Rent control confronts the Constitution

In case you haven’t been paying attention, rent control laws in general, and New York’s laws in particular, have been receiving a lot of attention in the courts. Three current challenges to New York’s laws (one was recently rejected by the United States Supreme Court and two others are still pending) lay out the issues. The Supreme Court has not addressed these issues in a while, but it seems as though fate is conspiring to bring them to the fore.

The current cases are Community Housing Improvement Program v. City of New York, 59 F.4th 540 (2d Cir. 2023), cert. den.; 74 Pinehurst LLC v. New York, 59 F.4th 557 (2d Cir. 2023), cert. pending; and 335-7 LLC, et al. v. City of New York, 2023 WL 2291511 (2d Cir. 2023), cert. pending.

New York’s Rent Stabilization Law (RSL) is reputed to be the most stringent (from the landlords’ perspective) in the country. It has two primary aspects. First, it tightly restricts the maximum rent that can be charged. Second, it essentially precludes the owners from reclaiming possession of any unit, even for themselves or family members to occupy. That turns a lease for a term into a permanent occupation for as long as the tenants or their successors desire.

Strangely enough, for an area as litigious as New York and an issue as omnipresent as rent control, it has been more than a century since the Supreme Court has reviewed New York City rent control. See Edgar A. Levy Leasing Co. v. Siegel, 258 U.S. 242 (1922); Marcus Brown Holding Co. v. Feldman, 256 U.S. 170 (1921). Times change. As Justice Oliver Wendell Holmes expressed it in that earlier era, “[a] limit in time, to tide over a passing trouble, well may justify a law that could not be upheld as a permanent change.” Block v. Hirsch, 256 U.S. 135, 157 (1921).

New York’s RSL was enacted a half-century ago as a temporary measure because of a “housing emergency.” It has since been repeatedly extended to the point where it has likely crossed Justice Holmes’s line and requires analysis as a permanent regulation rather than a temporary measure to handle a temporary situation.

In each of the three current cases, landlords have challenged the matter on two bases. First, because it has become the equivalent of a permanent occupancy requirement, giving the landlords no control over the end point of a lease, it has become a per se physical taking. Second, even if not rising to the level of a physical taking, it is such an imposition on the rights of landlords that it violates the Supreme Court’s prohibition against regulatory takings.

The RSL constitutes a physical taking because, once a lease is entered into, the landlord is locked in to it indefinitely, regardless of the term set in the lease. The tenant has the absolute right to continuously renew the lease. It constitutes a regulatory taking because the rent levels are set based not (as the market would have it) on reasonable costs plus a reasonable return on capital, but on the tenant’s ability to pay. Accordingly, New York’s highest court has viewed the RSL as a “public assistance benefit” for tenants who could not otherwise afford to live in New York City. In re Santiago-Monteverde, 24 N.Y.3d 283, 290 (2014). One suspects that the number of people who cannot afford to live in New York City without assistance is rather large.

Ends and means. As is so often true in constitutional litigation, that’s what these cases are about.

The problem arises when simplistic solutions are chosen for complex problems; when, in haste, one-sided “cures” are devised. The means chosen are once more before the courts.

To meet perceived needs, New York has cast its net too broadly. It has transferred palpable interests in property from landlords to tenants. Without compensation. That, the Constitution forbids.

That “public assistance” justification for the law demonstrates how it is a taking for public use and not some mere regulation of the rights and duties of citizens. Suppose that the City of New York decided that a large set of apartment buildings housed the city’s poorest citizens and, to protect them from joining the ranks of the homeless, the city decided to acquire all those buildings to maintain as low-income housing. To accomplish that, the city assembled the apartments’ owners and informed them that the city was simply taking them over. A sort of coup de apartments. In exchange for title to their properties, the owners would receive contracts to manage the new city-owned buildings and would be paid a salary based on a percentage of the rent collected. But the city would set the rent; the rental rates would change only when the city decided they could; funds for upkeep, insurance, and maintenance would have to come from the rents collected or money borrowed by the “managers,” as the city would invest no money of its own; and the tenants could either remain in perpetuity or designate their successors in interest.

Had the City of New York actually commandeered title to the properties and placed it in the City’s name, there is no doubt that a Fifth Amendment violation would have occurred. Property would have been taken for public use without any compensation changing hands. The acquisition of title would have made the taking obvious.

As the Supreme Court explained, “government action that works a taking of property rights necessarily implicates the ‘constitutional obligation to pay just compensation.’ [Citation.]” First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304, 315 (1987) (emphasis added).

When legislation is enacted that takes property with no intent to provide compensation, the legislation is invalid. Hodel v. Irving, 481 U.S. 704 (1987).

How does the hijacking of title from the apartment owners in the hypothetical differ from what the New York ordinance actually did to these apartment owners? In only one meaningful way: In the hypothetical, the owners would be relieved of the dubious honor of paying taxes on the property, as they would no longer hold title to it. As the New York Court of Appeals put it in its enduring exposition on the difference between overt and covert confiscation: “The only substantial difference, in such case, between restriction and actual taking, is that the restriction leaves the owner subject to the burden of payment of taxation, while outright confiscation would relieve him of that burden.” Arverne Bay Constr. Co. v. Thatcher, 15 N.E.2d 587, 592 (N.Y. 1938).

Aside from the taxation issue, the New York ordinance has stripped apartment owners of all useful indicia of ownership. Hyperbolic as this may sound, it is the reality. The stringent New York regulations have reduced the ownership of an apartment building in New York to something akin to a public utility, where all decisions are made by the government and the titular owners of the properties have lost not only control over what they can charge and who they can rent to, but have been compelled to transfer substantial property interests to their tenants with no compensation whatever.

The Supreme Court has been presented with multiple opportunities to review this extreme law. It has already rejected one, but perhaps the presence of so many independent cases raising virtually the same issue will get the Court’s attention.