Property Rights Foundation of America®

from Proceedings of the Second Annual New York Conference on Private Property Rights (PRFA, 1996)

Rent Control - Litigation to Protect Property Rights of Landlords
Sam Kazman

Chief Counsel, Competitive Enterprise Institute, Washington, D.C.

Generally, I'm here to talk about rent control. Specifically, the case we've been involved with in New York City. In terms of property rights regulation, rent control is relatively old, at least in American history; the environmental regs, endangered species, wetlands, have all come about in the last five, ten, twenty years. Rent control, on the other hand, the modern form of rent control, started in the wake of World War II, and so it's an oldie. It's been described by one Swedish economist that next to carpet bombing, rent control is the most effective way yet devised by mankind to destroy cities. In fact there is a book on rent control put out by the Fraser Institute of Canada, that has at the back, photographs of identified scenes of both World War II bombing destruction and rent control destruction. You are challenged to tell which is which, because the answers follow only later. That is the physical effect of rent control.

The intellectual effect, I put in these terms, that next to a broad tip magic marker, rent control is probably the most effective way to wipe out rights contained in the Constitution. With a marker you can just cross them out. In many courts in this country, especially in New York, when the state or the city utters the term "rent control," end of case, and the case is valid.

Rent control did come about in the wake of World War II. It began as a supposed solution to an alleged emergency. In places like New York, we are now in the fiftieth year of that emergency. The notion of an emergency extending for more than half a century gets quite a few snickers from judges. Unfortunately, those judges usually are in the descent. There have been many, many cases challenging rent control. There have been very few successes, and those successes themselves have been quite limited. There are some reasons for hope currently. I'll get to that shortly.

The first sets of cases essentially challenged the fact that under the regulated rents, the property owner was unable to earn a just return. Under the Constitution, the inability to earn a just return on one's capital is quite often considered a denial of due process or a taking. The problem is that those sorts of challenges have almost always bogged down in the fact that the rent control statute says that the landlord shall earn a just return and the rent shall be regulated and that there are all these exceptions if you don't earn a just return. However, going through those exceptions, attempting to make a case that in fact you haven't earned that return has been relatively impossible. You are simply buried between funny accounting methods and the discretion the courts give to agencies to put their own numbers. Cases challenging rent control on that basis have largely been failures.

More recently, there have been cases challenging rent control's very rationality. The claim is that rent control seeks to the be a response to inadequate housing, but, in fact, the evidence and theory indicate that it is the best way to continue the shortage of housing. In fact, if you look at the number of polls of economists, it turns out that about 98 percent of all economists generally agree that rent control simply exacerbates rather than improves a shortage in the quality or quantity of housing. The only economic proposition that gets an even greater degree of unanimity among economists is that restrictions on foreign trade do not benefit consumers. Rent control comes in a very close second, very close to 100%. Yet, courts, once again, are always the first to accept the legislative judgement that this is an emergency, we've got to defer to them, got to defer to them even more.

This is changing slightly. At least there's a chance for a break in this wall on the west coast where the Pacific Legal Foundation, which brought the Nollan case back in the Eighties, has won a reversal of a dismissal of a complaint involving Santa Monica rent control, where they intend to specifically introduce a study that examined rent control's effect in that municipality, and found that, in fact, it does nothing for housing, except make it worse. It actually decreases the percentage of low income families you find in rental housing. A lower court had dismissed the complaint for failure to state a claim. The high court in California reversed that dismissal on the grounds that, while in the past, legislatures were granted a huge amount of deference by courts, under Nollan, the courts have to give these restrictions on property somewhat higher judicial scrutiny than they have in the past. This intermediate level of scrutiny, or maybe almost strict scrutiny, gets higher than just the "Sure, if you say so, and you're the elected representative, then I guess you must be rational," approach, of course, that people have used. So that is one very big break in this case, and in the whole notion that rent control's irrationality is something the courts are going to just gloss over.

The specific cases in which I get involved deal with a somewhat different aspect of rent control. They essentially deal with the quest of what's called "owner occupancy," a landlord's right to live at the property that he or she owns. Now, even though you get massive destruction of property rights under rent control, most rent control laws across the country do or did have a provision saying, forget about everything we've done, for if you as the owner, if you, yourself want to live there, or your immediate family, yes, you can do that. I guess what motivated this was sort of a tip of the hat, nostalgic remembrance of property rights, in this one specific case. We won't let you make money on it, we won't let you get out of business, but if you want to live there yourself, okay. And this was the case in New York City as well, at least until 1983.

Now, restrictions on evictions sound like a technicality, but they're really essential to the political attraction that rent control has for tenants. Tenants do not want low rents in the abstract, they want low rents for themselves. They want controlled rents for themselves. And so, if a tenant is not secure in being able to hold onto his or her unit, they know that once they are out on the street, the low rates they enjoyed while they were a tenant will make it even harder for them to find a place to live. And so, if a tenant could be turned out onto the street, and be shafted, the way landlords have been shafted, or newcomers to the city have been shafted, the whole political attractiveness of rent control falls apart. So, one key to rent control's attractiveness to tenants, to it's political importance, is the fact that the tenant will not be evicted. But, once again, owner occupancy, at least until 1983, 84, in New York was allowed.

We are currently representing a family, Jerry and Ellen Ziman. They bought a small rent control townhouse in Greenwich Village in Manhattan, back in 1983. It had, at that time, three rent control tenants. They bought it intending not to keep on renting, but to restore it to a single family home for themselves and their kids. As soon as they bought it, they went ahead and filed their owner-occupancy eviction applications as the law said they could. Several months down the road, maybe four or five months at most, a new law was enacted in Albany that said, you can no longer evict on grounds of owner-occupancy if the tenant is more than 62 years old, or has been there for more than 20 years, or is handicapped, and this law takes effect immediately. It was activated to take effect immediately. There was actually a case where an eviction certificate had been issued by the responsible agency, Division of Housing and Community Renewal, that had not yet been executed, been enforced, and that tenant was able to remain in that house under this law.

Well, in the case of the Zimans, who had intended to move themselves and their kids in as a family as soon as they got the tenants out, all of a sudden they're stuck with a house with tenants, and they're stuck in the profession of landlords, something they never intended. They look around. There was one other provision which was still left in the law which was that, you could cease renting if you could show the inability to make a minimum return. Something very few people succeed at. The Zimans did succeed in showing that inability. They were able to show financial hardship. They went through two different accounting audits by the agency, but after three years, the judge said, "Yeah, you've shown financial hardship." And so, having failed in owner occupancy, they turned to financial hardship.

At that point, the agency which itself had been conducting these audits, said, "Wait a minute! You're using the avenue of financial hardship, but we know your real reason to evict these tenants isn't that you're suffering financial hardship, it's that you want to live there yourself. You've got an illegitimate motive in your heart, and even though you've satisfied the requirements for financial hardship, that's not what's really driving you here. You want to live there yourself, and so, you can't do that." And, the first court that they took their case to, the judge agreed, you can't do that. At this point we entered the stage, we came in as pro bono counsel in the case, and at the Appellate Division, we won a victory. Not on constitutional grounds, although we raised a slew of them, but on the grounds that having satisfied the technical requirements of financial hardship, that's the end of the matter.

I remember one query that came up from one judge during our argument was, "Well, didn't they know they were buying property in Manhattan? Rent control property?" As if Fifth Amendment means nothing because once you enter Manhattan there's a sign on the Holland Tunnel that says, "Entering New York, forget about it."

In any case, the tenant appealed to the Court of Appeals in New York, and so did the HCR. One thing the HCR wanted was even more hearings.

By this point, about five or six years had already passed from the time the Zimans bought their property. During this time one tenant had died, so they were able to take off that space. They and their two kids lived in two tiny rooms consisting of about 350 square feet of space, where they lived, slept, cooked, ate and read the Constitution. When that one tenant died, then it opened up upstairs, where the one nine-year-old then made his bed, but this was a separate unit, and remember, in a rent controlled apartment, you go outside in the hall, you're not in your house anymore, you're sort of out in the street. When this boy was going upstairs in the middle of the night, he had to take the key with him, and lock the door of the unit he was living in, go up the stairs, unlock the door to his bedroom. That was the way they lived.

The Court of Appeals upheld the Zimans on the grounds of financial hardship. One of the reasons they were upheld, I think, is because we had some very strong constitutional arguments, which I'll describe in a minute. And this was one way of avoiding that. After all, we get them in the house, maybe they'll forget the rest of this. They'll be happy about it. How many people can they get to live in the house, what more do they want? Once again, another two years dragged through until the Zimans were actually able to obtain warrants of eviction and get the two tenants out.

Now we are back and forth arguing that the seven years during which this battle went on constituted a temporary taking of property. Seven years, that's pretty long, but it did end. It's still a temporary taking of property. Under U.S. Supreme Court Law, the case known as First English Evangelical Lutheran Church, even if there's a temporary taking of property that comes to an end, you're still entitled to compensation. Just terminating it is not enough. You've got a right to money. There's a very good reason for that, because one common scheme among government planners is, pass a regulation saying, okay it gets knocked off for five or ten years, it's vacated we pass another regulation, another five or ten years, it's vacated. If the only remedy is to vacate the illegal law and never to slap these people monetarily, what's to keep them from playing this game for ever. In fact, that is the scheme in a lot of places. No, the Supreme Court said if you engage in a taking, no matter how short, you have to pay money for that, so we're back in court for that one.

The two arguments we're focusing on are as follows. One has to do with what's known as a physical taking. We are alleging that the Zimans suffered not just a regulatory taking of the property, but a physical taking. There's an important distinction between the two. First of all, with regulatory takings you get this huge balancing of interest and so forth by the court, where with physical takings, it's a bright line. If the State or one of its agents acting under this law has physically come onto your property, or if the State has put an object on your property, that's a taking, period. You don't inquire into the compelling interest for it; you don't inquire into notice or things like that. It's a taking. In fact it was upheld in the Loretto vs. Teleprompter case, where what was at issue was a small, half-cubic-foot cable box on the rooftop of a commercial/residential apartment building. Compare that to what happened to the Zimans. The landlady, Mrs. Loretto, probably never even knew that box was there until she went up to the roof one day. The Zimans had 80 percent their house taken away from them. That was the first argument. The second argument was, the Zimans' being forced to act as landlords for seven years was a violation of their liberty in that they were forced to be in a profession, an occupation that they could not leave.

Now, for a while we thought that New York itself was establishing some good precedents here. In the famous case known as Seawall, the Court of Appeals overturned an attempt to mandate that owners of single room occupancy hotels had to keep renting to their tenants. And one thing the court noted was that requiring this of their property was a physical taking.

But the court drew a bright line, a very strong line between single room occupancy hotels and rent control. For rent control, they said it's a totally different situation, because the tenants have already been there, so we're just regulating a pre-existing relationship. But what would happen in the case of the Zimans? The tenants were already there when they bought their house; but the law said those tenants could be evicted, and they bought that house on that assumption. Is there any real difference between the State pushing someone into your home, that's a physical taking on the one hand, and the State knocking on your door, sending someone to your home and saying "We'll leave when you want us to," and then that person refusing to get out? In my mind, there is no distinction whatsoever. And U.S. Supreme Court law pretty much makes that clear. There's a case known as Yee vs. Escondido, which states when the state compels someone to acquiesce in either renting of property, when the state forces someone to begin renting property, or the state compels them to continue renting property, it will be a physical taking. The distinction of whether the tenant is there in the first place or barges in later makes no distinction whatsoever.

Now there's a second point there as well, and that is the fact that these people are being forced to keep renting. The New York State rent control law is based on the Federal Emergency Price Control Act which was passed in 1943, and when that act was enacted, a number of cases challenged it, and the challenges were generally unsuccessful. But the court said, "We uphold these statutes on the grounds that they don't force anyone to keep renting." Anyone who wishes to, can cease renting under the terms of these statutes. In New York, the courts are finding and saying, there's no constitutional right to evict. In fact, if you look at what formed the basis of the New York State rent control law, it was the Federal law, that law was upheld by the Federal courts, on precisely that understanding that these laws did not compel anyone, that people could quit renting and withdraw from the market at any time. Early cases, construed the New York State law, came to the same conclusion, that, yes, there is a constitutional right to evict, or at least there ought to be.

Now the Zimans were very lucky, they succeeded because they showed financial hardship. We represented a another woman who owned a brownstone in Harlem which she also purchased intending to turn into a single family home. Once again the twenty year law was passed and she found she was stuck with tenants. And, by the way, to be stuck with unwanted tenants in a place like Harlem, where keys can be passed out to anyone on the street, and usually are, and drug dealing goes on all the time, is an incredible destruction of the security one should have in one's home. This woman had strangers barging in to her daughter's bedroom claiming they thought it was the bathroom down the hall. This woman did not succeed in showing financial hardship. She ended up having to pay her tenants to leave. Unfortunately she paid them in the midst of our appeal of her case, to the Court of Appeals, and the Court of Appeals threw the case out as moot, despite the fact that it wasn't moot. The fact that she had suffered for ten years before she raised the money to get her tenants to move out was once again a temporary taking, for which she was entitled compensation.

The current status of our case on behalf of the Zimans is we have filed in the State Supreme Court trial level asking for declaratory judgement, that they had suffered a taking. That court said, we can issue the declaratory judgements, but when you get to takings, you have to take it to claims court.

We filed in the claims court. The claims court said, New York State has not waived immunity for takings involving rent control issues. This was as if the Fifth Amendment had never occurred to this court. It's clear that New York has waived immunity. There was an interesting case called Keystone Associates v. New York State, where a six month delay in someone's ability to demolish an opera house was held to be a taking of property, and New York was held to be liable. Clearly, a state can not evade its duty to compensate if it takes property by saying, we haven't waived it, yet this is the mentality of judges.

And then what happens here... there's a little joke about a comedians' convention, where the jokes are so well known that they've got a number, and someone stands up and says "Number twelve!" and the audience bursts out laughing. Well, in state court, if the government stands up and says "rent control," it's rent-control-valid. Your challenge is just another of an endless series of cases all raising arguments which are by now "frivolous" like due process, like right to evict. Rent control is valid. Anyway, the Court of Claims ruling right now is on appeal to the Appellate Division. The Dawson case, the case involving the woman living in Harlem, was not accepted by the U.S. Supreme Court on a petition for cert. Given the other cases they've been taking involving incredibly minor interpretations of various laws, as far as I understand, why? I suspect that it's because rent control is simply something that the courts are still reluctant to touch. They still think, do this and you'll have thousands of people homeless on the streets, you'll have riots, this is not something we can engage in.

One rationale that the courts have thrown at us and at similar plaintiffs in a number of cases is, look, these people could not have had the expectation of being able to evict their tenants in spite of what the law said, because when you buy property in something so heavily regulated, where the shift is always toward more and more protection for the tenant, you've got to be crazy to think that your right to evict is going to remain untouched. And this is the actual language of the courts. Go back to Judge Justice Holmes language in the 1922-23, Pennsylvania Coal case. He said, the purpose of compensation, let me quote... "The natural tendency of human nature is to extend regulation more and more until at last, private property disappears." Now, that's the reason why you want a requirement of compensation, to check that tendency to keep pushing and pushing regulations more and more. What's the logic in New York? The natural tendency of rent control has been to grow and grow, therefore you don't get compensation. A court could not have taken this case and interpreted it more backwardly, more in reverse than the New York courts have.

When the Zimans first got in, were first able to fully occupy their house, we joke that a la Neil Armstrong, the astronaut, landing on the moon, this may be one small step for the Zimans, it was one giant step for Manhattan-kind. Given what's happened in case law since then on this particular issue, there have been no great successes, it maybe was not all that big a step.

Rent control itself has created an entirely new culture of its own. This is in one sense something to be very scared about, when you look at these new regulations and think what they're going to grow into. Rent control has turned landlords into an entirely new breed of profession, because of the incentives it creates. Think of what happened during prohibition. People who were in the distillery business, where before it had been legitimate, suddenly they were turned into criminals. The people who went into that business and stayed in it were the ones who were good at being criminals, at taking and swapping bribes and finding ways to evade police. Before rent control, there was a system where the landlord's every incentive, in the free market, was to find ways to better service his or her tenants. With rent control, that's flipped around, the incentive now, the way to survive and prosper as a landlord, is not to serve your tenants, it's to find ways to dis-serve them, to find ways to cut back on this and that and that, because your rents are fixed, so the less you offer them, the more money you'll make. The entire nature of being a landlord charges from a noble one to a dastardly one.

Hanging on to a rent controlled apartment becomes a nucleus of people's lives. There's a series of stories in a book about that by Tama Janowitz called Slaves of New York:Stories, where every couple's life revolved not around who gets custody of the kids, or who gets the automobiles once they're divorced, but who gets the rent control unit. Forget about the relatives and the dog, you can have them, give me the unit. This is what rent control does. And this, in the long run, is what any land-use regulation does. It will change the nature of owning property, so that those who succeed at it will be not the best of us, but the worst of us.

Even if we can not make much progress in our own lifetime against this sort of thing, the notion that this is the spectre that awaits our children is really what ought to be pushing us in the direction of fighting it.

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