Pennell v. San Jose

Appellants
Richard Pennell and Tri-County Apartment House Owners Association
Appellees
City of San Jose and City Council of San Jose
Appellants' Claim
That the provisions of the San Jose City rent control ordinance violated theTakings Clause of the Fifth and Fourteenth Amendments and the Due Process andEqual Protection Clauses of the Fourteenth Amendment.
Chief Lawyer for Appellants
Harry D. Miller
Chief Lawyer for Appellees
Joan R. Gallo
Justices for the Court
Harry A. Blackmun, William J. Brennan, Jr., Thurgood Marshall, William H. Rehnquist (writing for the Court), John Paul Stevens, Byron R. White
Justices Dissenting
Sandra Day O'Connor, Antonin Scalia (Anthony M. Kennedy did not participate)
Place
Washington, D.C.
Date of Decision
24 February 1988
Decision
The U.S. Supreme Court held that the appellants' claim was premature. There was no evidence that the tenant hardship provision of the San Jose City rent control ordinance was ever applied. Nor did the provision violate the Due Process Clause or the Equal Protection Clause because the ordinance was related to a legitimate interest of protecting tenants.
Significance
San Jose's rent control ordinance was crafted to protect the interests of both landlords and their tenants. Many San Jose landlords feared the possibilityof having to operate at a loss of income if, because a tenant might not be able to afford a rent increase, city hearing officers judged that the increasewas inappropriate. The Court found that tenant hardship provisions were notunconstitutional providing that they consistently served a state's legitimateinterest in protecting tenants and were not arbitrary or discriminatory. Thus, the U.S. Supreme Court not only found that tenant hardship was as relevanta consideration as the interests of landlords, but that government had a legitimate interest in protecting the interests of consumers.
The city of San Jose, California, enacted a rent control ordinance in 1979 inorder to solve problems raised by the growing shortage of, and the increasing demand for, housing. The ordinance sought to prevent excessive and unreasonable rent increases, alleviate undue hardship on individual tenants, and assure that landlords had fair and reasonable return on their property. A landlord was only entitled to raise the annual rent of a tenant by no more than eight percent. If a tenant was subject to a greater increase, the ordinance dictated that a hearing before a Meditating Hearing Officer would determine whether the proposed increase was "reasonable under the circumstances." The ordinance established seven acceptable circumstances. Six related to the landlord'scost of providing adequate rental units or to the condition of the rental market, and the seventh was "Hardship to Tenants," which considered the economicand financial hardship imposed on a tenant by a proposed increase. This lastprovision was aimed at protecting poor tenants from unjustified rent increases.
Richard Pennell, an individual landlord, and the Tri-County Apartment House Owners' Association, which represented owners and lessors of real property located in San Jose, filed suit in a state court seeking a declaration that therent control ordinance, and in particular the tenant hardship provision, was"facially unconstitutional and therefore . . . illegal and void." They arguedthat the first six factors were objective, and the tenant hardship provisionamounted to a transfer of the landlord's property to individual "hardship" tenants. The trial court sustained their claim that the tenant hardship provision violated the Takings Clause of the Fifth and Fourteenth Amendments by obligating private landlords to assume public burdens (possible poverty of theirtenants) without just compensation. (The Fifth Amendment dictates that no person's private property shall be taken for public use without just compensation. This provision 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 California Court of Appeal affirmed the ruling, adding that the tenant hardship provision also violated the Equal Protection Clause of the Fourteenth Amendment. (The Equal Protection Clause protectscitizens from varying treatment by a state's statute, unless the differencein treatment is rationally related to a legitimate state interest.)
Dissatisfied with the decision of the court of appeal, the city of San Jose appealed and won a reversal from the Supreme Court of California. At the hearing, the landlords added another argument, stating that the tenant hardship provision violated the Due Process Clause of the Fourteenth Amendment. Under the Due Process Clause, a state price regulation is unconstitutional if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislatureis free to adopt. The majority of the California Supreme Court judged that the tenant hardship provision did not arbitrarily select those landlords with hardship tenants to bear a burden that ought to be borne by all of society. The disparate treatment between landlords with and landlords without hardship tenants was justified by the state legislature's policy of protecting tenants.Pennell and the Tri-County Apartment House Owners Association then appealedto the U.S. Supreme Court.
"Hardship Tenants" a Landlord's Hardship?
Having heard oral arguments, the U.S. Supreme Court affirmed the decision ofthe Supreme Court of California. Before turning to the merits of the landlords' contentions, Justice Rehnquist considered the claim of the appellees (thecity of San Jose and the City Council of San Jose) that the landlords lackedstanding to challenge the constitutionality of the ordinance. Article III ofthe Federal Constitution requires that a litigant who challenges a statute must demonstrate a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement. The complaint of the landlords stated relevant facts, but did not allege that Pennell or any other member of theTri-County Association had "hardship tenants" who might trigger the ordinance's hearing process, or that they had been or would be aggrieved by the determination of a hearing officer that a certain proposed rent increase was unreasonable on the basis of tenant hardship. Rehnquist noted that when standing was challenged on the basis of the pleadings, the Supreme Court accepted as true all material allegations of the complaint, and construed the complaint infavor of the complaining party. Thus, the mere likelihood that the ordinancemight be enforced against members of the association and the probability thata landlord's rent would be lower than in the absence of the ordinance evidenced sufficient possibility of actual injury. The landlords had standing to challenge the ordinance.
They first argued the tenant hardship provision of the ordinance violated theFifth and Fourteenth Amendments' prohibition against taking of private property for public use without just compensation (the Takings Clause). They conceded the first six factors of the ordinance (relating to landlord's costs andto the condition of the rental market) were reasonable. They protected the only legitimate purpose of rent control: the elimination of "excessive" rents caused by San Jose's housing shortage. The landlords, however, challenged theseventh provision, "hardship to a tenant," because it did not serve the purpose of eliminating excessive rents. Rather, by providing assistance to hardship tenants, landlords feared that the possibility of operating at a loss was tantamount to delivering ownership of their property to their tenants. Thus, the ordinance forced individual landlords to shoulder the "public" burden of subsidizing their poor tenants' housing without just compensation.
Justice Rehnquist found that this argument was premature. There was no evidence that the tenant hardship provision had ever been applied by a hearing officer to reduce a rent below the figure set after considering the other six specified factors. In fact, the ordinance did not require that a hearing officerreduce a proposed rent increase on the grounds of tenant hardship, but onlymade it mandatory that tenant hardship be considered. The takings analysis, Rehnquist wrote, requires "essentially ad hoc, factual inquiry" because the constitutionality of statutes ought not be decided except in an actual factualsetting that made such a decision necessary. In this case there was no instance of application of the tenant hardship provision. The mere fact that a hearing officer was enjoined to consider hardship to the tenant in fixing a landlord's rent did not present a sufficiently concrete factual setting for the adjudication of the takings claim.
Rehnquist also rejected the landlords' argument that the Ordinance was facially invalid under the Due Process Clause of the Fourteenth Amendment. The standard for determining whether a state price-control regulation was constitutional under the Due Process Clause was well established--price control was unconstitutional if arbitrary, discriminatory, and demonstrably irrelevant to theadopted policy of a (state) legislature. Nobody disputed that the ordinance's purpose of preventing unreasonable rent increases caused by the city's housing shortage was a legitimate exercise of the city's police powers. But the attorney for Pennell and the Tri-County Association claimed that it was arbitrary, discriminatory, or demonstrably irrelevant for the city of San Jose to attempt to accomplish the additional goal of reducing the burden of housing costs for low-income tenants. They thought the objective of alleviating individual tenant hardship was not a policy the legislature was free to adopt. The Supreme Court, however, held the protection of consumer welfare as a legitimate and rational goal of price or rate regulation. The Court noted that only inthe context of the six other factors did the ordinance allow tenant hardshipto be considered. Rehnquist thus concluded that the ordinance carefully protected both the legitimate interests of the landlord and the tenant and did not violate the Fourteenth Amendment's Due Process Clause.
The Supreme Court disagreed with the landlords that the ordinance violated the Equal Protection Clause of the Fourteenth Amendment. Rehnquist explained that the city of San Jose and its Council needed only show that the classification scheme embodied in the ordinance was "rationally related to a legitimatestate interest." The ordinance's tenant hardship provision was designed to serve the legitimate purpose of protecting tenants. It was not irrational, therefore, for the ordinance to treat landlords differently on the basis of whether or not they had hardship tenants. The Court concluded that it was premature to consider the landlords' claim under the Takings Clause and rejected their facial challenge to the ordinance under the Due Process and Equal Protection Clauses of the Fourteenth Amendment.
In writing the dissenting opinion, Justice Scalia agreed that the tenant hardship provision of San Jose's rent control ordinance did not, on its face, violate either the Due Process Clause or the Equal Protection Clause of the Fourteenth Amendment. However, he disagreed with the Court's opinion that the landlords had filed suit prematurely. He felt it was inappropriate for landlordsto suffer loss by having to wait until they could show loss from a particular case due "to the consequences of [the hardship factor] in the ultimate determination of the rent." Further, it was unreasonable to thus shield alleged injustice from judicial scrutiny. Scalia also emphasized the unfairness of making one citizen pay to remedy a social problem that was not of her or his creation. His view was that San Jose had not merely regulated rents, but used rent regulation to establish a welfare program privately funded by landlords who happened to have "hardship" tenants.
Impact
San Jose's rent control ordinance was carefully crafted to protect both landlords and tenants. The U.S. Supreme Court found no evidence that any landlordin San Jose was or would ever be aggrieved by the application of the tenant hardship provision of the ordinance. The majority judged that a city's ordinance which sought to ensure fair and equitable rent control did not violate clauses of either the Fifth or Fourteenth Amendments if its provisions were notarbitrary, discriminatory, or irrelevant to state policy. Further, the Courtfound that when the provisions of an ordinance such as those of San Jose served a legitimate state interest (in this case, rent control that specificallyprotected low-income tenants), it was not inconceivable that some landlords would be subject to different treatment depending on whether or not they had "hardship tenants." The Court reasoned that tenants' hardship was as equally relevant as landlords' interests when a city ordinance served a legitimate purpose. Thus, in rendering their decision, the Court emphasized that cities (and states) had a legitimate interest in protecting consumer welfare.
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Rent Control
Rent control is a controversial system by which the federal, state, and localgovernments regulate rent rates by placing ceilings on the amount that private individuals can be charged for rent. It was initiated during World War IIas part of a broader effort to control increasing prices. Rent control policies usually target urban areas and are designed to help the economically disadvantaged during an inflationary economy (increases in the cost of living suchas occurred during World War II and the early 1970s). Four states currentlypermit rent control: New York, New Jersey, California, and Massachusetts.
In recent years, rent control has been abused by tenants in sound financial standing. In response to abuses of the system, which is costing property owners, property owners have organized to end the practice. One side effect of rent control is the increase of rent prices in non-controlled regions imposed byproperty owners to offset the losses incurred by rent control. The Allianceof Small Property Owners is a grassroots campaign to end rent control representing a group of small property owners in NY, NJ, CA, and MA. Boston and NewYork have made efforts to eliminate rent control in recent years.
Sources
USA Today Magazine,July 1998, Vol. 127, no. 2638, p. 20.