By Robert S. Coldren, Esq. and Mark D. Alpert, Esq.

The recent decisions of the United States Ninth Circuit Court of Appeals in Chevron USA v. Lingle, 136 F.3d 846, 2004 Daily Journal DAR 4637 (9th Cir April 1, 2004), Hacienda Valley Mobile Estates v. City of Morgan Hill, 353 F3d 651 (9th Cir. 2003), and Carson Harbor Village MHP v. City of Carson, 2004 U.S. App Lexis 4 (9th Cir. 2004) are laying the groundwork for substantial challenges to rent control laws that may even threaten their very existence. These decisions represent a threat to rent control because they make clear that the courts reviewing the application of rent control laws and ordinances and will examine whether they are applied in a manner which “substantially advances” a legitimate state interest. This “substantially advances” standard requires courts to examine the actual effect of rent control laws. In other words, good intentions are not enough. These laws must actually serve a legitimate, valid and legal purpose in a substantial way.

Manufactured home community rent control laws which provide for “vacancy control” are particularly vulnerable under these new decisions. “Vacancy control” prevents or limits the right of a property owner to raise rents when the property is vacated, as in a change in tenancy. In communities, “vacancy control” leads to “premiums” in the sale of homes. A “premium” exists when a residents moving into a community overpay for a home to take advantage of reduced space rents. These “premiums” effectively defeat the purpose of affordable housing because new residents who pay lower space rent simply pay more for the home. The total cost of housing remains the same.

Why are these ordinances at risk? Setting aside the legal jargon, they are subject to challenge because these laws do not actually do what they are supposed to do-- serve the interest of affordable housing. The holding of these decisions seems unremarkable and reasonable. What could possibly be wrong with requiring that a rent control ordinance do what it is supposed to do? The dissenting judge in the Chevron case, Circuit Judge Fletcher, argues it is unreasonable to expect rent control laws to “substantially advance” a legitimate state purpose. He states in his dissent in Chevron that:

Under the Panel’s holding, ‘virtually all rent control laws in the Ninth Circuit are now subject to the substantially advances a legitimate state interest’ test . . . and many of those laws may well be held unconstitutional under that test.” Rent control is often inefficient and sometimes unfair. [Citation]. But we should not confuse inefficiency and unfairness with unconstitutionality. (Emphasis added.)

Judge Fletcher offers a less-than-ringing endorsement of rent control. In fact, he makes the case against these laws, which are almost always “inefficient” and are inherently “unfair.” The damaging admission is only surprising because of the source. Economists, policy analysts, builders, and even many government officials charged with administering these laws, have long recognized that rent control is bad policy which harms, not helps, affordable housing. In fact, one of the few things almost all economists agree upon is that rent control is harmful, not helpful, to the cause of affordable housing (See "Is There a Consensus Among Economists in the 1990s?" American Ecnomic Review May 1992, 82, 203-9 in which 93% of surveyed economists agreed that rent control was harmful to affordable housing).

In the past, state courts, particularly in California, commonly have not reviewed rent control laws and administrative decisions to determine whether such decisions “substantially advanced” their stated purpose. For example, in decisions such as Santa Monica Beach v. Superior Court, 19 Cal.4th 952, (1999), California courts have resisted applying the “substantially advances” standard. Instead, the Court only considered whether the regulation was “rationally related” to its stated purpose. In other words, the Court would not examine the actual impact of the regulation. This deferential review cannot continue, post Chevron, without the state courts disregarding the Ninth Circuit’s explicit instructions on the application of federal law.

The proponents of rent control argue that the Chevron decision represents an usurpation of the right of governments to regulate land use. However, this argument fails to distinguish rent control laws from most governmental regulation of real property. As many courts have observed, "Courts do not sit as super-legislatures to determine the wisdom, desirability or propriety of statutes enacted by the Legislature. [Citations.]" Estate of Horman (1971) 5 Cal. 3d 62, 77. However, this general principal of deference has not been applied where the governmental decision making directly threatens constitutionally guaranteed rights, such as free speech, religion, and property rights. Applying a reduced level of scrutiny where those rights are at risk puts too much power in the hands of politicians to decide the property rights of individuals. The framers of the Constitution were particularly concerned that property rights could be unsafe if they were subject to the political whims of elected officials. James Madison wrote:

A man is said to have a right to his property, he may equally be said to have property in his rights. Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions. James Madison on Property (1792).

Rent control laws today are being administered by local political bodies, or their appointees, who have had enormous power in setting rents. The absence of meaningful court review and a political environment that is antagonistic to property rights has resulted in rent control being utilized as an enormous rent subsidy program, benefiting a lucky few residents, at the expense of unlucky property owners. With heightened judicial review now clearly the law, this trend may finally begin to reverse.

Are All Below-Market Rent Control Schemes At Risk?

Although Chevron and Hacienda specifically address the “substantially advances” standard of review, the principles underlying these cases also approve review of rent control laws under a “potential taking standard,” rather than a “due process” violation under the Federal Constitution. The importance of this rather technical legal distinction is that it changes the legal framework from which such laws are reviewed.

The United States Supreme Court noted in Armstrong v. United States, 364 U.S. 40, 80 S.Ct. 1563 (1960) observed:

The Fifth Amendment’s guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.

The U. S. Supreme Court echoed that sentiment more than a decade ago in the context of a community
rent control case, Yee v. City of Escondido, 503 U.S. 519 (1992):

Compensation is required only if considerations such as the purpose of the regulation or the extent to which it deprives the owner of the economic use of the property suggest that the regulation has unfairly singled out the property owner to bear a burden that should be borne by the public as a whole.

The natural conclusion to be derived from this principle is that rent control cannot be used to force a small group of private property owners to “subsidize” below “market rents.” As any property owners currently suffering under rent control surely can attest, these ordinances are being utilized as a tool to subsidize rents far below market. The question remains, however, whether courts will actually apply the Fifth Amendment to eliminate such private subsidies?

The Statute of Limitations Problem Solved?

A protected property right is meaningless without an effective method to protect those rights. Most rent control laws were passed many years ago, which can be a substantial barrier to challenging these laws because of applicable statute of limitations. In fact, a great many challenges to rent control laws have failed, without a hearing on the merits, because they were brought too late. A higher level of scrutiny in theory does no good for property owners if it is too late to sue.

The Hacienda decision is important, in part, because it addresses this statute of limitations problem. Hacienda holds that the “premium” constitutional challenge can be brought years after a rent control ordinance was passed based on the denial of a request for a rent increase under that Ordinance. While Hacienda was limited to constitutional challenge based on the existence of a “premium” in the sale of manufactured homes, it can be analogized to encompass any challenge to a rent control ordinance on the grounds that it does not “substantially advance” a legitimate state interest. This means that property owners who live in jurisdictions where rent control laws were passed many years ago may be able to file suit long after the applicable statute of limitations would have passed for a generalized constitutional challenge.

Conclusions

The war against rent control may not yet be won, but Chevron, Hacienda and Carson Harbor represent important battle victories in that war. The decisions provide specific guidance for state courts to review rent control laws, which will hopefully cause those state courts to follow the law or face reversal. When they do, as Judge Fletcher predicted, many such laws will fall.

Robert S. Coldren is a founding partner with the law firm of Hart, King and Coldren and may be reached at robertc@hkclaw.com. Mark D. Alpert is an associate with Hart, King & Coldren and may be reached at marka@hkclaw.com. Hart, King & Coldren is a full service corporate law firm specializing in manufactured home community law with offices in Santa Ana and Santa Rosa, California. The firm can be contacted at (714) 432-8700 or www.hkclaw.com.