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Landlords Try for a Better Lot : High Court to Decide Rent Control Case

December 13, 1987|DAVID W. MYERS | David W. Myers is a real estate writer for The Times. and

The U. S. Supreme Court is expected to issue a ruling early next year on a California case that could trigger a new assault on rent control laws and adversely affect government programs designed to help elderly and disadvantaged people.

At issue is whether a provision in San Jose's rent control law that requires officials to consider a tenant's financial situation before raising rents more than 8% constitutes an illegal "taking" of a landlord's property, in violation of the Fifth and 14th Amendments.

A secondary issue is whether the measure violates the equal protection clause in the 14th Amendment.

Limit Some Landlords

Landlords who are suing San Jose say it's illegal to limit the increases some landlords can get just because they rent to tenants who may be suffering financial hardship, while landlords with well-heeled tenants can get bigger increases.

The case pits landlord Richard Pennell and the Tri-County Apartment House Owners Assn. against the City of San Jose.

The landlords' argument that the measure amounts to an unconstitutional taking of their property is similar to those made by property owners in a land-use case and a zoning case that the Supreme Court ruled upon earlier this year.

The owners won both of those cases in decisions that were widely seen as victories for developers and private property owners, but setbacks for municipalities that believed they were acting in the best interests of the general public.

If the high court rules that the "taking" concept can also be applied to rent control ordinances, some real estate experts believe many of the estimated 200 control ordinances across the nation will come under renewed legal attacks by landlords.

But the impact of a victory for landlords in the Pennell case could go far beyond rent control ordinances, some experts say. They claim that hundreds of other government-linked programs that provide discounts on an array of services ranging from telephones to energy bills could also be dealt a setback if the landlords win.

Ironically, San Jose's rent control ordinance, passed in 1979, is viewed as one of the least-stringent control measures in the nation. It allows landlords unlimited rental increases when an apartment is vacated and lets them raise rents on occupied rental units an automatic 8% annually without concern for the tenant's ability to pay.

If 8% isn't enough, the law provides formulas for bigger increases based on the cost of improvements, maintenance, debt-service and the like.

If none of the formulas provides an increase large enough to satisfy the landlord, the ordinance calls for a hearing officer to consider the case. The officer must consider several factors, one of which is the economic hardship the proposed increase would have on the tenant--the only such provision in the nation.

In papers filed with the high court, Pennell's attorneys argue that this so-called "hardship provision" is an unconstitutional taking under the Fifth and 14th amendments because it requires landlords "to assume the public burden of subsidizing low-income tenants without just compensation."

The hardship provision "forces the burden (of helping low-income tenants meet housing expenses) solely on landlords, when it should be shouldered by society as a whole," Jon D. Smock, a rent control specialist who filed a friend-of-the-court brief on behalf of the California Apartment Assn., said in an interview.

"In effect, the city is taking a landlord's property without just compensation."

Rulings in previous cases have found that property owners are entitled to a "just and reasonable return on their property," and that concept could be an important factor in the Pennell case, said Joan Gallo, San Jose city attorney.

"A guaranteed 8% annual increase is certainly a fair return on a landlord's property, and they can qualify for even more," Gallo said.

"Clearly, this isn't a taking. If anything, it's a giving: It gives landlords a lot of latitude when they want to raise their rents."

Gallo feels confident the arguments she presented to the court last month will prevail. She also argued that the case should be thrown out on technical grounds, because the hardship provision of the ordinance has never been applied, and Pennell allegedly sold the property before the case was appealed to the Supreme Court.

Pennell prevailed in a California trial court in 1980 and the First District Court of Appeal in 1984. But the California Supreme Court ruled in August, 1986, that the ordinance did not amount to a taking of the landlords' property because it allowed them "a generous 8% automatic increase" annually.

The state Supreme Court also rejected arguments that the ordinance illegally treats landlords subject to the hardship provision differently than those who aren't.

Instead, the court reasoned, the law "grants all landlords the same constitutional fair return and simply grants to those whose tenants can afford it an additional increase above that constitutionally required."

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