A federal appeals court rejected the rent control challenge

A federal appeals court ruled that the government did not necessarily take a landlord’s property when it forced him or her to work at a loss while renting to a tenant he or she never agreed to host.

That’s the view of the U.S. Court of Appeals for the Second Circuit, which yesterday threw out a challenge to the rent stabilization law brought by two New York landlord associations that argued that rent increase restrictions and evictions passed in 2019 were so draconian, they were an effective seizure of their properties.

The court rejected these arguments, in part because the landlords did not prove that rent stabilization eliminated the income of each owner of the rent-controlled building.

“When allowable rent increases are exceeded by increases in operating expenses, the result may be a reduction or, in some cases, elimination of net operating income,” the 2nd Circuit’s opinion read. But “petitioners have not simply alleged that every owner of rent-stabilized property has suffered an adverse economic impact.”

New York’s rent stabilization law, which typically limits rent increases to 1 percent or 2 percent in New York City’s nearly 1 million apartments, has survived numerous legal challenges since it was first passed in 1969.

In 2019, the New York legislature passed several draconian updates to the law that limit property owners’ ability to raise rents to make individual apartment improvements (like a new furnace), capital improvements (like a new roof) or make-up. Over the years they have raised rents below the legally allowed maximum.

Progressive lawmakers behind the 2019 update also made the law much more favorable to high-income renters. It eliminated ways in which landlords could “deregulate” units (start charging market rates) where rents exceeded a certain threshold or that were occupied by earners of $250,000 or more a year.

Property values ​​in rent-stabilized buildings have declined since the 2019 law was passed. Landlord groups complain that this has effectively “deteriorated” their buildings by limiting their ability to afford maintenance costs and by limiting allowable rent increases relative to rising operating costs.

The result, they claim, is a growing number of dilapidated, unlivable rent-stabilized units. About 10 percent of New York City’s rent-stabilized units are vacant.

In response to the 2019 law, the Community Housing Improvement Program (CHIP) and the Rent Stabilization Association (RSA) sued New York City and its Rent Guidelines Board, citing different arguments.

They argued that rent control’s long history of reducing housing supply and quality made it an unreasonable means of improving housing affordability in violation of the Fourteenth Amendment’s substantive due process protections.

They argued provisions of the law that force landlords to renew leases with existing tenants and allow those tenants to give their rent-stabilized units to family members, dependents and partners amount to a government-imposed physical taking of their property. Limiting rent increases, they say, amounts to a regulatory takeover by reducing their property values ​​and holding rents below what is needed to earn a reasonable profit.

These arguments were rejected in 2020 by the US District Court for the Eastern District of New York, which upheld New York’s rent stabilization program.

The 2nd Circuit has now done the same. Its opinion explains how constitutionally the constitutional challenge to high economic regulation and rents is particularly clear.

Yesterday’s opinion said that tenants’ right to assign their lease to their successor was conditioned on whether the successor was a family member and whether they were already living in the unit.

Even if the statute required landlords to unconditionally pass rent to an “invited successor,” the 2nd Circuit reasoned that this did not amount to a physical taking because it would “merely deprive landlords of the ability to decide who their incoming tenant is.” The power of landlords to evict those tenants is not completely eliminated, just conditioned. Therefore, it was not a permanent physical adoption.

CHIP and RSA argued that the landmark 2021 Supreme Court decision Cedar Point Nursery v. Hasid—which struck down a California law requiring union organizers to grant temporary access to private business premises—meaning the temporary, conditional occupation of property also amounts to a physical taking.

The 2nd Circuit rejected that argument as well, holding that no Cedar Point Nor were the other two physical takings cases cited by RSA and CHIP about rental housing and, therefore, did not apply.

“None of them concerns a statute that regulates the landlord-tenant relationship, and none limits—much less ignores—the state’s longstanding authority to regulate that relationship,” the opinion read.

As noted, the 2nd Circuit also rejected Chip and RSA’s claims that New York’s rent stabilization law was a facial regulation on the grounds that not all landlords were made unprofitable by the building law.

There is a prevailing notion among left-leaning and liberal Yes in My Backyard (YIMBY) housing advocates that rent stabilization is actually a necessary complement to the zoning reforms they support. Zoning will encourage construction and lower prices for everyone. Rent control or stabilization will prevent existing tenants from being displaced while we wait for that new supply to come online. And if rent control modestly reduces how much new supply the market will provide, that’s a tradeoff worth making, they say.

Even if one thinks this is a realistic policy platform (I don’t), the 2nd Circuit opinion is a good reminder that legal challenges to rent control and zoning regulations will rise or fall together.

“The caselaw is exceptionally clear that legislatures enjoy broad authority to regulate land use without running afoul of the Fifth Amendment’s prohibition on physical taking,” the 2nd Circuit opinion read. Therefore, since stabilization is a land use control such as zoning, it is not considered adoption.

At least, that’s where things currently shake out. A Supreme Court ruling could change that.

A Chip and RSA spokesperson said Gothamist Yesterday that they “always hoped that these issues would be decided by the Supreme Court and we are confident that we will ultimately prevail, and finally force leaders around the country to create real and just solutions to our nation’s housing challenges.”