LEGAL CORNER: Challenges to New Rental Laws Hit a Judicial Obstacle

On Sept. 30, U.S. District Court Judge Eric R. Komitee for the Eastern District of New York, issued a decision that deals a temporary blow to two cases filed more than a year ago by the Community Housing Improvement Program and the Rent Stabilization Association of N.Y.C., in one case, and several landlords, in another [see https://bit.ly/3jPJKzp] (collectively, “CHIP”), in opposition to the Statewide Housing Security and Tenant Protection Act of 2019 (the “2019 Act” or “Act”) [see https://bit.ly/2xA6lth] passed on June 14, 2019.

Since the cases involved similar issues the court issued one decision addressing both actions. In light of this decision, it is likely that the Plaintiffs will appeal the decision. The court addressed, among others, two major constitutional issues: (1) whether the 2019 Act resulted in an unconstitutional “taking;” and (2) whether it violated the “Contracts” clause contained in Article I of U.S. Constitution.

Notable Provisions Highlighted by the Court

In the Opinion, Judge Komitee highlights some of the more “notable” provisions of the 2019 Act:

• “Cap the number of units landlords can recover for personal use at one unit per building (and only upon a showing of immediate and compelling necessity).” N.Y. Reg. Sess. § 6458, Part I (2019).

• Repeal the “luxury decontrol” provisions, which allowed landlords, in certain circumstances, to decontrol a unit when the rent reached a specified value. Id. at Part D, § 5.

• Repeal the “vacancy” and “longevity” increase provisions, which allowed landlords to charge higher rents when certain units became vacant. Id. at Part B, §§ 1, 2.

• Repeal the “preferential rate” provisions, which allowed landlords who had been charging rates below the legal maximum to increase those rates when a lease ended. Id. at Part E.

• Reduce the value of capital improvements — called “individual apartment improvements” (IAI) and “major capital improvements” (MCI) — that landlords may pass on to tenants through rent increases. Id. at Part K, §§ 1, 2, 4, 11.

• Increase the fraction of tenant consent needed to convert a building to cooperative or condominium use. Id. at Part N.

• Extend, from six to 12 months, the period in which state housing courts may stay the eviction of breaching tenants. Id. at Part M, § 21.”

It is important to note that the 2019 Act “repealed” many of the provisions which, under original rent regulations passed decades ago, were set to expire at a finite point in the future. In a previous article [see https://bit.ly/34NCP3r], it has been noted that the rent stabilization and rent regulation laws were not intended to go on in perpetuity. Yet, under the 2019 Act, critical provisions of the New York Rent Regulation laws were extended in perpetuity. This is something that not only contradicts the original intent of previous rental regulations, it provided no notice to property owners about the rights that were being stripped from them. In April, a New York State Supreme Court decision in Regina Metropolitan Co., LLC v. New York State Division of Housing and Community Preservation (“Regina Metropolitan”) [see https://bit.ly/38I4y79], not only barred the retroactive applicability of the 2019 Act, but also potentially laid the ground work that could ultimately provide a basis for a challenge regarding the constitutionality of parts of the Act.

The rent regulation laws were passed many years ago to address housing shortages that existed immediately following World War II. In 1969, the Rent Stabilization Law of 1969 (“RSL”) [see https://bit.ly/3iCns3U] was passed in New York City. In 1974, New York State also passed the Emergency Tenant Protection Act. These laws were enacted to further address housing shortages and issues that existed at that time. However, none of these previous regulations were enacted to remain in effect in perpetuity, and in fact, they were passed with the requirement that there be a periodic reassessment of whether these rent regulation laws were still necessary. The New York Supreme Court in Regina Metropolitan pointed out that the legislature did not provide a rationale for many of the provisions passed under the 2019 Act.

The 2019 Act and The Constitutional “Takings” Clause

Judge Komitee states in his Opinion that “[w]hen a government authorizes ‘a permanent physical occupation” of property, a taking occurs [citations omitted].” He further states that “[p]hysical takings are characterized by a deprivation of the ‘entire bundle of property rights’ in the affected property interest—‘the rights to possess, use and dispose of’ it.” Under the 2019 Act, the “luxury decontrol” provision, the “vacancy” and “longevity” increase provisions, and the “preferential rate” provisions were all repealed completely, not reasonably extended or modified. While the judge in CHIP, in his opinion, believes that the 2019 Act did not take away an entire “bundle” of rights from owners, it clearly did not simply deprive owners of a singular strand. In fact, the Act stripped owners of a significant and sizeable “bundle” of real property rights.

The 3-Factor Test Used in Determining a ‘Constitutional Taking?’

The Opinion in CHIP indicates that “[e]ven without rendering property worthless, a regulatory scheme may still effectuate a taking if it ‘goes too far,’ in Justice Oliver Wendell Holmes Jr.’s words. [citation omitted].” As pointed out by Judge Komitee, “[i]n the current era, courts apply the three-factor test to determine whether a regulation that works a less than-total destruction of value has gone too far. The factors are: (1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with reasonable investment-backed expectations; and (3) the character of the governmental action in question.” [See Penn Central Transportation Co. v. New York City (U.S. Supreme Court, 1978) at https://bit.ly/3jTgFDe]. These factors must be analyzed in order to determine whether or not a plaintiff has been deprived of property without just compensation or due process.

Factor 1: Economic Impact

According to Judge Komitee, the “economic impact” against the plaintiffs “…needs to be calculated on an owner-by-owner basis, and those calculations will vary significantly depending on when a property was purchased, what fraction of its units are rent stabilized, what improvements the landlord has made, and many other metrics.” The judge stated that “[a]t best, Plaintiffs can make vague allegations about the average diminution in value across regulated properties.” Since, its passage, the 2019 Act has clearly had a significant impact on property values and the “vague allegations” referred to in the Opinion, at the very least warrant the presentment of evidence at trial. A summary determination that there is no economic impact is not only vague, it contradicts the clear evidence in the market to the contrary.

Factor 2: Interference with Investment-Backed Expectations

The second factor deals with the extent to which enacted regulations “…interfere with reasonable investment-backed expectations.” Judge Komitee, citing a Second Circuit Court of Appeals case [see Allen v. Cuomo (U.S. Ct. App 2d. Cir, 1996) at https://bit.ly/3lFwjm0], indicates that “…the nature of each landlord’s investment-backed expectations depends on when they invested in the property and what they expected at that time.” It is clear that each of these plaintiffs invested in and purchased their properties prior to the enactment of the 2019 Act and it is safe to assume that none of their expectations included a substantial diminution in property rights and investment expectations. For example, where a landlord was able to reasonably increase rental rates and recoup capital investments, these rights and benefits have been severely restricted, if not altogether eradicated by the 2019 Act.

Factor 3: The Character and Magnitude of the Regulatory Taking

The third factor focuses on “…the character of the governmental action in question.” Judge Komitee citing Penn Central, explains that “[a] taking may more readily be found when the interference with property can be characterized as a physical invasion by government, than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” Judge Komitee, however, goes on to quote language from another notable U.S. Supreme Court case [see Lingle v. Chevron U.S.A. Inc. (2005) at https://bit.ly/3iTexK8], which provided that “…the Penn Central inquiry turns in large part, albeit not exclusively, upon the magnitude of a regulation’s economic impact and the degree to which it interferes with legitimate property interests…,” and then relying on this language, dismissed the plaintiffs’ regulatory-takings claim. Again, a plain reading of the Penn Central 3-factor test and the above language, it is not clear how a dismissal could be warranted without permitting the plaintiffs to establish the “magnitude” of the impact of the 2019 Act on their property rights.

Did the 2019 Act Violate the ‘Contracts’ Clause of the Constitution?

Under Article I of the U.S. Constitution, States are prohibited from “pass[ing] any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts….” In analyzing a claim under the “Contracts Clause”, a Court “…must ask three questions: ‘(1) is the contractual impairment substantial and, if so, (2) does the law serve a legitimate public purpose such as remedy a general social or economic problem and, if such purpose is demonstrated, (3) are the means chosen to accomplish this purpose reasonable and necessary[?].’” Judge Komitee indicated that one of the plaintiffs, 74 Pinehurst LLC, “…adequately allege[d] that the 2019 amendments ‘substantially impair’ its executed leases by affecting a critical term of their executed lease agreements — the monthly rent.” However, the court summarily determined that the plaintiff did not satisfy the second and third questions and dismissed the Contracts Clause claim.

Again, there was not much analysis offered as to why the second and third questions were not answered, especially where there was no hearing held to allow those prongs to be addressed. As pointed out in Regina Metropolitan, there were many concerns as to whether the legislature established that these new laws “served a legitimate public purpose”, and whether the means were “reasonable and necessary.” It seems that the court in CHIP also failed to address these critical issues.

The Fight is Far from Over

It is clear that the fight against the 2019 Act is not over. The appeal process will be crucial in determining whether the plaintiffs will be successful in overturning all or portions of the 2019 Act. We must now wait to see how the lawsuits filed in both federal and state courts will proceed through the appellate process. Prior to the COVID-19 pandemic, property values and rental markets throughout New York State, and particularly in New York City, were dramatically and negatively impacted by the 2019 Act. The pandemic has only exacerbated these effects. The Act, passed to afford tenants added protections, has had the opposite effect. Landlords have drastically cut capital improvements and have also decided to keep many rental units off the market. Rather than increase the availability of housing, the 2019 Act has only reduced the amount of affordable (and renovated) housing units made available to tenants.