'Fair rents' or 'forced subsidies' under rent regulation: finding a regulatory taking where legal fictions collide.

• Author: Collins, Timothy L.

1. INTRODUCTION

   Two legal fiction(1) have been used to describe the ultimate product of rent control laws. This Article explores the development and operation of each of these fictions. The first is a longstanding presumption that a properly structured system of rent regulation results in "fair" or "reasonable" rents.(2) The second fiction is a presumption of more recent vintage which suggests that public intervention in private markets which directly benefits one party at the expense of another produces a "forced subsidy." Both fictions have some grounding in western economic and legal traditions.(3) Nonetheless, as operative assumptions used to analyze whether landlords subjected to rent regulation are unconstitutionally deprived of their property rights, both fictions are fundamentally incompatible.

   The Fifth Amendment's Takings Clause, made applicable to the states through the Fourteenth Amendment,(4) establishes a constitutional border between popular sovereignty and private economic prerogatives.(5) Legal precedent which openly examines and persuasively selects one or the other of the fictions described herein could defuse at least one of the many skirmishes which appear to be breaking out along that border.(6) Although the immediate impact of such a selection may be limited to those who are affected by rent controls, the acceptance of one or the other of these fictions may influence views on the constitutionality of more broadly structured regulations of property and markets.

   The disparate legal impact of choosing between the fair rent and forced subsidy fictions is exemplified by two judicial opinions. The first, and most recent, is a majority opinion written by Judge Bellacosa of the New York Court of Appeals, in Manocherian v. Lenox Hill Hospital.(7) Judge Bellacosa's opinion squarely incorporates the subsidy fiction.(8) The second is a dissenting opinion written by Justice Scalia in Pennell v. City of San Jose.(9) Although that opinion addressed a takings claim which was declared premature by the majority of the Court, Justice Scalia's dissent clearly acknowledged the legitimacy of the traditional fair rent objective of rent regulation.(10)

   To illustrate these distinct approaches, parts II and III of this Article, respectively, discuss the Manocherian and Pennell opinions. Part IV attributes the emergence of the subsidy fiction to the growing influence of economic theory in constitutional analysis, and briefly considers the potential implications of this trend. Part V discusses New York City's rent regulations, analyzing their purpose with respect to the fair rent and subsidy fictions. The Article concludes that the semi-conscious nature of this transmutation from the traditional fair-rent fiction to the subsidy fiction will, if left unexamined, seriously undermine democratic accountability.

2. MANOCHERIAN V. LENOX HILL HOSPITAL

   In the 1960s Lenox Hill Hospital, a Manhattan-based not-for-profit teaching hospital,(11) leased several apartments for its medical staff in a building located near the hospital.(12) In 1976 the Manocherian family, one of the city's largest property owners,(13) purchased the building while Lenox Hill's personnel were still in occupancy.(14)

   Two citywide problems arose in the early 1980s which, although not involving the apartments leased to Lenox Hill, led to the unintended temporary removal of rent protections for Lenox Hill's employee subtenants. First, some absentee tenants were subletting apartments at much higher rents than owners were permitted to charge.(15) Second, absentee tenants were subletting their units to retain valuable inside purchasers' rights in the event of a conversion to cooperative ownership.(16) In short, a law that was designed to prevent landlord profiteering had, in some instances, facilitated the rise of tenant profiteers.

   In an attempt to remedy these and other abuses, the New York State Legislature amended the New York City Rent Stabilization Law(17) and the Emergency Tenant Protection Act.(18) These amendments impose strict limitations on the right of rent-regulated tenants to sublet their apartments.(19) Among other changes, these reforms removed the right to sublet from all but prime tenants who intended to return to their apartments within a specified time.(20)

   As a corporate tenant, Lenox Hill Hospital could not be a prime/occupying tenant.(21) As a result of the statutory change, approximately one hundred of Lenox Hill's employees, residing as subtenants in the Manocherian building and other buildings in the vicinity, faced eviction.(22)

   In recognition of this unintended consequence, the New York State Legislature again amended the New York City Rent Stabilization Law and the Emergency Tenant Protection Act by reestablishing rent stabilization protection for not-for-profit hospitals that sublease apartments.(23) Under this exception to the prohibition against non-primary tenancies, Lenox Hill Hospital could continue renting apartments for the purpose of providing reasonably priced housing for their employee subtenants.(24) The Manocherians, claiming that the reestablishment of the rent protections for Lenox Hill employees effected a regulatory taking, filed suit in state court.(25) Their claim relied in part on Seawall Associates v. City of New York.(26)

   The Seawall case involved an effort by New York City officials in the mid-1980s to stem the tide of conversion, alteration, and demolition of low rent single room occupancy housing.(27) This housing was thought to be a vital resource for some of the city's low income tenants.(28) The law at issue imposed a moratorium on conversion, demolition, or alterations of such housing, except if a $45,000 payment was made to a special housing fund for each converted unit.(29) In addition, the law mandated that owners repair and rent out unoccupied or "warehoused" units.(30) Finding that the buy out provision amounted to a form of "ransom"(31) and that the rent-up provision resulted in a forced physical occupation of property,(32) the New York Court of Appeals held that the moratorium violated of the Takings Clause.(33)

   In addressing the regulatory taking claims implicated by the law, the New York Court of Appeals considered, among other things, the heightened scrutiny standard of review for takings claims applied in Nollan v. California Coastal Commission.(34) The court found that "a burden-shifting regulation of the use of private property will, without more, constitute a taking: (1) if it denies an owner economically viable use of his property, or (2) if it does not substantially advance legitimate State interests."(35)

   In Nollan, the Supreme Court concluded that where a condition is imposed as a quid pro quo for granting a building permit, it must serve the same end as the governmental purpose served by the general restriction on building.(36) A failure to establish such a nexus violates the second prong of the takings test.(37)

   The Nollan case involved several elements that were present in Seawall. First, in Seawall the buy out option--a forced payment to avoid a general prohibition--arguably amounted to an unconstitutional condition.(38) Nollan similarly involved an unconstitutional condition: the California Coastal Commission demanded that a property owner cede an easement across a beach in exchange for the lifting of a building restriction designed to secure visual access to the oceanfront.(39) In Seawall, the rent-up provision amounted to a specific exaction,(40) while in Nollan the easement was a specific exaction.(41) In Seawall, the rent-up provision also imposed a forced physical intrusion.(42) In Nollan, public use of the easement arguably amounted to the same.(43) The only notable distinction between Nollan and Seawall was that Nollan involved an individualized decision by the California Coastal Commission,(44) whereas Seawall involved a local law of general application.(45)

   Although the New York Court of Appeals seems to have taken the lead in utilizing Nollan's essential nexus test as a generic standard for all takings claims, including challenges to regulations of general application,(46) the Supreme Court has yet to apply Nollan's heightened scrutiny of property regulations outside of an individualized context where owners of specific property are being coerced to accept an "unconstitutional condition" in exchange for the lifting of a general prohibition.(47) Nollan established the need for some causal nexus between the condition imposed and the burden lifted in order for the condition to avoid a takings claim.(48) In Dolan v. City of Tigard,(49) the Supreme Court refined this standard by requiring "rough proportionality" between the condition imposed and the public burden being alleviated.(50)

   Manocherian(51) involved none of the critical elements present in Nollan, Seawall, and Dolan. There was no physical intrusion of any kind (the tenants were lawful occupants),(52) no specific exaction (the units would remain under rent regulation if vacated by the hospital employees),(53) no unconstitutional condition (the Manocherians were not being coerced into giving something up in exchange for lifting a general prohibition),(54) and no individualized determination (chapter 940 was general use legislation affecting all similarly situated hospitals).(55)

   Notwithstanding these critical distinctions, the Manocherian court found that "the statute [did] not protect and benefit specific occupant subtenants, but rather erect[ed] a subsidized housing regime for Lenox Hill Hospital's preferential allotment."(56) Explicitly relying on the Nollan standard, the court concluded that Chapter 940 "suffers a fatal defect by not substantially advancing a closely and legitimately connected State interest."(57)

   The New York Court of Appeals did briefly acknowledge the fair rent objective of rent regulation by recognizing that protection against profiteering was at least one purpose of the rent...