Here's the latest in a case we've been following since its inception.
The U.S. Court of Appeals for the Second Circuit has affirmed the Eastern District of New York's 12(b)(6) dismissal of a complaint alleging that New York (state)'s sweeping amendments to its Rent Stabilization (rent control) statute effected physical and regulatory takings.
First, this can't be a surprise to anyone who has been paying attention to how courts treat rent control. Putting aside for a moment the legal theories and the various challenges, rent control has become so ossified -- such a political third-rail and sacred cow -- that courts are very reluctant to do anything to upset the system, and will approve most any ratcheting-up of the restrictions. Any challenger, whatever the logic of their legal theory, has to recognize that they start off in a very deep hole.
That said, let's take a look at the Second Circuit's opinion because this case is, by all accounts, headed to the Supreme Court (and always has been aimed in that direction).
Physical Occupation?
The plaintiffs, owners of apartments subject to the amended rent control statute, asserted the law effected facial and as-applied takings. The first claim was for a physical occupation. The statute deprived them of the right to exclude, they argued, because they have to house tenants at below-market rates. The panel opinion didn't beat around the bush, but got right to the heart of the reasons why it affirmed the dismissal - the owners have no right to exclude, relying on Yee v. City of Escondido because you let the tenants in:
However, where—as here—property owners voluntarily invite third parties to use their properties, regulations of those properties are “readily distinguishable” from those that compel invasions of properties closed to the public. Cedar Point, 141 S. Ct. at 2077. As the Supreme Court made pellucid in Yee v. City of Escondido, when “a landowner decides to rent his land to tenants” the States “have broad power to regulate housing conditions in general and the landlord-tenant relationship in particular without paying compensation for all economic injuries that such regulation entails.” 503 U.S. 519, 528–29; see also Loretto, 458 U.S. at 440 (“This Court has consistently affirmed that States have broad power to regulate housing conditions in general and the landlord-tenant relationship in particular without paying compensation for all economic injuries that such regulation entails.”); Home Building & Loan Ass’n v. Blaisdell, 290 U.S. 398 (1934); Edgar A. Levy Leasing Co. v. Siegel, 258 U.S. 242 (1922). The numerous cases that affirm the validity of rent control statutes are the necessary result of this long line of consistent authority. See, e.g., Bowles v. Willingham, 321 U.S. 503 (1944); Block v. Hirsh, 256 U.S. 135 (1921).
Slip op. at 7.
We've never quite wrapped our head around this rationale (assuming that Yee says that pellucidly, which we don't think it does at all). What is the difference between an owner saying "keep out" and barring the door and having the law force the door open, versus the law restraining an owner from saying to someone who is no longer invited to "get out?" Yeah, the owners here voluntarily invited tenants to occupy their properties, but occupancy was subject to whatever terms the owners and the tenants agreed to.
But the court was having none of that. You property owners willingly put your units into the rental market -- oops, sorry, the "regulated housing market," slip op. at 9 -- so this is on you for not simply keeping your gates closed. Shame on owners for offering your properties for rent!
To begin, no plaintiff alleges that the RSL forces them to place their properties into the regulated housing market, and it is well-settled that once an owner “decides to rent his land to tenants, the government . . . may require the landowner to accept tenants he does not like.” Yee, 503 U.S. at 526–28. See also Heart of Atlanta Motel Inc. v. United States, 379 U.S. 241, 259–60 (1964).
Slip op. at 9.
Next, the court concluded that the statute doesn't deprive the owners permanently of the right to exclude, "[b]ecause, as pled, landlords may yet succeed in evicting current tenants, we cannot say that the RSL “compel[s] a landlord over objection to rent his property or to refrain in perpetuity from terminating a tenancy.” Yee, 503 U.S. at 528." Slip op. at 9.
Ripeness (Exhaustion)
Same story with the regulatory takings claim and pleading Penn Central. Before whacking the claim for a failure to plead, however, the court noted the claim was not ripe because the owners have not sought an exemption from the statute's effects under the "hardship" provision. Slip op. at 12. "[T]he as-applied challengers have not sought exemptions. Instead, they speculate that the hardship provisions offer economic relief 'in theory' but practically 'result in few applications . . . being granted.' Speculation of this sort is insufficient under Pakdel." Slip op. at 13.
Yes, such "hardship exemptions" or "variances" are seemingly built into every land regulation scheme out there, and are increasingly becoming the tail that wags the dog: they rarely if ever get granted (and when they do, they are the product of behind-the-scenes decisionmaking that virtually overrule the legislatively-adopted regulation, and operate mostly as a ripeness pressure valve allowing government to avoid having to face the takings music that is the natural consequence of the blanket regulatory ban or restriction).
But who knows, the State just might grant some relief, right Second Circuit?
Penn Central
Back to the Penn Central claim. Slip op. at 13 ("That said, even if the as-applied challengers’ regulatory takings claims were ripe, these claims would nevertheless fail on the merits."). The court seems to analyze the merits of the claims, rather than just stick to whether the Penn Central factors were adequately pleaded. For example, check out this sleight-of-word: "Furthermore, the as-applied challengers have not plausibly alleged that the economic impact factor tilts in their favor." Slip op. at 15.
But isn't all that is required is an allegation that the regulations have had an economic impact on the owners (with it being up to the jury or fact-finder to determine whether this impact, when measured against the other factors, "goes too far" and looks like it is having an effect similar to an eminent domain seizure? Here, the plaintiffs alleged a decrease in value between 20 and 40 percent, and that seems like it should have been enough. But here we have the court determining as a matter of law that this can never be enough, which to us is an usurpation of the right to have a jury make this determination.
Next, the investment-backed expectations factor (which, in itself, invites the kind of bizarre analysis the court engaged in, focusing on whether the property owners here could and should have predicted future restrictions). One answer might be that of course, having their properties in New York, they should have expected to get nailed. And strangely, that is just what the court concluded:
We agree with the district court and hold that any investor could reasonably expect limits on the use of rental properties, such as those as provided by the RSL.
Slip op. at 17. Go ahead, read the rest of pages 17 and 18, where the court bootstraps the very existence of the RSL to conclude that owners should just know that more is coming. You frogs in the slowly boiling water: it's your own damn fault for not getting out of the pot.
The opinion ends on a low note, the inevitable butchering of Penn Central's character inquiry. The RSL is a valid police power regulation, the court concludes, and therefore the character factor is in the government's favor. That analysis properly belongs in the following section (pages 21-23) where the court concludes that the rent control statute is a valid exercise of police power.
More on the opinion:
Stay tuned there will be more.
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*We know the rule in legal writing is never to use "clear" or "clearly," but if you substitute "pellucid," you are just making it worse, not better.
74 Pinehurst LLC v. New York, No. 21-467(L) (2d Cir. Feb 6, 2023)
