BILL ANALYSIS Ó
SB 1191
Page 1
Date of Hearing: July 3, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 1191 (Simitian) - As Amended: May 15, 2012
As Proposed to be Amended
SENATE VOTE : 23-13
SUBJECT : RESIDENTIAL TENANCIES: NOTICE OF DEFAULT
KEY ISSUE : SHOULD POTENTIAL TENANTS OF SINGLE-FAMILY AND
SMALLER MULTI-FAMILY HOUSING BE INFORMED PRIOR TO ENTERING A
LEASE WHEN A NOTICE OF MORTGAGE DEFAULT HAS BEEN ISSUED AGAINST
THE PROPERTY?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
This bill would require certain landlords (offering property
with one to four units) who have received a notice of default to
disclose that notice to any prospective tenant prior to entering
into a lease agreement for the property. A violation would
allow the tenant to void the lease or be punishable by a minimum
financial penalty of two months' rent. Supporters argue that
the bill helps ensure that Californians make rental decisions
with full and accurate information about the property that may
become their home. Because it is not legally required to inform
an applicant that the rental unit they are considering is in
foreclosure, supporters argue, tenants often sign leases they
would not otherwise enter into only to find out that the
property will be up for auction, although the new owner is
legally obligated to honor the lease or provide at least 90
days' written notice before eviction. Supporters include the
California Apartment Association, which argues that, unlike
apartments, purchasers of foreclosed single-family homes often
terminate any existing tenancies. Opponents contend that the
measure unfairly targets owners of smaller properties and is
unduly punitive.
Proposed amendments narrow and clarify the measure, but there
remain outstanding issues to be resolved. First, there is a
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question whether owner-occupied properties should be excluded
from this mandate so as to avoid inappropriately discouraging
rental arrangements designed to allow the homeowner to stay in
their homes, especially given the difficulty many homeowners
have encountered when they seek loan modifications from their
banks and servicers. Secondly, there is a question whether a
monetary penalty should be imposed if the tenancy has not been
affected.
SUMMARY : Requires disclosure to prospective tenants when the
owner of certain residential property receives a notice of
default (NOD). Specifically, this bill :
1)Requires specified landlords who have received a NOD that has
not been rescinded to notify a prospective tenant of that
default in writing prior to executing a lease agreement for
the property.
2)Provides that a violation of the bill would void the lease at
the election of the tenant and entitle the tenant to recovery
of twice the monthly rent or twice the actual damages,
whichever is greater if the tenancy is terminated.
EXISTING LAW :
1)Regulates the non-judicial foreclosure of properties pursuant
to the power of sale contained within a mortgage contract. To
commence the process, existing state law requires the trustee,
mortgagee, or beneficiary to record a Notice of Default and
allow three months to lapse before setting a date for sale of
the property. (Civil Code Secs. 2924, 2924f.) Existing law
governs the issuance of the Notice of Sale, and requires the
notice to be recorded at least 20 days prior to the date of
sale. (Civil Code Sec. 2924f.)
2)Generally regulates the judicial foreclosure process, and
states that a notice of sale may not be given for at least 120
days after the notice of levy was served on the judgment
debtor. (Code Civil Proc Sec. 701.510 et seq.)
3)Requires a trustee or authorized agent, upon posting a notice
of sale, to also post, and mail, a statutory notice informing
tenants that they are residents of a property subject to a
foreclosure sale. (Civil Code Sec. 2924.8.)
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4)Provides that tenants living in a rental unit at the time the
property is sold in foreclosure must be given 60-days' notice
before they may be evicted. This provision, which does not
apply if any party to the mortgage note remains in the
property as a tenant, subtenant, or occupant, sunsets on
January 1, 2013. (Code Civil Proc. Sec. 1161b.)
5)Requires a successor in interest in a property subject to
foreclosure to provide a bona fide tenant in the property with
a 90-day notice to vacate. The successor in interest must
also honor the tenant's lease until the end of the lease term
unless the property is sold to a purchaser who intends to
occupy the home as his or her primary residence. In that
case, the tenant must be provided with a 90-day notice to
vacate (unless a longer period is required by state or local
law). In addition, tenants of foreclosed properties must be
provided with 90-days' notice to vacate if there is no lease
or the lease is terminable at will. These provisions sunset
on December 31, 2014. ("Protecting Tenants at Foreclosure Act
of 2009," Public Law 111-22.)
6)Contains various provisions regulating the hiring of real
property, as specified. (Civil Code Sec. 1940 et seq.)
COMMENTS : The author explains the reason for the bill as
follows:
Senate Bill 1191 helps ensure that Californians make rental
decisions with full and accurate information about the
property that may become their home. While it seems like
common courtesy to tell someone that the apartment they're
considering is in foreclosure, it's not legally required.
As a result, tenants often sign leases only to find out
that in just a few days or weeks, the property will be up
for auction. There are several risks associated with
leasing a property in foreclosure.
First, in advance of the foreclosure sale, tenants often
experience decreased services from landlords facing
financial difficulties. For example, owners may fail to
pay utilities, or ignore requests for maintenance or
repairs.
Second, after the foreclosure sale, tenants face a
tremendous amount of uncertainty. Tenants may not know to
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whom they should send rent, or direct requests regarding
the property. Similarly, tenants may not be aware of the
protections guaranteed to them under federal and state law,
and so may feel pressured to vacate or to terminate leases
through "cash for keys" offers. Third, there are several
circumstances where a tenant's lease may be invalidated by
the foreclosure sale. For example, if the new owner intends
to move into the property the tenant will have only 90 days
to vacate, regardless of the terms of the lease. In
addition, the federal Protecting Tenants at Foreclosure Act
- and pending legislation in California - do not apply to
certain leases, meaning that tenants may face eviction
before their lease concludes.
Fourth, in practice it is especially difficult for tenants
to recover security deposits during or after a foreclosure.
The defaulting landlord may lack the financial resources
to return it, and the new owner - though legally obligated
to return the deposit - is often reluctant to do so.
Finally, tenants in recently foreclosed properties often
face exposure to bad actors. Tenant advocates report that
their clients are frequently subject to harassment and
misinformation from individuals seeking to remove tenants
from recently foreclosed properties.
Tenants Together writes in support, "This is an important tenant
protection bill. The fact that the foreclosure process is
underway is a material fact that should be disclosed to renters.
A landlord's foreclosure has significant impacts on tenants and
their rights. Foreclosure may affect the length of the tenancy,
the housing conditions experienced by tenants, and the
likelihood that tenants get back their security deposits after
vacating. It is only fair that tenants be notified of
foreclosure activity so they can make an informed choice about
their housing."
Impact of Foreclosure Crisis On Tenants. As this Committee has
frequently observed, California leads the nation with one of the
highest rates of foreclosure. According to RealtyTrac, in
California, one in every 303 housing units received a
foreclosure filing in March 2012, and 48,422 houses received a
foreclosure notice in February alone. Tenants living in those
homes have overwhelmingly been impacted. A November 18, 2007
New York Times article, "As Owners Feel Mortgage Pain, So Do
Renters," noted "thousands of American families are losing their
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homes without ever missing a payment. They are renters in
houses whose owners default on their mortgages - a large but
little noticed class of casualties."
In January 2011, Tenants Together released its third annual
report entitled "California Renters in the Foreclosure Crisis."
The report estimated that at least 38 percent of homes in
foreclosures were rentals and more than 200,000 California
renters were directly affected by home foreclosures in 2010
alone.
Current Protections For Tenants In Foreclosure . State and
federal laws have been enacted to provide tenants with
additional time to move when the home in which they are living
is the subject of a foreclosure. In 2008, the Legislature
passed and the Governor signed SB 1137 (Perata, Corbett,
Machado, Ch. 69, Stats. 2008), which requires that tenants
receive 60-days' notice before they may be evicted after the
rental unit in which they are living is foreclosed. These
provisions sunset on January 1, 2013. Measures currently
pending before this Committee would revise and extend current
law for an additional six years.
Federal lawmakers have also acted to protect tenants in
foreclosure situations. On May 20, 2009, President Obama signed
S. 896, Public Law 111-22, which included the "Protecting
Tenants at Foreclosure Act of 2009" (PTFA). The PTFA generally
requires a successor in interest in a property subject to
foreclosure to provide bona fide tenants with a 90-day notice to
vacate and, with limited exceptions, to honor the tenant's lease
until the end of the lease term. In 2010, the President signed
legislation extending the PTFA until December 31, 2014 and
clarifying that its protections extend to tenants who have
entered into leases before the date on which complete title is
transferred as the result of a foreclosure.
The PTFA fundamentally changed the obligations of subsequent
owners of foreclosed properties (usually the foreclosing entity)
by modifying the general rule that foreclosure extinguishes the
lease of any tenant in the property. While the notice provided
by this bill responds to the situation where a tenant signs a
lease after an NOD has been recorded and before the sale of a
foreclosed property - a sale that previously would have
extinguished the lease - the recent protection of those leases
under federal law changes the effect of this bill from one that
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warns tenants of a situation that would extinguish their lease
to one that informs tenants of information about the property
they are renting.
This Committee Has Previously Passed Similar Legislation . This
bill is similar to AB 331 (Hall) of 2009 which would have
required a landlord to disclose any of the following
circumstances to a prospective tenant before the execution of a
rental agreement: (1) any outstanding notice of default, or
notice of trustee's sale; (2) any pending suit to foreclose a
mortgage, trust deed, or vendor's lien under a contract of sale;
(3) any pending declaration of forfeiture or suit for specific
performance of a contract of sale; or (4) any pending proceeding
to foreclose a tax lien. That measure passed this Committee
without opposition but was held in the Senate Judiciary
Committee.
Potential Benefits And Detriments Of Proposed Notice. As
discussed above, tenants in foreclosed properties are protected
in several ways under existing state law - tenants receive
notice of the pending foreclosure sale before their rental
property is sold, and tenants of foreclosed properties are
allowed to stay in the property for a period of time (state law
generally provides for 60 days, but federal law extends that
time period to 90 days).
This bill seeks to increase tenant protections by requiring a
landlord to give prospective tenants a written notice of the
existence of an outstanding notice of default. Unlike the
notice required under existing state law for a notice of sale,
this notification would be provided to prospective - not
existing - tenants, and the notice would inform prospective
tenants of the first step in the non-judicial foreclosure
process as opposed to the notice of sale, which tenants are
notified of under existing law and is provided at a minimum of
three to six months after the notice of default.
The notice proposed by this bill would provide useful
information to prospective tenants that may affect their rental
decision. Although their lease would likely be protected under
federal law, those prospective tenants would be able to make the
educated decision to avoid the risks associated with renting a
property in foreclosure. On this point, supporter Western
Center on Law & Poverty notes that the fact that foreclosure
proceedings have begun on the property is a "material fact
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Ýthat] is critical for tenants to make an informed choice about
whether to rent a particular dwelling. Some tenants might be
willing to live with the risk that their tenancy may soon be
interrupted. Others, for example those with children in school,
will want more certainty that the dwelling will remain available
to them for the foreseeable future." There have also been
reports of unscrupulous landlords signing tenants to new leases
right before the foreclosure sale (and thus collecting first and
last month's rent plus a security deposit) and many allegations
that existing federal law requiring recognition of the lease by
a new owner is often not followed.
It is useful to note that a notice of default can be cured, and
much of the recent federal loan modification efforts, as well as
pending proposals before this Legislature, have been to assist
those borrowers who are in default. As a result, it is
important that any prospective tenant who receives notice that
their potential rental property is in default understands that
the notice of default does not impact the landlord-tenant
relationship, including their obligation to pay rent, and that
they do have rights under state and federal law should the
property be sold at a foreclosure sale. Moreover, from the
perspective of a distressed homeowner, the rental of the
property may represent the only way to make the mortgage
payment. The homeowner may have lost his or her job, failed to
qualify for a loan modification, and moved out of their primary
residence in an attempt to rent the family home in order to make
their mortgage payment. Considering that a prospective tenant
could be discouraged from renting a home if they do, in fact,
know that the home is in foreclosure, the notice required by
this bill could potentially frustrate the leasing of homes by
those troubled borrowers. Without tenants, a distressed
homeowner could be unlikely to have sufficient funds to pay the
mortgage, resulting in the loss of the home.
The Committee may wish to explore with the author whether these
competing interests can best be balanced by focusing the bill on
property owners who are in the rental business, rather than
those who are renting their own primary place of residence, as
suggested in the amendment proposed below.
Questions Regarding Exclusion of Most Apartments. This bill
would omit most apartments from the notice requirements because
it is limited to single-family dwellings and multifamily
dwellings not exceeding four units. In support of that
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limitation, supporter California Apartment Association contends
that the mortgage crisis is predominantly about single-family
homes and that the purchaser of a foreclosed home often
terminates the existing tenancy. Despite those contentions, it
is important to note that apartments are not immune from
foreclosure. The Associated Press' March 18, 2009 article
entitled Foreclosures Force Renting Families Onto Street
reported:
While the nation's default rate on apartment buildings is
still relatively low, it is rising quickly. Fannie Mae,
for example, said its delinquency rate was 0.30 percent
at the end of last year, double what it was at the end of
September, and almost four times the rate at the end of
2007. In Los Angeles, neighborhoods in the city's
low-income south and central areas are being walloped.
In 2007, buildings containing a total of 1,690 apartments
were foreclosed on. In 2008, owners lost buildings
containing 4,789 apartments, according to the city
housing department.
RealtyTrac data shows that there were 587 properties undergoing
foreclosure with five or more dwellings in select cities at the
end of February 2012 as follows: Los Angeles had 212 such
properties; San Diego, 29; San Jose, 37; San Francisco, 53;
Fresno, 86; Sacramento, 25; Long Beach, 37; Bakersfield, 24;
Riverside, 20; Stockton, 13; San Bernardino, 11; Modesto, 26;
Moreno Valley, 10; and Roseville, 4.
As the author properly notes, "The foreclosure crisis is
primarily limited to smaller properties. According to DataQuick,
only 0.43% of notices of default filed in California in 2011
were for apartment buildings with five or more units. In fact,
there were more notices of default filed for quadplexes
(buildings with four units) than for all buildings with five or
more units combined." In addition, according to the author,
"tenants in large multifamily properties are less likely to face
exposure to bad actors seeking to remove existing tenants.
Tenants in single-family homes or small properties undergoing
foreclosure may receive 'cash for keys' offers, or
misinformation regarding the legitimacy of their lease. Larger
multifamily properties are valuable because of their potential
to generate revenue through leases, and so successor interests
are far less likely to seek to remove existing tenants."
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Nevertheless, it is somewhat unusual to single-out one form of
rental housing for special notices regarding potential
foreclosure rights. Neither existing state law under SB 1137,
nor existing federal law under the PTFA, is limited to single
family and small multi-family units as this bill is. Likewise,
currently pending proposals to reform and extend tenant
protections in foreclosure, such as the Attorney General's
sponsored legislation, AB 2610 and SB 1473, do not exclude
apartment renters.
Questions Regarding Remedies For Violation. As currently
drafted, a violation of the notice requirements would void the
lease at the election of the tenant and entitle the tenant to
recover twice the monthly rent or twice the actual damages,
whichever is greater. As set out in more detail below,
opponents argue that the bill's financial penalty is excessive.
By contrast, existing law imposing an obligation to notify
tenants of a notice of sale has no specified financial penalty
for violation.
While a sufficient deterrent is necessary to ensure compliance
with the bill's requirements, the Committee may wish to explore
with the author whether a monetary remedy related to the
tenant's anticipated damages is needed if in fact the tenant has
not been damaged because there has been no termination of the
rental agreement. There are a number of circumstances that may
arise by which the tenant would avoid financial harm. The
notice of default may be cured. If not cured, the rental period
may nevertheless be completed without incident before any
foreclosure sale takes place. Indeed, even if the property is
sold the purchaser must honor any lease in most cases or provide
the tenant with at least 90 days' notice. If the tenancy is not
affected, it may not be appropriate to require the landlord to
pay the tenant, or to do so in the amount proposed by the bill.
Where the tenancy is terminated, however, a financial penalty
bears a stronger relationship to the tenant's expected damages.
Thus, it may be appropriate to allow the tenant to void the
lease at any point and recover the financial penalty of two
months' rent to compensate the tenant for relocation costs
necessitated by the move, and to allow similar recovery where
the tenant suffers an eviction flowing from the notice of
default, but not to otherwise impose a financial penalty. This
proposal is reflected in the amendments suggested below.
ARGUMENTS IN OPPOSITION : A number of landlord associations
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oppose the bill.
The Apartment Association of California Southern Cities, the
NORCAL Rental Property Association, the East Bay Rental Housing
Association, and the Apartment Association of Orange County give
the following reasons for their opposition:
Only single family and one-to-four unit property owners
are penalized. Why aren't others penalized?
The required notice is equivalent to putting up a "Don't
Rent Here" sign.
Instead of helping people keep their property during
this foreclosure crisis, this bill facilitates and speeds
up the foreclosure process.
No showing of injury or harm to the tenant is required.
Even though the foreclosure process can take years to
finalize, and even if the landlord cures, the bill contains
no limitation on how long a tenant may wait to bring a
claim.
Property owners are not allowed to cure the NOD at any
point in the process, thus giving rise to an unwarranted
strict liability offense.
The "twice the actual damages" penalty is too severe a
consequence and out of proportion with the aim of the bill.
In addition, the Apartment Association of Greater Los Angeles
(AAGLA), the San Diego County Apartment Association (SDCAA) and
the Santa Barbara Rental Property Association (SBRPA) argue that
the bill "is an especially punitive bill that while asserting a
well-intentioned public policy, targets only small property
owners to pay an exceptionally unreasonable financial penalty
and increases the likelihood that those property owners will
suffer a foreclosure." These groups state:
By requiring the smallest and most vulnerable property
owners (one to four units) to notify prospective tenants of
Notice of Default - using prescriptive, alarming statutory
language which translates into essentially a "don't rent
here" sign - SB 1191 worsens the financial conditions of
these owners and hastens foreclosure.
SB 1191 also follows a strict liability standard to
impose financial punishment on owners who intentionally or
not violate its provisions. Tenants, with no need to show
harm, can void leases and collect an amount equal to two
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months' rent or elect to stay and avoid paying two months'
rent.
Issuing a warning to prospective tenants at the time of
default is misleading and pre-mature:
It hurts the housing market and doesn't help tenants -
scaring them from renting what are often the most
affordable rentals in the area.
Tenants in foreclosed properties are already protected
by state and federal law - at least 60 and sometimes 90
days' notice in a month-to-month tenancy, or to the end of
an existing lease term.
Proposed Amendments . Dialog between the author, the Committee
and interested parties has resulted in the following proposed
amendments. As discussed above, the author has not indicated
his willingness to exclude owner-occupied properties or to limit
the financial penalty to cases in which the tenant has elected
to vacate or has been evicted.
2924.9 . 2924.85 (a) Subject to subdivision (f) , every landlord
who offers for rent is in default under a mortgage or deed of
trust secured by a single-family dwelling, or a multifamily
dwelling not exceeding four units, and who has received a notice
of default that has not been rescinded with respect to a
mortgage or deed of trust secured by that property from the
mortgagee, trustee, or other person authorized to take the
foreclosure sale shall disclose the notice of default in writing
to any prospective tenant prior to executing a lease agreement
for the property subject to the notice.
(b) A violation of subdivision (a) shall void the lease at the
election of the tenant . If a tenant elects to void the lease
and vacate the property or if the tenant elects to remain but is
evicted as the result of a foreclosure sale, a violation of
subdivision (a) and shall entitle the tenant to recovery of
twice the monthly rent or twice the actual damages, whichever is
greater, and all prepaid rent from the landlord who received the
notice of default, in addition to any other remedy that the law
may provide.
(c) In lieu of the remedies in subdivision (b), if the tenant
elects not to terminate the lease and the foreclosure sale has
not occurred, and the tenancy is terminated as the result of a
foreclosure sale the tenant may elect to deduct a total amount
equal to two months' rent from future rent obligations owed the
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landlord who received the notice of default.
(d) The written disclosure notice required by subdivision (a)
shall be provided in English and the languages described in
Section 1632 in substantially in the following form:
The foreclosure process has begun on this property, and this
property may be sold at foreclosure. If you rent this property,
and a foreclosure sale occurs, the sale may affect your right to
continue to live in this property in the future. Your tenancy
may continue after the sale. The new owner must honor the lease
unless the new owner will occupy the property as a primary
residence, or in other limited circumstances. Also, in some
cases and in some cities with a "just cause for eviction" law,
you may not have to move at all. In order for the new owner to
evict you, the new owner must provide you with at least 60 90
days' written eviction notice in most cases . or 90 days if
required by any other provision of state or federal law.
However, some laws may prohibit eviction. (e) A property manager
shall not be liable under this section for failure to provide
the written disclosure notice in subdivision (d) unless the
landlord has notified the property manager of the notice of
default and directed him or her in writing to deliver the
written disclosure, in which case the property manager shall be
liable to the extent specified in subdivision (b). This
subdivision shall not preclude a landlord from being held liable
when a tenant does not receive the written disclosure notice in
subdivision (d).
(f) This section does not apply to rental property that is
occupied by the landlord as his or her principal residence.
(g) The rights and remedies provided by this section are in
addition to and independent of any other rights and remedies
under any other law. Nothing in this section shall be construed
to alter, limit, or negate any other rights or remedies.
(h) This section shall remain in effect only until December 31,
2019, and as of that date is repealed, unless a later enacted
statute, that is enacted before December 31, 2019, deletes or
extends that date.
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REGISTERED SUPPORT / OPPOSITION :
Support
Asian Law Caucus
California Apartment Association
California Nurses Association
California Public Interest Research Group
California Rural Legal Assistance Foundation
Center for Responsible Lending
Consumer Attorneys of California
EAH Housing
Eden Housing
Greenlining Institute
Housing Leadership Council of San Mateo County
Inquilinos Unidos
Law Foundation of Silicon Valley
Legal Aid Society of San Mateo County
MidPen Housing
National Housing Law Project
Neighborhood Housing Services Silicon Valley
Non-Profit Housing Association of Northern California
Palo Alto Housing Corporation
Santa Cruz County
Tenants Together
Western Center on Law & Poverty
Opposition
Apartment Association, California Southern Cities
Apartment Association of Greater Los Angeles
Apartment Association of Orange County
East Bay Rental Housing Association
NORCAL Rental Property Association
San Diego County Apartment Association
Santa Barbara Rental Housing Association
Analysis Prepared by : Kevin G. Baker / JUD. / (916) 319-2334
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