Does an illegal rent increase amount to receiving stolen property? An appellate court rules that a jury can weigh the evidence. 

As if there are not enough penalties to dissuade landlords from improper rent hikes, these illegal rent increases may violate California Penal Code Section 496. 

We have always been proponents of legal rent increases, with the operative term being 'legal'. Landlords who are overeager and raise rents beyond what is legally allowed, or rent out unpermitted units, can be terribly disappointed to learn that the extra rental income can be disgorged.

In many cases, Bornstein Law has delivered the bad news that it is prudent to return money that was collected in excess of what was permissible to be demanded.  When there is acrimony in the rental relationship, rest assured that tenants’ attorneys will go through a forensic accounting of rent paid and will identify improper rent increases like a heat-seeking missile.

Landlords should also be aware of anti-tenant harassment ordinances that have sprouted up throughout California.

These ordinances add stiffer penalties in instances of unreasonable, abusive, or coercive landlord behavior. Think acts like removing housing services, not making timely repairs, unlawful entry, threats, coercive buyout offers, false eviction claims, retaliation, and privacy violations. Retaliatory rent increases would fall into this category. An easy example is if the tenant complains to a building inspector and is suddenly asked to pay more rent, or the landlord threatens that if the tenant does not pay additional rent, they will be reported to immigration authorities.

We are unaware of any anti-landlord harassment ordinances that penalize tenants who use deception to gain access to a rental unit, wreak thousands of dollars in damage,  cause nuisances (in some cases, driving out good tenants), and fail to pay rent. But this is the reality we have to deal with in an era when the laws and political rhetoric fall squarely on the side of tenants. If a landlord harasses a tenant, there is hell to pay, but renters can harass landlords with impunity.

The stakes just got ratcheted up for landlords who engage in illegal rent increases in the most egregious of circumstances, when housing providers act in bad faith and obtain rent money through false pretenses.

In Randy Johnson v. Connie, LLC, the Court of Appeal for the 4th Appellate District has opened the floodgates for tenants for tenants to argue that unlawful rent increases are tantamount to receiving stolen property under Penal Code Section 496.

California Penal Code 496 is the "Receiving Stolen Property" law, which makes it a crime to buy, receive, sell, conceal, or withhold property that you know is stolen or obtained through extortion.

Some background is in order

In 1995, a gentleman signed a lease to rent an apartment in a triplex for roughly $800 a month. Nothing in the lease indicated that the tenant would perform property management duties, and there was no agreement to provide services in exchange for reduced rent.

In 2020, ownership of the triplex passed to Connie, LLC. The tenant, by then, was paying $1,025 a month for rent. The LLC hired a property management company that was compensated six percent of rent payments received.

The LLC gave a false characterization of the tenancy, wrongly telling the property management company that the tenant had been a resident manager for the triplex, which explained why his rent was much lower than that of other tenants in the building. The property management company was instructed to terminate the tenant’s role as resident manager and increase the rent to market rates.

The tenant was informed that his services were no longer needed and that the new rent was $2,450. The tenant acquiesced to this rent increase and paid the increased amount for 11 months. When the tenant learned the rent hike was illegal, he sued to recover overpaid rent and included a claim under Penal Code § 496.

The appellate court found that the tenant offered evidence that the LLC illegally raised his rent through “careful planning and deliberation.” The court did not find that the LLC was guilty of theft. Rather, it ruled there was enough evidence - viewed in the light most favorable to the tenant - for a jury to weigh the evidence and decide whether there was a violation of Penal Code § 496.

The cat is out of the bag

When the court handed down its decision, it was not available for prying eyes because it was originally unpublished – it could not be cited in other cases. Tenant advocates successfully argued that the case should be certified for publication.

The Legal Aid Foundation of Los Angeles (LAFLA) and the Western Center on Law and Poverty submitted that the court’s opinion merits publication for applying existing law to significantly different facts than prior published decisions. Further, the opinion should be published because it involves a legal issue of continuing public interest. You can read the letter here.

Some of our takeaways

We have said that being an attorney who represents tenants can be more lucrative than practicing law as a personal injury attorney.

Penal Code § 496 not only criminalizes the receipt of criminal property. It also allows aggrieved tenants to seek damages of up to three times the amount of their loss in civil courts. No doubt there will be enterprising tenants’ attorneys salivating over this opportunity to get more money from rental property owners.

When first issued, the opinion was unpublished, meaning it applied only to the parties and could not be cited in other cases. Tenant advocacy groups asked the court to publish it, and the court agreed. The case is now a binding precedent statewide and may be cited in rent disputes across California.

The California Apartment Association points out that the facts in the case at hand were atypical. The property owners engaged in alleged misrepresentation and fabricated employment status, which are pretty egregious allegations. "This is not the type of rent increase scenario most landlords face," it says. The association goes on to say that this theory will likely not prevail in more ordinary circumstances.

Maybe so, but it will not stop tenants' attorneys from trying. Whenever we allow the legal counsel of tenants to prolong a legal dispute, they can seize the opportunity, even if the claim is meritless. More often than not, frivolous claims are designed to ratchet up the legal expenses of landlords and coerce them into a settlement.

At Bornstein Law, we are not so concerned about tenants successfully articulating a case under Penal Code § 496. More concerning to us are the increased legal expenses of rental property owners when they have to defend against claims, as an emboldened legal team for tenants now has a new tool in their toolbox.

Whenever we are asked about a new law that is passed, we do not profess to have all the answers because the law is always cleaner on the page than it is in real life. To have any definitive answers, it is instructive to see how new laws are interpreted in the courts. Similarly, this court opinion must be digested and applied by other courts. Although the case law applies throughout California, every case has a different fact pattern. It will also be interesting to see how many tenants' attorneys attempt to test this argument and push the envelope in future cases alleging improper rent increases.

With uncertainty ahead, it is prudent for housing providers to tether themselves to a law firm that manages landlord-tenant relationships on a daily basis with the goal of resolving disputes as quickly and inexpensively as possible, taking into account time, risk, and attorneys' fees.