Undermining landlords and property rights

by Zain Jaffer

Movies and television shows often feature the evil landlord versus the persecuted tenant. While that is often fodder for fiction, that mindset also often makes its way into real life. It is definitely not good.

A good and interesting real estate podcast on how the law is stacked against landlords is one by Sachs Realty that featured real estate lawyer Dennis Block last January 2024 [https://www.youtube.com/watch?v=gssvyqSJKgw]. I’ve personally seen some of the issues discussed, but my properties are in different places and what I’ve seen is not as extreme as what was discussed. The situation between tenants and landlords in California is really extreme, but it could make its way to other states eventually.

According to Block, the practice of rent control started in 1947 after soldiers returned from World War II. Because of the limited housing supply then coupled with increased demand, the rental prices shot up. Hence rent control was established.

More recently during the pandemic Los Angeles banned rent increases until February 2024. Afterwards landlords can then raise rent by four percent. Four percent. That’s a four year no rent increase policy despite inflation, where prices of construction materials and labor have increased. Only residential housing is subject to rent control. Other types of properties are not.

According to Block there is also the concept of threshold. In Los Angeles, there is a minimum rent backlog threshold before you can serve a three day eviction lawsuit. If it falls below that, the eviction cannot be served. So the tenant can game the system by paying a minimum amount only when the rent due exceeds the threshold, but not the whole amount. He can pay a small amount just to bring the total due below the threshold. This can go on for years.

Unfortunately says Block, the probability of getting and collecting a favorable judgment is probably less than fifty percent. Effectively the landlord becomes a social service provider, a task that the government should be doing.

Then there is Section 8 of the Housing Act of 1937 [https://en.wikipedia.org/wiki/Section_8_(housing)] where the government subsidizes most of the rent. For example the monthly rent may be $2,500 but the government pays the majority, and the tenant chips in a smaller amount. Unfortunately California disallows landlords from turning away Section 8 tenants. In addition, California just passed a law effective January 2024 disallowing the use of a credit score to judge a tenant, and instead use verifiable “ability to pay.” Unfortunately, someone may have the ability to pay, but choose not to pay, which a credit score is supposed to show.

There was already an eviction moratorium that lasted for three and a half years after the pandemic. There is simply too much protection of tenants that still goes on when they have been given enough protections during the pandemic. Many of them are just gaming the system. They are able to buy new fancy cars, yet when pressed to pay have no money to pay their rent.

According to Block, retaliatory acts by the landlord are also banned in California. For example the warranty of habitability means that the landlord warrants that the property is habitable. If the tenant alleges that the property lacks something, like heating, leaks, pests, and other reasons that affect habitability, the tenant can withhold payment. All this without proper due notice that gives the landlord time to correct the shortcoming.

When the landlord does evict the tenant, the latter sometimes resorts to doing damage to the property. Tenants can ask for a free lawyer, no filing fees, and ask for a jury trial.

The law of supply and demand is an economic truth. But if we use politics to subvert it, we cease being a country based on capitalism and free enterprise. What we have are landlords subsidizing their tenants, which is not free enterprise.

The market should determine the rental rate. If you want to stay in a rental house, you need to pay the rent. That’s basic. Unfortunately California politicians seem to think that living in a rental house for free is a right. Or at least they make it seem that way to landlords and property owners.

Landlords serve a purpose. Even corporate buyers serve a purpose. Granted there are some bad landlords and bad property owners who need to be penalized and weeded out. But most landlords and property owners are just trying to make an honest living out of their hard earned capital.

Many of these properties are largely loaned from the banks since majority of real estate loans are financed by debt. Debt that is expensive these days because of high interest rates. By freezing rentals and allowing non payment, we are putting the developers in trouble with the banks. We are also risking the banks, who are already in trouble with their older low interest long term treasury bonds and almost empty office space.

Laws need to be fair. Politicians are pandering to their constituent tenants because there are more of them as voters. Landlords have been demonized too much, not just in fictional films and television shows but in the legal system.

It is time to put a stop to this.