Recent Amendments to the Disclosure Regime Governing California Lease Agreements (Part 1)

November 28th, 2013

Senate Bill 1186 – Accessibility

Over the past several months, the legal and regulatory framework applicable to California commercial lease and rental agreements has undergone major legislative changes, some of which are already in effect. In the following two articles, we will discuss the two most important amendments – Senate Bill (SB) 1186 and Assembly Bill (AB) 1103/531 – each mandating the inclusion of additional disclosures, pertaining to accessibility and energy use respectively, in certain categories of lease agreements.

Perhaps no case illustrates the importance of the pre-legislative process and sound statutory drafting better than California’s tryst with the Americans with Disabilities Act (ADA) and related state accessibility legislations. In the past few years, over 14,000 ADA lawsuits have been filed in California alone, with some statistics attributing over 40% of all ADA lawsuits filed to the Golden State, despite it having the highest overall ADA compliance in the country. In an effort to curb such predatory litigation and abuse of court process, while simultaneously incentivizing ADA compliance in commercial establishments, the California State Legislature enacted SB 1186 in September 2012, which imposes stricter procedural obligations on plaintiff’s attorneys litigating on such accessibility laws, and offers additional protections to businesses faced with such litigation.

SB 1186 requires all commercial lease agreements executed on or after July 1, 2013 to disclose: (a) whether the subject-matter property had been inspected by a Certified Access Specialist (CASp) (any person certified under Section 4459.5 of the California Government Code), and if so, (b) whether or not the property has been determined to be in compliance with the accessibility standards notified under California Civil Code Section 55.53. As per the advice of the California Commission on Disability Access, this requirement may be applicable to certain commercial lease agreements entered into prior to July 1, 2013, in so far as the same has been amended or renewed on or after this date, or buildings that are the subject matter of pre-existing leases, but which are being sold or financed after July 1, 2013.

While the amendment makes neither the CASp inspection nor compliance with Section 55.53 standards compulsory, and simply mandates disclosures in these respects, lessors who can make both disclosures in the affirmative may argue for certain protections – such as preliminary stays on ADA lawsuits (and hence, the opportunity to correct accessibility issues and dismiss the lawsuit), as well as reduced statutory damages, provided that the violations are cured within 30-60 days of the complaint (depending on the size of the business). At the same time, the legislature has been careful to ensure that a negative statement in respect of a CASp inspection is inadmissible as evidence of “lack of intent to comply with the law” (California Civil Code Section 55.53(f)).

The inclusion of this disclosure is slated to become a contentious point during the lease agreement execution process, especially since both landlords and tenants have been held to have concurrent ADA liability (Botosan v. Paul McNally Realty (216 F.3d 827 (9th Cir. 2000)), leading to several tenants being named as defendants in accessibility lawsuits. For small business tenants (commercial space of 7,500 square feet or less) operating out of San Francisco, the San Francisco Administrative Code Chapter 38 titled “Obligations of Landlords and Small Business Tenants for Disability Access Improvements,” which came into force on June 1, 2013, supplements these protections by ensuring that commercial lessors make appropriate disclosures as to the accessibility-condition of the rental space.

Thus in addition to the existing burden of negotiating which party will be required to bear the cost of compliance, parties will now have to undertake a cost-benefit analysis of the CASp inspection, and determine whether the cost of the inspection outweighs the cost of compliance in every case that arises – for instance, the cost of installing ramps, widening doors, designating special parking space, adding Braille markings on elevator buttons and signs, installing accessible bars isn toilets, and replacing certain types of carpeting inter alia. Nevertheless, given the propensity of ADA litigation in California, parties may, more often than not, find it beneficial to conduct the inspection in every case, and avail of the additional protections provided by SB 1186, which thus creates an important item in the commercial real estate due diligence checklist.

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Weighing in on the Affordable Housing Debate in California: Legal Issues and Policy Considerations

November 28th, 2013

Inclusionary housing ordinances in counties and cities across the United States have been enacted to address the affordable housing needs of the region while promoting effective economic integration. Indeed, the California affordable housing program has been one of the most successful in the nation, yielding over 10,000 affordable housing units, as opposed to states such as Massachusetts that are yet to produce even one.

In the wake of the housing bubble, an acute shortage of affordable housing in upmarket San Jose, California prompted a spate of executive action, most notably San Jose’s inclusionary housing ordinance in 2010. Slated to come into force in January 2013, the municipal housing ordinance mandates that (a) 30% of residential development projects of 20 or more units be made available at varying below-market rates, as per the notified pricing slab, or (b) such affordable housing be constructed at a different location as a proportion of the total project, or (c) an “in-lieu” development fee, equal to the surplus of the median market price (over the past 3 years) over the government-specified market rate, be paid into the city affordable housing fund.

However, the legality of this particular ordinance is currently sub judice in the appeal against the decision of the Sixth District Court of Appeals in California Building Industry Association v. City of San Jose ((2013) 157 Cal.Rptr.3d 813) pending before the California Supreme Court expected to have far-reaching implications on similar ordinances promulgated throughout the state of California in 2014. The bone of contention that emerges from the controversy is whether this ordinance, which compels the real estate industry to provide affordable housing, amounts to an arbitrary allocation of a societal burden of the state.

In the various cases in which the validity of these ordinances has been considered, three rationales emerge, with the judiciary having overturned validity on two of those grounds in two of the very first successful challenges in 2009. In Palmer/Sixth Street Properties v. City of Los Angeles (175 Cal. App. 4th 1396 (2009)), (where the court invalidated the ordinance in respect of rental units as violative of a lessor’s freedom to set initial rent under a rent “de-control” legislation) and Building Industry Association of Central California v. City of Patterson (171 Cal. App. 4th 886 (2009)) (where the court characterized the aforementioned “in-lieu development” fee to escape compliance with the ordinance as an exaction which failed the “reasonable relationship” test) the judiciary used very different analyses – rent/price control and exactions, respectively – to arrive at the same fundamental result.

Furthering the line of reasoning adopted in Patterson, the jurisprudence on the California Mitigation Fees Act 1987 that invalidates such “in-lieu development” fees as being “exactions” was reaffirmed by the California Supreme Court as recently as October 2013 in Sterling v. City of Palo Alto (Cal. S. Ct. No. S204771). The verdict followed the June 2013 ruling of the United States Supreme Court in Koontz v. St. Johns River Water Management District (568 US ___ (2013)) where the Court held that the land use ordinances imposing such fees would have to survive the nexus test of “rough proportionality” between the exaction and the impact of a proposed development.

The controversy was further heightened when the California legislature unsuccessfully attempted to reverse the result of Palmer and Patterson through the passage of Assembly Bill 1229, which would accord statutory backing to these inclusionary housing ordinances. However Governor Brown vetoed the Bill, given that the matter is still pending before the California Supreme Court, and until then, Palmer and Patterson continue to hold as good law.

It remains to be seen whether the California Supreme Court’s opinion in San Jose will bring closure to this legal controversy, and whether it will choose to overrule or reconcile its decision with Palmer, which specifically applies to “rental” projects, and is not based on the “exactions” rationale.

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