Rent control in the new Lochner era.

• Author: Manheim, Karl

CONTENTS I. Introduction II. Recent Developments III. The Takings Clause A. Fifth Amendment "Property" 1. Background Principles 2. Fractional Property B. Possessory Takings 1. General Rule 2. Rent Control C. Regulatory Takings 1. Economic Impact 2. Substantially Advancing Prong D. Unconstitutional Conditions 1. Discretionary Benefits and Relinquished Rights 2. Exactions 3. Individual Adjudicative Discretionary Actions E. Temporary vs Permanent Takings 1. Doctrinal Origins 2. Regulatory Delay IV. Due Process Clause A. The Theory of "Confiscation" 1. Modern Standard for Confiscation 2. Particular Problems in Confiscation B. Preference for Takings Analysis V. Conclusion I.

INTRODUCTION

Housing is one of the necessities of life. (1) It also comprises a large share of most Americans' disposable income. Unlike other consumables, competition in supply and demand does not result in effective market restrictions on price. First, there is a limited supply of housing. The limit is both natural (there is a finite amount of land) and artificial (zoning restrictions limit housing supply). Second, consumers of rental housing do not have the same market power as do consumers of other goods. This is principally because substituting one product or brand for another, say at lease renewal time, exacts a high transaction cost--the considerable expense and inconvenience of relocating. Since rental housing is not fungible, each landlord is a demi-monopolist. (2) This is not meant as a pejorative, only to describe the owner's market power.

The absence of a free market in rental housing (at least in an idealized sense) often leads to exploitation by housing providers. This is especially true in times of economic stress, when the nation's resources are devoted to more pressing needs (e.g., wartime), or during periods of high inflation and real estate speculation. It is during these times that government policy makers often consider restrictions on rent increases and other forms of tenant protection. (3)

Of course, there are other means to overcome market inefficiencies in housing. Tax and cash subsidies can encourage housing production or assist with rent payments. Zoning incentives can do likewise. But federal and state governments are not as concerned with housing as they once were; the issue is currently perceived as one of local concern. As a result, municipalities are left holding the bag, so to speak, with a dwindling arsenal of regulatory means available to them in addressing housing shortages. Rent control is one of those still-remaining means.

Rent controls were first enacted in the United States during World War I. Since then, the Supreme Court has considered the constitutionality of rent control at least a dozen times, upholding the challenged law on every occasion save one. (4) It is somewhat remarkable that even during periods of extraordinary judicial protection of property rights, rent control laws have nonetheless survived. This was true in the Lochner era, (5) as well as during the modern resurgence of property rights activism, at least at the Supreme Court.

Despite long-standing judicial acceptance of rent regulation, the attack on rent control has been unrelenting. For some reason, rent control triggers greater emotional and ideological opposition than do most other forms of economic regulation. Virtually every constitutional theory has been tried. Most challenges are based on the takings and due process clauses, but the contracts clause (6) and even the first (7) and thirteenth amendments (8) and equal protection (9) have made their way into the opinions. Creative statutory claims have also been mounted, such as the argument that rent control is an illegal form of price fixing. (10)

This article deals principally with takings clause challenges to rent control. There is some discussion of due process issues because they are often intertwined and sometimes confused with takings claims. (11) The sections that follow focus on substantive doctrine. Although equally important, procedural issues are omitted since they are covered elsewhere.

II.

RECENT DEVELOPMENTS

The Supreme Court has upheld every rent control law it has faced since 1922. Yet, takings doctrine has undergone major changes in recent years. While these developments typically occur in land use cases, lower courts are often asked to apply them to rent control. While evolving doctrine must be applied, lower courts often reach wrong results. One can speculate why that is so, and why Supreme Court review is often needed to correct misunderstandings of takings law. Perhaps it is the shifting ideology of federal judges, or their views on the balance of power between the judicial and legislative branches. Whatever the reason, what was once thought to be a settled issue, has moved back onto the front burner of judicial activism.

Two takings issues have emerged in recent years that deserve special attention in the context of rent control. They are briefly described in this overview section, and receive detailed attention below. First, is the notion of fractional or partial takings--if an owner's property interest can be conceptually divided into component parts, and her interest in any of those parts is found to have been completely extinguished, then a partial taking has occurred. Thus, if the difference between regulated and market rents (the consumer's saving due to price regulation) is a distinct property right, then rent control fully takes that component. This notion gained currency in a series of Federal Circuit takings cases, and applied to rent control in Hall v. Santa Barbara. (12) But, it was firmly rejected by the Supreme Court in Tahoe-Sierra Pres. Council v. Tahoe Reg'l Planning Agency. (13)

The second recent development in takings doctrine is the standard of review a court should use when examining the constitutionality of property regulation. Until recently, the Supreme Court had articulated two significantly different standards similar to those used in due process cases--strict scrutiny and rational basis. The former applied to possessory takings (e.g., government occupation of land) and categorical takings (regulations that deprived all viable use). In these cases, no degree of justification can exempt the state from paying just compensation for taking all meaningful value from the owner. The deferential standard was used in all other takings cases, since it was not ordinarily a judicial function to second-guess the reasonableness of a legislature's economic judgments and adjustments.

A third category of takings cases emerged starting in the late 1980s. These involved the granting of conditional land-use permits, where government required concessions from owners (such as easements) in exchange for discretionary permits. In Nollan v. Calif. Coastal Comm'n (14) and Dolan v. Tigard, (15) the Supreme Court held that the use of conditional permits carried a risk that government could withhold discretionary permissions as a way of exacting unrelated property rights from owners. Hence, the standard of review was elevated in this category, to require that regulation "substantially advance" underlying state interests. This heightened scrutiny, in conditional permit cases, is consistent with the "unconstitutional conditions" doctrine, which prevents the state from using its largesse (discretionary benefits and permits) to force people to relinquish constitutional rights. (16)

As originally developed by the Supreme Court, the "substantially advance" requirement was to be applied to a narrow category of takings cases--those involving ad hoc conditions on discretionary permits. However, some lower courts began to broaden this use of heightened scrutiny, and apply it to rent control cases, where no discretionary permitting is involved. The Ninth Circuit lead the charge in elevating the standard of review, finding that some features of rent control failed to "substantially advance" legitimate state interests, and therefore caused a regulatory taking. (17)

There were three serious and related problems with the "substantially advance" test, which had its roots in the substantive due process regime of the Lochner era. First, it conflated the takings and due process clauses. The former is intended to prevent severe economic impacts on property, unless government pays for the resulting loss. The latter is designed to prevent arbitrary and capricious government action. One cannot bring a due process claim if the more explicit takings clause would apply. (18) Moreover, the repudiation of economic substantive due process generally should apply equally to rent control as to other economic regulation. But, by merging it into the takings clause, activist courts found cover to resurrect Lochner.

Second, it put courts in the business of making normative judgments as to which state interests were important enough to protect with economic regulation. Thus, in Cashman v. Cotati, (19) the Ninth Circuit apparently thought that maintaining affordable housing for incoming tenants of mobilehome spaces was an important interest, but protecting the investments of outgoing tenants was not. (20) Third, it required courts to make economic judgments about the efficacy of particular regulatory schemes. Cashman also illustrates this point. The court held that vacancy control (maintaining regulated rent levels for new tenants) would not in fact benefit incoming tenants of mobilehome parks because they would be paying a rent premium as part of the purchase price of the mobilehome. "Unlike ordinary rent control ordinances, an ordinance that permits incumbent tenants to capture a premium based on the present value of the reduced rent fails to substantially advance a state's interest in creating or maintaining affordable housing." (21) The court rejected out of hand the district court's finding that no such premium existed. Unless the rent control law, on its face, prohibited the...