West Coast Real Estate Update - May 2018

by Holland & Knight LLP

Holland & Knight LLP

New Rules on the Horizon to Reduce Emissions and Improve Air Quality

Facing pressure to meet federal clean air standards, California's South Coast Air Quality Management District (SCAQMD) voted 7-6 to direct staff to write new rules to reduce smog-forming emissions from truck traffic to and from local warehouses as well as in and around rail yards, ports, airports and new developments. The SCAQMD encompasses a wide area that consists of Orange County, most of Los Angeles County, most of Riverside County and the southwest portion of San Bernardino County.

In order to meet the federal ozone standard deadline in 2023, smog-forming emissions must be reduced by an additional 45 percent beyond the levels resulting from current regulations. Unlike factories, emissions related to warehouses, rail yards, ports and airports emanate from sources outside the direct control of the property owner. Therefore, these facilities will have to use indirect methods to control emissions, such as reducing the number of truck trips into or out of their facilities and utilizing zero or near-zero emission cargo-handling equipment.

The vote did not come without controversy, of course. Business and industry groups argued that imposing additional rules on warehouses could harm the local industry and result in diversion of cargo to other ports. Neighborhood and environmental groups countered by arguing that warehouses are often located in or near low-income neighborhoods, and these rules are necessary to protect residents who cannot afford to move elsewhere.  

California Legislators Revise "Efficient Proximate Cause" Statute in Response to Landslides

When landslides and mudflows destroyed homes, closed freeways and killed 21 people in January, people wondered what role the Thomas Fire played in the damage. Just a month earlier, in December 2017, the Thomas Fire scorched more than 281,000 acres, making it the largest wildfire in California's history and denuding entire landscapes of vegetation. Without healthy vegetation on hillsides, the January rains caused soil in the burn areas to flow off the hillsides into anything in its path.

The legal issue raised by this scenario centers around property insurance coverage and the legal causes of property damage. Most first-party insurance policies insure against loss or damage from fire, but specifically exclude coverage for damage resulting from landslides and mudflows. To determine whether insurance companies must cover damages caused by the landslides and mudflows that were partly caused by the Thomas Fire and other wildfires that plagued California last fall and winter, a California court will likely apply an efficient proximate cause analysis. Under an efficient proximate cause analysis, when a loss is caused by a combination of a covered risk and a specifically excluded risk, the loss is covered only if the covered risk is the most important or prominent cause.

California Insurance Commissioner Dave Jones already has issued a notice to insurance companies advising them that mudflow exclusions are unenforceable if the "efficient proximate cause" of the mudflow was a wildfire. More recently, the California legislature passed SB 917, which added Section 530.5 to Section 2 of the Insurance Code.

This new section specifies: "If a loss or damage results from a combination of perils, one of which is a landslide, coverage shall be provided if an insured peril is the efficient proximate cause of the loss or damage." Sections 530 and 532 already codify the efficient proximate cause analysis developed by California courts. This new section explicitly addresses landslides as one of the causes of damage or loss.

Since SB 917 was just passed on April 25, 2018, it is too early to tell what impact, if any, it will have on insurance coverages and any related litigation. However, the combination of action from the insurance commissioner and the California legislature appears to send a message to insurance carriers that damage caused by mudflows that would not have occurred absent the Thomas Fire most likely should be covered.

Los Angeles Passes Rules Governing Short-Term Rentals

The Los Angeles City Council recently unanimously approved a set of rules to govern short-term rentals within the city. The rules allow residential units to be rented out for a total of 120 days each year. A two-tier appeal process is created for those who wish to rent out their space for more than 120 days. The first tier creates an administrative appeal process whereby a unit can be rented out for a full year so long as the short-term rental host agrees to certain conditions, including registration requirements, approval from neighbors and clearing any nuisance citations. The second tier is for hosts that cannot meet the conditions of the first tier. It requires the host to obtain a discretionary approval from the city's planning director.

Under the new rules, only primary residences may be used for short-term rentals, and any housing units subject to Los Angeles' rent control ordinance would be prohibited from being used as short-term rentals. In addition, all short-term rental agreements will be subject to a 10 percent "bed tax," the proceeds of which shall be divided equally among Los Angeles' 15 council districts.

The rules authorized by the City Council still must go to the Los Angeles Planning Commission to formalize some of the details. The Los Angeles City Council will vote on a final version of the ordinance later this year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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