leases” (absent reconsideration motions, and pursuit of immediate appellate relief in state and federal courts):

– “Local exemption leases” continue in full force and effect, unabated.

–  “798.17 leases” also continue on, but rent increase provisions become subject to the RCO. Such can be modified in 2 respects, in addition to any other changes deemed to be advisable. For example:

(1) For each lessee, prepare and distribute a written memorandum (notice, addendum, supplement, as per your local practice) that all references to Civil Code §798.17 are deemed deleted (because that code section no longer applies to rent increase provisions of the lease), to be kept on file by the tenant and attached to the lease agreement;

(2) By written memorandum, perhaps inserted on monthly invoicing, that the “798.17 lease” will continue in effect, subject to compliance with the RCO.

(3)  Confirm the next scheduled time and amount of rent adjustments to conform to the requirements of the RCO after January 1, 2025.

(4)  Promptly determine whether or not a petition, application or other written demand to the local rent control agency is appropriate for approval of adjustments, including, potentially, adjustments as agreed in previously-approved lease agreements, or to reinstate rights such as bonus payments, deferred increases for constitutionally-guaranteed capital improvement adjustments and investments, or other concessions frustrated by AB2782.

(5) Promptly determine whether management should seek application to establish a base rent determination to make rents reflect based on general market conditions under decisional case law (Vega v. West Hollywood, etc.)  is appropriate. The right to establish a base rent determination  rent under general market conditions may be time sensitive.  Rent control challenges are subject to a relatively short statute of limitations. Don’t sit on your rights.  Owners must protect their interests by proactively understanding time frames for seeking legal or agency relief.

(6) Add a “reservation of rights” to monthly invoicing or other recurring notification while collecting restricted rents control rents where less than the corresponding lease rates. Where the regulated rent control rate is higher than the lease rate, seek individualized legal assistance for options.

Government also often forces confiscation of uncollected, banked/reserved rent increases.  In order to avoid later claims of surprise from recoupment efforts to collect full amounts when the law allows (when AB2782 eventually invalidated), due under a lease (in the event that AB 2782 is ultimately invalidated and nullified), management should state that all rights and remedies to reimbursement of any balance are reserved. That reservation of rights might further include anti-waiver protections to avoid waiver or estoppel by collecting reduced payments under rent control. Consider disclosure of the amount of accruing shortfall as it increases.

Owners are required to comply with an RCO any applicable local rent control during the pendency of AB2782 litigation in the event the injunction is not granted. Based on the likelihood confidence of eventual victory, tenants residents should be reminded that full  “798.17 leases” rates may be subject to full  unabated performance in the future. In that case, if AB 2782 is ultimately struck down, we say that management reserves the right to collect the full accrued shortfall between the rent payable under the long-term lease and the rent paid under local rent control. Likewise, in such case, the exemption in the “798.17 lease” will be restored and become effective again. This means that such leases may be subject to further assignment and extension. Talk to your lawyer.

More complications: The reason we emphasize that legal counseling is necessary for a clear understanding is because the rules are rather arcane. For example, some ordinances specify that leases are exempt only if the lease complies with Civil Code “§798.17,” or, “§798.17 as amended,” or “§798.17(b).” Whether or not such leases are deemed to be a “798.17 lease” or “local exemption lease” cannot be answered here.

Lawyer speak: A city adopting an ordinance may specify that lease exemptions are conditioned on just a sub-part of a larger scheme or statute (§798.17 for example). The incorporated subpart is generally construed to reflect an intent for that text to apply, verbatim, excluding subsequent updates or modifications. On the other hand, the phrase “as amended,” for example,  is construed generally construed to reflect an intention to incorporate subsequent legislative changes to the incorporated text. These legal principles may have dispositive implications for your situation. Again, talk to your lawyer to determine applicability and strategy.

A final point: Once a long-term lease is rescinded, lapses or is abandoned, it cannot likely be revived unless “renewed” with a new agreement. And if AB2782 is nullified, no new “798.17 leases” are allowed after February 13, 2020.  Keep your leases in effect, and modify to comply with rent adjustment provisions of an applicable RCO, until we know the fate of AB2782 and the state-law exemption (if WMA prevails). If given the opportunity, owners may choose to would prefer to maintain the status quo, and extend the existing leasehold if possible, not “renew it” based upon continued exercise of vested rights. A small point, but a very important point. Renewing an agreement starts over, arguably extinguishing any of the previous vested rights in the former lease.

Conclusion:  No new long-term lease agreements are allowed in reliance on any exemption under state law, but preserving the right to exempt long-term leases can still be accomplished with new solutions.  Cities and counties may adopt leasing exemptions. The “memorandum of understanding,” a rent accord, or other mutual understanding is far cheaper for the taxpayer and means a higher quality of life than the strife of adversarial annual battles over rent increases.

The interest in a quiet retirement for seniors deserves more than throwing out the baby with the bath water. Of course, “local exemption leases” continue on in forward-thinking local governments, and may be offered, enforced, assigned and modified by mutual agreement as the interests of the parties dictate.