Help My Poor Grandma

Location: Orange County, CA.

My grandma has a small house she purchased years ago when it was still possible for a low income family to afford a home. She lives by herself (divorced). She is also retired and has been living on a limited Social Security income. She has an unpermitted room with private entrance/bath in her house, which she has been renting out for a little extra.

One year and a half ago, a couple started renting this room from her. They have been paying rent at $1,100 per month for 12 months before they moved out. They would fight each other in the middle of the night occasionally. One night their fight escalated from verbal to physical and the police arrived. Both of them went to jail for a few days before getting released. My grandma was pretty stressed out about the situation, so she asked them to move out right after the domestic violence incident happened. They agreed, and both moved out willingly after they found a new place.

6 peaceful months later, they hired an attorney to send my grandma a demand/extortion letter. The letter states that since the room was unpermitted, my grandma must pay back all rent collected (Rent Disgorgement), citing Green v. Superior Court (1974) case. The letter also made up a story that there was pest infestation to paint a picture of "unhabitable" living conditions. They had no issues & no complaints during the stay of 1 year, then hit my grandma with $13k demand letter 6 months after moving out. Attorney fees would cost $6k to $10k in our area, regardless of case outcome. Due to this outrageous cost, she will be presenting herself in court if they do sue for real.

Is there really a law where it says you can't collect rent from an unpermitted room? Do you think her chance of winning this case is high or slim? The room, although it is unpermitted, it looks nice like a normal room & not getto/run-down or anything. What should she prepare ahead for a possible court case? What should she say in her defense to eliminate or lower the rent disgorment claim?