Pennell v. San Jose

Having heard oral arguments, the U.S. Supreme Court affirmed the decision of the Supreme Court of California. Before turning to the merits of the landlords' contentions, Justice Rehnquist considered the claim of the appellees (the city of San Jose and the City Council of San Jose) that the landlords lacked standing to challenge the constitutionality of the ordinance. Article III of the 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 the Tri-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 in favor of the complaining party. Thus, the mere likelihood that the ordinance might be enforced against members of the association and the probability that a 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 the Fifth 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 and to 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 the seventh 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 officer reduce a proposed rent increase on the grounds of tenant hardship, but only made 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 factual setting 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 the adopted 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 in the context of the six other factors did the ordinance allow tenant hardship to 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 legitimate state 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 landlords to 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.