When Rent Control Becomes A Taking

Damon Root has an interesting article discussing a potentially important takings case that the Supreme Court is now deciding whether to hear:

The handsome five-story brownstone located at 32 West 76th Street in Manhattan doesn’t look like it belongs at the center of a contentious legal struggle. But that impression changes when you learn about the recent activities of its owner, 68-year-old James D. Harmon Jr.

Harmon … has filed a powerful legal challenge asking the U.S. Supreme Court to strike down New York City’s four-decades-old rent stabilization law. At first, New York officials thought so little of Harmon’s challenge that they waived their right to file an opposing brief with the Supreme Court. But those officials got a rude awakening when the Supreme Court asked them to respond to Harmon’s petition anyway, signaling that somebody at the Court took the legal challenge seriously…..

[T]he Supreme Court has also said that government regulations may sometimes count as a taking [under the Fifth Amendment], which means that they too require the payment of just compensation. As Justice Oliver Wendell Holmes remarked in the 1922 case of Pennsylvania Coal Company v. Mahon, “while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” How far is too far? In the 2010 case of Stop the Beach Renourishment, Inc. v. Florida, the Supreme Court declared that at a minimum, “it is a taking when a state regulation forces a property owner to submit to a permanent physical occupation.”

New York City’s rent stabilization law (RSL) meets that test. In Harmon’s case, three of the six rental units in his building—which has been in the possession of his family since 1949, when his immigrant grandparents first bought it—feature rent-stabilized tenants whose occupancy can only be described as both physical and permanent.

Not only do these rent regulated tenants pay government-set rates that are 59 percent below-market, they have the option of remaining in their apartments for life. Harmon essentially has no choice but to keep renewing their respective leases every few years. The tenants even have the right to name their own successors to the apartments.

When I first heard about this case, my reaction was that it was probably precluded by the Supreme Court’s 1992 decision in Yee v. Escondido, which ruled that a California statute imposing rent control on mobile home parks was not a taking, even though state law allowed tenants to renew the rent-controlled leases indefinitely even against the will of the owners. I am no fan of the Yee decision, but the Court is unlikely to overrule it in the near future.

However, there is a crucial difference between Harmon’s case and Yee. In the latter, the Court emphasized that there was no permanent physical occupation of the owners’ property because “the Mobilehome Residency Law provides that a park owner who wishes to change the use of his land may evict his tenants” so long as he then uses the property for something other than a mobile home park. By contrast, as Root describes, the New York City rent control law does not allow Harmon and other landlords to evict their tenants even if they do wish to use the property for something other than rental housing. Effectively, therefore, this is a government-imposed permanent physical occupation of property.

In its belated response to the cert petition, New York argues that the law allows the Harmons to not renew the leases if they choose to live in the rent-controlled apartment themselves or if they demolish the building in question. However, as the Harmon cert petition points out, the former option requires the Harmons to find other, comparable housing for the tenants at the same rent, while the latter is precluded by the fact that the building in question is a legally designated landmark that by law cannot be destroyed. Regardless of these points, reducing the owners’ options to demolition and personal occupation is far more severe imposition on property rights than that in Yee, where any use of the land other than mobile home park was enough to allow the owner to decline renewal of a lease.

One of the best-established principles of takings law is that such a government-mandated permanent physical occupation automatically qualifies as a taking even if the intrusion imposed by the state is fairly minimal. In the classic case of Loretto v. Teleprompter, the Supreme Court found a taking even though the owner was only required to place a television cable and two boxes on the roof of her apartment building. This makes good sense. Whatever else might be considered a taking, there pretty obviously is one when the government compels a physical occupation of your property, thereby preventing you from using it yourself.

The physical invasion inflicted on Harmon and other New York landlords is obviously much more severe than that in Loretto, since they are forced to accept unwanted tenants essentially forever. Even if the tenant dies or moves out, he has the right to pass the rent-controlled lease onto a successor of his choosing if he has lived there for more than a minimal period of time.

As Root points out, many of the beneficiaries of New York’s rent control law are far from poor. One of Harmon’s tenants, for example, is a wealthy executive. There are far better ways to increase the availability of low-income housing, such as dismantling some of the zoning regulations that artificially restrict the stock of housing in the city and help make it one of the most expensive in the country. Economists overwhelmingly agree that rent control exacerbates housing shortages and usually fails to redistribute wealth to the poor. But if the City prefers to conscript unwilling landlords’ apartments in perpetuity, it should have to pay “just compensation” for the privilege, as required by the Fifth Amendment.

UPDATE: Richard Epstein commented on the case here, and George Will in this column.