We are all devastated by the recent fires in Los Angeles, which have left countless families displaced and in need of housing. In these challenging times, landlords in Newport Beach, Costa Mesa, and across California must balance their ability to provide much-needed housing with the myriad of restrictions and cautions on increasing rental prices as a result of these or any natural disasters. California’s Penal Code Section 396 sets strict limitations to prevent price gouging during declared states of emergency (DSOE), allowing rental increases of no more than 10% for 30 days after a DSOE.
While this seems straightforward on properties currently listed for rent (i.e. no more than a 10% increase is allowed) ambiguity arises especially when determining what types of properties this applies to (for sale, for lease, what about short-term or long-term leases) and if a property has not recently been listed for rent and HUD calculations then apply to determine the fair market rent, including deciding which rental benchmark—county-wide Fair Market Rents (FMRs) or Small Area Fair Market Rents (SAFMRs)—to use.
Let’s take a deep dive into these issues.
Of note – while the recent LA fires have pushed this issue into the headlines, a declared state of emergency is not unusual and have been called many times in California and various counties and localities. The information and discussions here will remain relevant to future declarations as well.
What Do Price Gouging Protections Say?
Under Penal Code Section 396 (pertinent text below), the maximum rental increase allowed for 30 days after a DSOE is calculated based on the “fair market rent” (FMR) set by the U.S. Department of Housing and Urban Development (HUD). Specifically:
- If a property was rented within the past year, the base rent is the most recent price paid by the tenant.
- If it was not rented but offered for rent within the last year, the base is the most recent rental offer price.
- If it has not been rented or offered within the last year, the base rent defaults to 160% of the HUD fair market rent.
Key Question: What does this apply to, for sale, for lease, what about short-term or long-term leases? See below for more discussions on this question.
Key Question: Which HUD FMR applies—the county-wide figure or the more localized Small Area FMR (SAFMR)? See below for more discussions on this question.
Let’s examine the pertinent sections of Penal Code Section 396:
(e) Upon the proclamation of a state of emergency declared by the President of the United States or the Governor, or upon the declaration of a local emergency by an official, board, or other governing body vested with authority to make that declaration in any city, county, or city and county, and for a period of 30 days following that proclamation or declaration, or any period the proclamation or declaration is extended by the applicable authority, it is unlawful for any person, business, or other entity, to increase the rental price, as defined in paragraph (11) of subdivision (j), advertised, offered, or charged for housing, to an existing or prospective tenant, by more than 10 percent. However, a greater rental price increase is not unlawful if that person can prove that the increase is directly attributable to additional costs for repairs or additions beyond normal maintenance that were amortized over the rental term that caused the rent to be increased greater than 10 percent or that an increase was contractually agreed to by the tenant prior to the proclamation or declaration. It shall not be a defense to a prosecution under this subdivision that an increase in rental price was based on the length of the rental term, the inclusion of additional goods or services, except as provided in paragraph (11) of subdivision (j) with respect to furniture, or that the rent was offered by, or paid by, an insurance company, or other third party, on behalf of a tenant. This subdivision does not authorize a landlord to charge a price greater than the amount authorized by a local rent control ordinance.
(j)(10) “Housing” means any rental housing with an initial lease term of no longer than one year, including, but not limited to, a space rented in a mobilehome park or campground.
(j)(11)(A) This amount may be increased by 5 percent if the housing was previously rented or offered for rent unfurnished, and it is now being offered for rent fully furnished.
So What ‘Housing’ Does this Apply To? What About For Sale, For Lease, Short-Term or Long-Term Leases?
Penal Code Section 396 (j)(10) defines housing as: “’Housing’ means any rental housing with an initial lease term of no longer than one year, including, but not limited to, a space rented in a mobilehome park or campground.”
This means that:
- For-sale properties are not covered under price gouging laws unless they are being offered as rentals.
- Rental properties with leases of one year or less are covered, including apartments, single-family homes, and spaces in mobile home parks or campgrounds.
- Short-term rentals (e.g., month-to-month leases, vacation rentals, and temporary housing) are subject to price gouging restrictions if they fall under the definition of housing.
- Long-term leases exceeding one year are not explicitly covered under Penal Code 396.
Landlords in Newport Beach, Costa Mesa, and beyond should be mindful of these distinctions when pricing rental units during a declared state of emergency.
Moreover, getting ‘cute’ or ‘creative’ in offering leases of, for example, 12 months and a day, would be unwise. However, 2-year leases, etc., would not fall within the scope of Penal Code Section 396.
As this is a highly sensitive and highly charged issue at this time, caution is urged, along with consultation with legal counsel.
County-Wide FMR vs. Small Area FMR
HUD calculates FMRs at two levels:
- County-Wide FMRs:
- These represent the average rent across an entire metropolitan or non-metropolitan county.
- Historically, these have been the default standard for most HUD programs.
- Small Area FMRs (SAFMRs):
- These are calculated at the ZIP code level and provide more granular data.
- SAFMRs are mandatory for Housing Choice Voucher (HCV) programs in certain high-concentration metropolitan areas and optional for other areas.
While Penal Code 396 doesn’t explicitly specify which FMR to use, SAFMRs provide a compelling case for areas with significant rent variations across ZIP codes.
Real-World Examples: County-Wide vs. Small Area FMRs For a Three Bedroom
Let’s consider two examples of three-bedroom homes—one in Eastside Costa Mesa (ZIP code 92627, which is shared with other parts of Costa Mesa) and another in Corona Del Mar (ZIP code 92625)—to illustrate the differences between the county-wide and SAFMR approaches:
Eastside Costa Mesa (ZIP Code 92627):
- County-Wide FMR (Santa Ana-Anaheim-Irvine Metro): $3,927
- SAFMR (ZIP Code 92627): $3,730
In this case, using the SAFMR results in a lower benchmark than the county-wide FMR. If the property hadn’t been rented in the past year, the maximum base rent would default to 160% of either of these figures. In this case, a landlord might want to use the county-wide figure.
Corona Del Mar (ZIP Code 92625):
- County-Wide FMR (Santa Ana-Anaheim-Irvine Metro): $3,927
- SAFMR (ZIP Code 92625): $5,890
Here, the SAFMR for Corona Del Mar is substantially higher than the county-wide FMR, better reflecting the area’s higher rental market. In this case, a landlord might want to use the more localized figure.
However, the 160% calculation of either the county-wide FMR ($6,283.20) or SARMR ($9,424) still serves as the maximum allowable rent and might seem low for many CDM properties.
These examples illustrate the importance of knowing both the SAFMR and county-wide FMR, as well as understanding how the 160% rule might apply in various scenarios.
The Case for SAFMRs
Using SAFMRs aligns with the intent of price gouging protections, which aim to ensure fair pricing for both landlords and tenants during emergencies. Here’s why:
- Localized Accuracy:
- SAFMRs reflect market realities for individual ZIP codes rather than relying on county-wide averages, which can obscure significant disparities between high- and low-rent areas.
- HUD’s Stated Purpose:
- The SAFMR Final Rule emphasizes reducing voucher concentration in high-poverty areas and expanding access to higher-opportunity neighborhoods by tailoring rents more closely to local conditions.
- Legal Argument:
- Penal Code 396 refers broadly to HUD’s “fair market rent,” leaving room for SAFMRs to be used if they better represent local market conditions.
Challenges and Considerations
Despite their advantages, using SAFMRs comes with some risks and uncertainties:
- Lack of Explicit Legal Guidance: Penal Code 396 does not specifically authorize or prohibit the use of SAFMRs. Landlords may need to justify their choice to regulatory agencies if challenged.
- Administrative Complexity: Opting for SAFMRs requires familiarity with HUD’s SAFMR datasets and a willingness to defend the choice in potential legal disputes.
- Service and Utility Exclusions: Penal Code 396 explicitly states that rent cannot include adjustments for additional goods or services, such as gardening or utilities. This restriction applies regardless of whether SAFMRs or county-wide FMRs are used.
FAQ: Price Gouging Protections for Rental Properties
Here are the most frequently asked questions about California’s price gouging protections for rental properties:
- When do the price gouging protections apply?
- Protections are triggered by a proclamation of a state of emergency from the Governor, the President, or local government.
- How long do the price gouging protections remain in effect after a DSOE?
- For rental housing, the protections last a minimum of 30 days but can be extended for longer periods.
- What is the maximum increase in the rental price permitted under the price gouging law?
- The law prohibits rental price increases of more than 10% during a DSOE.
- Does it apply to a homeowner advertising their own property for rent?
- Yes, it is unlawful for any individual, business, or entity to increase rental prices by more than 10% during a DSOE.
- How is housing defined?
- “Housing” includes any rental housing with an initial lease term of no longer than one year, including spaces in mobile home parks or campgrounds.
- How is the base rental price determined?
- For housing rented within one year prior to the DSOE, the base is the actual rental price paid.
- For housing not rented but offered for rent within one year, it is the most recent offer price.
- For housing not rented or offered within one year, it defaults to 160% of the HUD fair market rent.
- How can I check if there is a current DSOE in effect?
- The Governor’s Office of Emergency Services provides a chart showing current price gouging protections by county.
- Does the price gouging law apply to properties outside the county where the DSOE is declared?
- Yes, it can apply elsewhere in the state if there is increased consumer demand due to the emergency.
- What are the penalties for violating the price gouging law?
- Violators may face up to one year in jail, a $10,000 fine, civil penalties of up to $2,500 per violation, restitution, and potential licensing violations.
Will I Really Get in Trouble?
Yes! Someone will, that’s for sure. The State is seeking to “make examples” and has filed at least one criminal complaint against a real estate agent.
Per a State press release, “The investigation revealed that the couple applied to rent a home but after the application was received [after the declared state of emergency], they were informed that the price increased by 38%.” There, the State alleges the agent sought to increase the price of the rental by 38% from a previously advertised rate.
Read more about the State’s Complaint against this agent here: https://oag.ca.gov/news/press-releases/attorney-general-bonta-files-charges-against-southern-california-real-estate
This type of low hanging fruit will make for easy examples for the State to pursue.
Lucas Real Estate: Experts in Navigating Rental Laws
At Lucas Real Estate, we specialize in helping landlords in Newport Beach, Costa Mesa, and beyond navigate the complexities of property management during challenging times. Our deep understanding of California rental laws and HUD policies ensures that our clients remain compliant while maximizing their investments.
When disasters strike, we’re here to guide you through pricing strategies, legal compliance, and tenant communications with clarity and professionalism.
If you’re uncertain about which rent benchmarks to use during price gouging protections, reach out to us today. Together, we can ensure your rental business operates fairly and effectively, even in the most trying circumstances.
Contact Lucas Real Estate Today
Lucas Real estate specializes in assisting property owners and Trustees with real property. Devin Lucas is Real Estate Broker, Real Estate Attorney, and REALTOR®, Courtney Lucas is a CPA and REALTOR®. Together, they are experts in California Real Estate sales, capital gains issues, property tax matters including Propositions 13, 58, 193, 60, 90 and new Proposition 19 and property management.
If you’re preparing to sell, lease or manage real property in Newport Beach, Costa Mesa, or nearby communities like Huntington Beach or Laguna Beach, trust Lucas Real Estate to handle your transaction with precision and professionalism. From understanding key landlord tenant requirements, to taxation issues, to disclosure exemptions to fulfilling your obligations, we ensure a smooth and compliant sale.
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Author Devin R. Lucas is Real Estate Professional – a Real Estate Broker, Real Estate Attorney, and REALTOR® – specializing in Newport Beach, Costa Mesa and Orange County coastal communities, serving individuals and Trustees in residential real estate.
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Sources:
- CA Penal Code 396 https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=PEN§ionNum=396
- State Governor’s Office: https://www.caloes.ca.gov/office-of-the-director/policy-administration/legal-affairs/price-gouging/
- State Attorney General’s Office: https://oag.ca.gov/consumers/pricegougingduringdisasters
- HUD – https://www.hud.gov/ and https://www.huduser.gov/portal/datasets/fmr/fmrs/FY2025_code/2025summary.odn
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