New rent control legislation in Montgomery County (Rent Stabilization Bill (15-23)), signed into law by the County Executive on July 24, 2023 after a marathon legislative session, caps annual increases of base rent for non-exempt rental units at the lesser of CPI-U plus 3% or 6%.
However, the specificity seemingly ends there, with the Council leaving many other aspects of the Bill to be clarified by the Director of the Department of Housing and Community Affairs through Method 2 regulations, which have yet to be drafted.
- The Bill permits landlords to seek relief from rent control caps by application to the Director, which the Director must grant where an increase is necessary to obtain a “fair return” on the rental unit. However, a “fair return” is only defined as a return on investment that is (a) sufficient to offset operating expenses, and (b) in keeping with similar investment returns in other enterprises having comparable risks. Instead of the Council deliberating and arriving at what they viewed as an appropriate formula that provides a “fair return” (which would be crucial for the legislation to pass constitutional muster), the onus was instead placed on the Director.
- The Bill permits a surcharge to cover costs of certain capital improvements (exclusive of ordinary repair and maintenance) after the capital improvements are complete, which (a) if affecting all units, must be prorated evenly across all units for no more than 96 months and must not exceed 20% of the base rent, or (b) if affecting less than all units, must be prorated evenly across all affected units for no more than 60 months and must not exceed 15% of the base rent. To qualify the improvements must also be depreciable, and if energy cost savings are created, that savings must be passed onto the tenant and either result in reduction in energy use in the building or be intended to comply with applicable law. However, landlords are forestalled from applying a surcharge until it is first approved by the Director following the submission of a petition, the process and timing of which are to be determined in the Method 2 regulations.
- The Bill imposes limitations on fee increases and new fees charged by landlords for regulated units, without clarifying whether these limitations concern only application, amenity, pet or similar fees, or whether system charges, such as utility billings through a RUBS system for a master metered building, are also affected. Rather, the Director is responsible for making these determinations.
- The Bill requires the Director to issue regulations that cover how rent control caps are to be applied to units that are not leased and are vacant for more than a year which returns to the market for rent, and does not clarify how units are to be treated where leased for terms of less than a year, or where a tenant vacates the unit prior to the expiration of the lease.
- The Bill restricts rent increases for “troubled” or “at-risk” properties unless determined by the Director as necessary to cover costs to improve habitability. The fact that it currently takes longer for a building that is “at-risk” to be removed from the “at-risk” designation than it does for a building that is “troubled” due to inspection scheduling for these properties means properties on the “at-risk” list are likely to be subjected to the potential of no rental increases for a longer period than their “troubled” counterparts, despite being in better condition. Ideally, the Method 2 regulations will provide a path for properties to be promptly removed from the “troubled” and “at-risk” designations where repairs are timely made.
When Do the Rent Control Caps Apply?
Confusion also abounds as to when the rent control caps are applicable. The effective date of the Bill was originally six months following signature by the County Executive, and the Bill initially permitted rent increases above rent control caps if the increase was effective prior to the effective date of the Bill or the Method 2 regulations. However, the PHP Committee requested language be added to clarify rent increases occurring between the date the Bill becomes law and the date the regulations take effect need to be withdrawn or modified to comply with the rent control caps.
In response, in the legislative session the Council (a) amended the Bill to be effective 90 days after signature by the County Executive, by deleting language specifying an effective date of six months after the County Executive signed the Bill (thus reverting to existing law which treats the 91st day following County Executive signature as the effective date), and (b) amended the Bill to require rent increases to comply with rent control caps if occurring after the effective date of the Bill and after the effective date of the Method 2 regulations.
The PHP Committee also requested language be added to clarify when the Bill is operational, and in response the County added a new Section 4, which stated that “the requirements of the Bill must not apply and must not be enforced until the Method 2 regulations … take effect.”
Unfortunately, although this history is clear in the Action Staff Report for the Bill, these amendments have still left many with the impression that the Bill allows rent increases to exceed rent control caps so long as they are effective before the Method 2 regulations are in place. At this stage, it is unclear if the Director will address this by including a provision in the Method 2 regulations that authorizes noncompliant increases so long as they are effective prior to the adoption of the Method 2 regulations, or whether the County will seek to retroactively apply the restrictions of the Bill to increases which occurred after the effective date of the Bill but prior to the effective date of the Method 2 regulations. Should the latter come to pass, it is also unclear what penalties or fines may be imposed over and above the likely refund or crediting of excess rents charged, which is a cause for concern as the neighboring law in the District of Columbia permits aggrieved parties to seek treble damages.
Lerch Early is actively engaged in legislative advocacy on behalf of landlords on these matters, and we will provide an update as the answers to these many ambiguities (in particular, when the rent control caps are to actually be effective) come into clearer focus.