Pennell v. San Jose

San Jose's rent control ordinance was crafted to protect the interests of both landlords and their tenants. Many San Jose landlords feared the possibility of 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 increase was inappropriate. The Court found that tenant hardship provisions were not unconstitutional providing that they consistently served a state's legitimate interest in protecting tenants and were not arbitrary or discriminatory. Thus, the U.S. Supreme Court not only found that tenant hardship was as relevant a 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 in order 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's cost of providing adequate rental units or to the condition of the rental market, and the seventh was "Hardship to Tenants," which considered the economic and financial hardship imposed on a tenant by a proposed increase. This last provision 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 the rent control ordinance, and in particular the tenant hardship provision, was "facially unconstitutional and therefore . . . illegal and void." They argued that the first six factors were objective, and the tenant hardship provision amounted 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 their tenants) 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 protects citizens from varying treatment by a state's statute, unless the difference in 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 legislature is 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 appealed to the U.S. Supreme Court.