BILL ANALYSIS ” 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 SB 1191 Page 2 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.) SB 1191 Page 3 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 SB 1191 Page 4 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 SB 1191 Page 5 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 SB 1191 Page 6 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 SB 1191 Page 7 ›that] 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 SB 1191 Page 8 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." SB 1191 Page 9 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 SB 1191 Page 10 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 SB 1191 Page 11 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 bya 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 saleshall 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) andshall 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 salethe tenant may elect to deduct a total amount equal to two months' rent from future rent obligations owed the SB 1191 Page 12 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 6090 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. SB 1191 Page 13 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 SB 1191 Page 14