Written By: Noah H. Centore
Rent in New York City is famously high. To address this concern, the City has a Rent Guidelines Board which regulates how much the rent for rent-stabilized apartments can increase each year. To challenge the limitations on rent increases, a group of landlords brought a lawsuit claiming that New York City’s rent-stabilization laws are an unconstitutional government taking of their property. New York sits within the jurisdiction of The Second Circuit Court of Appeals. The Second Circuit has repeatedly held that these laws do not qualify as a government taking. The landlords petitioned the Supreme Court asking them to decide on this question. The Supreme Court declined to hear this case.
What is a Taking?
The Fifth Amendment provides that “private property [shall not] be taken for public use, without just compensation.” Where the government takes property without such compensation, this is an unconstitutional taking. The power of eminent domain is a clear instance of government takings. Eminent domain is the government’s authority to expropriate property without the owner’s consent in certain circumstances. Of course, where the government employs eminent domain, it must pay the former property owner just compensation. In Kelo v. City of New London, the Supreme Court addressed the constitutionality of eminent domain and expanded its scope. Kelo held that a state could use eminent domain to take property from a private individual and redistribute it to another individual as long as that taking is rationally related to a conceivable public purpose. There, the conceivable public purpose was economically revitalization of a struggling city.
Eminent domain is the paradigm example of a taking. However, a purported taking will not be as clear where the government does not expropriate the entire property. In some instances, a government action will reduce the value of a property without the government seizing the entire property. These situations are referred to as regulatory takings.
Regulatory Takings
Where government regulations reduce the value of a property, this can be found to be a Fifth Amendment taking. The seminal case on regulatory takings is Penn Central Transportation Co. v. New York City. In Penn Central, the Supreme Court listed four factors courts must consider when determining whether a regulatory taking has occurred. Those factors are (1) the economic impact of the regulation or the diminution or degree of diminution in value, (2) the regulations interference with reasonable investment backed expectations, (3) the character of the government action, and (4) whether there is any reciprocity of advantage. In Lingle v. Chevron U.S.A. Inc., the Court clarified that this inquiry “aims to identify regulatory actions that are functionally equivalent to the classic taking in which the government directly appropriates private property or ousts the owner from his domain.” Accordingly, it is a high burden to make a showing of a regulatory taking.
There are two instances where government action will constitute a “per se” taking. A per se taking means that the government regulations will qualify as a taking themselves. That is, the Penn Central factors will not be applied to weigh whether a regulatory taking occurred. The first type of per se taking occurs where a regulation deprives an owner of all economically viable use of their property. In practice, it is uncommon that these takings occur because it is rare for a regulation to deprive a property of all economically viable use. The second type of per se taking occurs where a regulation causes a physical invasion of an owner’s property. In Loretto v. Teleprompter Manhattan CATV Corp, the Supreme Court found a taking where a New York State law required buildings to allow television cables to be installed because the cables qualified as a physical invasion. Though a per se taking will be found in these instances, the damages awarded to the property owner can be negligible depending on the severity of the physical invasion. For example, in Loretto, the Plaintiff was only awarded one dollar in damages for being required to install the cable in their apartment.
Significance of Rent-Stabilization Laws
Of the over three and a half million homes in New York City, roughly one million are rent-stabilized. Accordingly, rent-stabilization impacts the living situations of over one million tenants in New York City. On average, the rent in stabilized apartments is over $400 cheaper than in unregulated units. Rent-stabilization provides additional protections to tenants beyond the restrictions on increases in rent. Tenants are entitled to receive required services, renew these leases, and may not be evicted except on grounds allowed by law. Additionally, tenants can choose whether to renew their leases for one or two years. They can also file complaints with the Division of Housing and Community Renewal which is required to serve the complaint on the owner and issue a written order.
Rent stabilization would be beneficial to tenants anywhere, but it bears a special significance in New York City. America’s largest city also consistently has the highest rent prices. In July of 2022, single bedroom apartments, on average, cost $3,780 a month to rent. In contrast, the average American renter pays $1,326 a month. Further, in 2022, New York City’s rent was more than five times the average rent of the most affordable city in the United States. Wherever one stands on the wisdom of rent-stabilization, it cannot be denied that the approach has a significant financial impact for both landlords and tenants.
Looking Ahead
Though the Supreme Court declined to hear this case, the interested parties intend to continue bringing suits. The average rent for stabilized apartments is $400 below unregulated apartments and there are over one million apartments regulated. Accordingly, a decision in favor of the landlords could be worth four-hundred million dollars. Of course, this is an extremely rough valuation of the consequences of any such decision. However, this number does provide an understanding of how valuable a ruling in favor of the landlords would be for the interested parties.
The petitioners here have urged the Second Circuit to adopt an approach used in the Eighth Circuit Court of Appeals. This approach states that the requirement to renew a lease indefinitely qualifies as a per se physical taking. If the Second Circuit, or the Supreme Court, were to adopt such a rule, this would dramatically impact the legality of current rent-stabilization laws by invalidating the lease renewal requirement. Up until this point, the Second Circuit has been consistent in their view that no taking has occurred under these circumstances. Accordingly, it is likely that any change in the law, if change does occur, will come from the Supreme Court.
Sources:
Sources
Adam Liptak, Supreme Court Turns Away Challenge to New York’s Rent Regulations, The New York Times (Oct. 2, 2023).
Average Rent by State, World Population Review (Jan. 2023).
Ilaria Parogni and Mihir Zaveri, Understanding Rent Regulation in N.Y.C., The New York Times (June 22, 2023).
Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (2005).
Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982).
Martine Paris, These Are the Most Expensive US Cities for Renters, With Some Prices Up 41%, Bloomberg (July 26, 2022).
Penn Cent. Transp. Co. v. New York City, 438 U.S. 104 (1978).
Petition for Writ of Certiorari, 355-7 LLC v. City of New York, 2023 WL 2291511 (No. 21-823).