Will the United States Supreme Court Strike Down Rent Stabilization?

A Manhattan landlord has done what few have dared to do before him – he has started a lawsuit in federal court asking that provisions of the New York City rent stabilization scheme be stricken as a violation of Fifth Amendment right to not be deprived of his property under the “Takings Clause”.  Various news articles have cited landlord James Harmon as being a formal federal prosecutor who reacted to his frustration with the fact that he was required to continue to house three (3) rent-stabilized tenants in his Upper West Side townhouse by commencing the federal lawsuit.

Supreme Court Taking Notice

What makes Mr. Harmon’s lawsuit so captivating is that the United States Supreme Court has indicated an interest in taking his case. Mr. Harmon’s lawsuit was dismissed by the United States District Court and his appeal was denied by the United States Court of Appeals. Mr. Harmon tenaciously then sought a writ of certiorari from the United States Supreme Court.

A writ of certiorari is an application to the United States Supreme Court asking that the Court accept your case for hearing. The number of writs changes each year but generally the Court receives more than 7,000 requests from litigants to hear a particular case and the Court grants the application in approximately 1 out of every 100 applications. In order to grant a writ of certiorari, 4 justices must vote to hear the case. Most applications are denied very quickly and without comment. Given the sheer volume of the applications this would be expected.

Mr. Harmon’s case is unusual in that the Court invited the defendants in Mr. Harmon’s lawsuit to formally oppose the writ of certiorari. This indicates that Mr. Harmon’s application has someone’s attention and his writ is being taken seriously.Given precedent it would seem that Mr. Harmon has an uphill battle in front of him notwithstanding the Supreme Court’s invitation to the defendants to brief the issue.

Rent Stabilization Laws Presumed Constitutional

First, there is a presumption of constitutionality for enabling statutes like the rent stabilization law and for promulgated codes like the rent stabilization code.

• In reversing a lower court’s ruling that a Pole Attachments Act constituted an unconstitutional taking under the 5th Amendment, the United States Supreme Court in FCC v. Florida Power Corp, 489 U.S. 245 (1987), held that “Statutes regulating the economic relations of landlords and tenants are not per se takings” under the 5th Amendment. Id at 252.

• The Court in Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), although finding an unconstitutional physical taking of property which entitled the landlady compensation, stated that it has “consistently affirmed that States have broad power to regulate housing conditions in general and the landlord-tenant relationship in particular without paying compensation for all economic injuries that such regulation entails.” Id at 440.

• Moreover, the Supreme Court cited Bowles v. Willingham, 321 U.S. 503 (1944) for the proposition that the primary purpose of rent control laws is the protection of tenants.

Takings Clause arguments like Mr. Harmon’s have assumed two forms-those alleging that a physical taking of property has occurred and those alleging that regulatory taking has occurred by way of a legislatively enacted statute. While the inverse condemnation arguments arising from rent control and stabilization mainly fall into the latter category, some have unsuccessfully attempted to bring suit under the former theory. Mr. Harmon seems to argue that there is an inverse condemnation that is occurring. In similar situations the United States Supreme Court has sided with the regulators.

• In upholding the constitutionality of a mobile home rent control ordinance, the Supreme Court in Yee v. City of Escondido, 503 U.S. 519 (1992) held that government regulation of a property owner’s rental housing was not a “physical taking” where such owners “voluntarily opened their property to occupation by others and were not required to continue to do so by either the city or the State.” Id at 529.

• The New York Court of Appeals has affirmed the State Division of Housing and Community Renewal’s newly enacted amendment to the City’s rent stabilization regulations extending non-eviction protection to “family members” of a tenant of record. Rent Stabilization Association of New York City Inc v. Richard L. Higgins , 83 N.Y.2d 156 (1993) (holding, “that a rent regulated tenancy might itself be of indefinite duration--as has long been the case under rent control and rent stabilization--does not, without more, render it a permanent physical occupation of property.”). Id at 172-173.

New York’s highest court explains that a regulatory taking under the Fifth Amendment will only be found where the so called Agins-Nollan test is met. The person seeking to undo a regulation under the Takings Clause will need to show either that “Regulation of private property constitutes an unconstitutional taking because it is denying an owner economically viable use of the property. See Nollan v. California Coastal Commission, 483 US 825 (1987) (Essentially a property owner argues that he/she cannot receive the maximum return on his/her investment – an argument specifically rejected by the New York Court of Appeals in Higgins.) Second, the person seeking to undo the regulation may be able to prevail if he/she can show that the regulation does not substantially advance a legitimate State interest. See Agins v. Tiburon, 447 U.S. 255 (1980).

The Odds Are in Tenants’ Favor

Landlords often fail when seeking to rid themselves of rent control (or rent stabilization as is the case with Mr. Harmon). A case often cited by landowners whose properties are subject to rent regulation is Richardson v. City and County of Honolulu, 124 F.3d 1150 (9th Cir.1997). The United States Court of Appeals held that the city‘s rent control ordinance constituted a regulatory taking because it didn't advance the legitimate state interest of increasing affordable housing. The city ordinance allowed for the conversion of leasehold condo interests into fee interests. Specifically, the court noted, “the absence of a mechanism that prevents lessees from capturing the net present value of the reduced land rent in the form of a premium, means that the Ordinance will not substantially further its goal of creating affordable owner-occupied housing in Honolulu” Id at 46.However, eight years later the United States Supreme Court implicitly rejected the holding in Richardson in the case of Lingle v. Chevron, 544 U.S. 528 (2005). In Lingle the United States Supreme Court deemed the Agins test inappropriate for rent regulation. Reversing a judgment of the Ninth Circuit which found a regulatory taking in favor of an oil company who sued the state for implementing rent controls on its leased properties, the Court held that the Agins test, in general, should not factor into the determination of a Takings Clause case. Specifically, the Court said that “reading it [the Agins test] to demand heightened means-ends review of virtually all regulation of private property would require courts to scrutinize the efficacy of a vast array of state and federal regulations---it would also empower--and might often require---courts to substitute their predictive judgments for those of the elected legislatures and expert agencies.” Id. at 10-15. See also Santa Monica Beach, Ltd. v. Superior Ct of LA County, 19 Cal. 4th 952 (1999) [court held Agins test was insufficient to be applied to rent control and appellants instead need to prove that rent control was an ‘arbitrary regulation of property rights’].Landlords in New York fighting to be rid of rent regulation have failed in each instance.

• In New York, the Court of Appeals in Higgins also held that all that must be proven is a close causal nexus between rent control/ stabilization and alleviating the housing shortage, not its “general wisdom or desirability”. 83 N.Y.2d 156 (1993) at 174-175.

• In Park Avenue Tower Associations v. City of New York, 746 F.2d 135 (1984), the United States Court of Appeals made clear that the standard under the economically viable use test was not a “reasonable return” but rather “any profit whatsoever” on a property owner’s investment. The court specifically held “(1) the inability of appellants to receive a reasonable return on their investment by itself does not, as a matter of law, constitute an unconstitutional taking”. Id at 6.

• Rent Stabilization Assn v. Dinkins, 805 F. Supp 159, (S.D.N.Y. 1992) stands for the proposition that rent stabilization is not a regulatory taking simply because it denies property owners a reasonable return on their investments. The Court stated, “This court rejected the notion that loss of profit -- much less loss of a reasonable return -- alone could constitute a taking.” Id at 14. The court granted the motion to dismiss Plaintiffs’ complaint regarding the constitutionality of the rent regulation laws in New York.



• In Federal Home Mortgage Corporation v. NY State Division of Housing and Community Renewal, 83 F.3d 45 (1996), FHLMC sought a declaratory judgment that rent stabilization that is applied to previously exempt properties (hence post-foreclosure) was violative of the 5th Amendments Takings Clause. The Court of Appeals held that NY’s rent stabilization laws do not violate the Takings Clause., specifically stating that “although FHLMC would not profit as much as it would under a market-based system, it may still rent apartments and collect the regulated rents.”

In reviewing the writ of certiorari the United States Supreme Court will have two justices very familiar with the rent regulatory scheme. Justice Antonin Scalia will often in public speeches and lectures refer to his family living in Queens. Justice Sotomayor’s recently celebrated appointment to the High Court was filled with accounts of her growing up in a New York City apartment building and Justice Sotomayor now resides in an apartment in Manhattan. The author will be anxiously awaiting a decision on Mr. Harmon’s writ of certiorari though it appears that precedent is decidedly stacked against him. The author gratefully acknowledges the assistance of Jennifer Kucuk in the preparation of this article.