With the Governor's signature on Senate Bill 608 on February 28, Oregon became the first state with a statewide rent control law. The new law took effect March 1 and is applicable only to residential tenancies. The new law has three primary features.
1. Rent Control. Rent may not increase during the first year of the lease. Thereafter, rent may increase annually by no more than 7% plus the annual change in the consumer price index. The tenant must be given 90 days written notice of any rent increase. If the tenant voluntarily moves out, the rent may be reset to market rates without regard to the cap. The cap on rent increases does not apply to any unit newly constructed within the prior 15 years, or to subsidized housing.
2. Limitation on Evictions. Tenants who have occupied the premises for more than one year may only be evicted for good cause, or upon 90 days notice if one of these exceptions apply:
- landlord intends to demolish the premises or convert the premises to non-residential use;
- the premises are unsafe or uninhabitable and landlord intends to make renovations;
- landlord or their immediate family intend to move in;
- landlord has a contract to sell the property to a buyer who intends to move in.
If the landlord owns five or more residential units, any eviction under one of the foregoing exceptions requires payment of one month's rent to the tenant. Landlords may not avoid the application of the cap on rent increases by terminating a month-to-month lease without cause prior to the end of the first year; in that situation the rent to the new tenant could not increase beyond the cap.
There is also an exception to the for-cause eviction requirement if the tenant's unit is in the same building as the landlord's principal residence and there are only two dwelling units in the building (i.e., an "in-law" apartment).
3. Conversion of Fixed Term Leases to Month-to-Month. At the expiration of a fixed-term lease for longer than one year, the lease automatically converts to month-to-month and the tenant is protected from evictions as outlined above, unless the tenant has committed three or more violations of the lease within the prior 12 months. In that situation, and provided that the landlord has complied with certain notice requirements, the lease does not convert to month-to-month and the landlord may terminate the lease on 90 days written notice.
Penalties for violation of the new law by landlords can include payment of three months' rent plus actual damages to the tenant. Also, the tenant can assert non-compliance with the eviction protections as a defense to an action by the landlord to recover possession.
This new law places onerous and unbalanced requirements on residential landlords. For example, notices of default must contain specific and detailed language if the landlord wants to later take advantage of the exception to automatic conversion of fixed-term leases to month-to-month, described above. Also, tenants may terminate month-to-month leases on 30 days notice at any time, but landlords must give between 30 and 120 days notice depending on the specific facts, if the landlord is even entitled at all to terminate the lease. The law also is limited to leases for a fixed-term, month-to-month or week-to-week, so it is unclear how the law might apply to leases for a different term, such as a lifetime lease or year-to-year.
Setting aside the technical flaws in the new law, rent control is just a bad idea. Rent control is almost universally justified as a way to protect low-income tenants, and in the short term that is true. But in the long term, low-income tenants are hurt because of two important effects. First, artificially low rents discourage creation of quality new housing and also discourage existing renters from making a decision to move that might otherwise be economically advantageous. This double whammy makes entry-level housing harder to find for newer tenants, thereby benefiting low-income tenants now at the expense of even lower-income tenants of the future.
Second, even though they are discouraged from moving by low rents, lower-income tenants are ultimately more likely than higher-income tenants to experience job displacement and be forced to move. Also, landlords are incentivized to take advantage of loopholes and exceptions allowing conversion of rental stock to owner-occupied housing as the gap between rental income and property value expands. As a result, in the long run rent control disproportionately benefits higher-income households who are able to stay put and are closer to being able to buy a place of their own.
A better solution to the admittedly-severe housing shortage in Oregon would be to incentivize creation of more affordable homes. The debate rages on about how best to do that, with ideas that range from laxer land use laws, to higher density requirements, to obligating or incentivizing developers to build affordable housing, to direct subsidies to low income tenants. Focusing on real wage growth would also help.
While Governor Brown has said that rent control is only a start, at the moment it is all that we have. Unless the Governor and the Legislature follow through on the promise of more tools in the toolkit, Oregon will likely experience unintended but thoroughly foreseeable negative consequences as a result.