Does New York’s “rent stabilization” law violate the federal Constitution? The law, which regulates approximately 1 million apartments in New York City, was enacted more than fifty years ago and remains in effect based on an every-three-year declaration of a housing “emergency.” The law does not merely regulate rent levels, it also limits a property owner’s right to determine who uses an apartment, to convert the property to new uses, and to occupy the property for use by the owner and his or her family.
A lawsuit filed last year asserts that the New York law—including 2019 amendments that significantly increased the restrictions on property owners—violates due process and effects both physical and regulatory takings of the property that it regulates. New York City, New York State, and tenant advocacy groups have moved to dismiss the action.
Rent control is not just a New York phenomenon. Other cities across the country have enacted, or are considering, rent regulation legislation. Andrew Pincus, lead counsel for the plaintiffs, and Prof. Richard Epstein, of New York University School of Law, will discuss the constitutional challenge in the context of the Supreme Court’s evolving property rights jurisprudence.
Andrew Pincus, Partner, Mayer Brown LLP
Prof. Richard Epstein, Laurence A. Tisch Professor of Law and Director, Classical Liberal Institute, New York University School of Law
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Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society’s Environmental Law & Property Rights Practice Group, was recorded on Thursday, February 27, 2020, during a live teleforum conference call held exclusively for Federalist Society members.
Wesley Hodges: Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is a Litigation Update on New York’s “Rent Stabilization” Law. My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the experts on today's call.
Today, we are very fortunate to have with us a wonderful panel to discuss this topic. And starting with us is Andrew Pincus, who is a partner with Mayer Brown. Andrew has a practice focusing on Supreme Court and appellate litigation and has argued 30 cases before the Supreme Court. He is counsel for the plaintiffs in this suit. Also with us is Professor Richard Epstein, who is the Laurence A. Tisch Professor of Law and Director of the Classical Liberal Institute at the New York University School of Law. He’s a Senior Fellow at the Hoover Institution and the James Parker Hall Distinguished Service Professor Emeritus of Law and Senior Lecturer at the University of Chicago Law School. Professor Epstein is not counsel for the plaintiffs.
After our speakers have their remarks, we will have time for your questions. We really do encourage you to participate. Thank you very much for sharing with us today. Andy, I believe the floor is yours to begin.
Andrew Pincus: Thanks very much, and thanks to The Federalist Society for setting up this teleforum. I thought it would be useful as a starting point to describe our challenge because it’s complicated, just as the New York rent regulation law is extremely complicated, but I will try and simplify things as much as I can.
I think when you hear rent control, the first thing that may come to your mind is emergency regulation. Maybe it started during World War II, focused on regulating rent levels, but the New York law is very different and much broader than that. The rent law that we’re talking about, which is New York’s rent stabilization law, was first enacted in 1969, so it’s been in effect for over 50 years, although it’s premised on the conclusion that there’s an emergency in terms of a lack of affordable housing.
This law does regulate rent levels and the ability of property owners to recover investments and improvements in their buildings. But it also imposes very significant limitations on a property owner’s ability to control who resides in his or her property, to reclaim property for his or her own use, to change the use, and to sell the property; lots of very broad regulations. This law was constitutionally suspect for many years, but a series of amendments that were enacted last June, in June 2019, that dramatically increased the regulatory burden on property owners really makes clear how unconstitutional this law is.
So we have three basic challenges in our lawsuit. We have a due process challenge, we have a physical taking challenge, and we have a regulatory taking challenge. And we’re challenging the law on its face. In other words, our argument is as it applies generally to property owners in New York, this law is unconstitutional.
So let me start by describing the due process challenge. The theory of this law is that it has basically three purposes. It’s designed to provide affordable housing for people of limited means who live in New York. It’s designed to maintain or increase the diversity, socioeconomic and racial diversity in New York. And it’s designed to abate a housing crisis by providing for more affordable housing.
But the facts, and there are a lot of facts — we made certain to include them in our complaint — make clear it doesn’t do any of those things. First, on relief for low income New Yorkers, there’s nothing in the law that targets -- gives benefits on low income individuals, no financial qualification standard. Stabilized units are awarded to anyone who has the good fortune to either find one or have a relationship with someone who lives in one, as I’ll describe. Frequent news reports and studies have confirmed that hundreds of thousands of these units are rented by New Yorkers who can afford to pay market rents. And one survey found, in fact, that the percentage of lower income families living in these units is only marginally greater than the percentage living in market rate units. For similar reasons, the law has no rational relationship to socioeconomic or racial diversity because, again, nothing in its benefits are targeted on that ground.
Finally, the argument that the law somehow increases the supply of affordable housing is actually a cruel joke because the law has the opposite effect. What it does is reduce the availability of vacant apartments by preventing property owners from redeveloping their property to create new units by making use of permissible zoning, and it incentivized tenants to stay in units even if their families no longer need the space because the rent is so low.
We did a study comparing 50 buildings that had rent stabilized units with 50 that didn’t and found out the rent stabilized buildings were under built by 20 percent in terms of the available zoning envelope compared to the non-rent stabilized properties. Applying that to the city, if those units could be treated the same as non-rent stabilized property, that could mean as many as 100,000 additional apartments in New York. So there’s nothing that this law is doing to increase the supply of affordable housing; quite the contrary.
So our argument is no rational relationship here between the purported ends and the means being used, even if rational basis is the test. But we also include an argument that because of the dramatic intrusion on property rights here, a court should consider whether a stricter scrutiny standard should apply to this kind of regulation.
Our second argument involves a physical taking. And our argument is pretty simple. What we say is this law deprives property owners of their core rights to exclude others from the property and to possess, use, and dispose of their property. And that physical taking without compensation, as the Supreme Court has said, violates the federal Constitution.
So it takes a little bit of time to explain this unbelievably complex web of regulations, but just to hit a few of the high points to give everybody on this call an idea of just how dramatic the limitation of property owners’ rights is, owners can’t refuse to renew leases except in very narrow circumstances. So in other words, owners no longer have the right to exclude people from their property. They have to renew the least unless one of these narrow exceptions applies.
And that’s not just for the original tenant. I don't know if folks remember that in Friends, Monica was living in her grandmother’s rent regulated apartment. I though that was a liberty taken by the writers of that series but, in fact, it isn’t. The tenant may give his right to live in the unit to another person, and the property owner, if that person is either a relative who has lived with the original tenant or a caregiver who has taken care of the original tenant for a period of time, the property owner has to allow that successor to renew the lease on government dictated terms. So in property terms, like the state with inheritance rights, is quite an interference with a property owner’s rights.
The other thing that happens here is the property owner cannot take back the property, even for his or her own use. The law formerly was hedged with restrictions. It appeared to allow the property owner to take back apartments but didn’t really. But the 2019 amendments made clear that the property owner can only take back one unit. So many of the owners of these buildings, they’re small buildings, they’re family owners. A family may live in the building. Maybe there’s an elderly parent that needs care and the property owner would like to enable that parent to be able to move in to an apartment. He can’t take back an apartment to allow that to happen.
Second, property owners can’t withdraw their buildings from the housing rental market and convert them to non-housing uses, nor can they simply stop renting. The owner can’t even demolish a building unless he or she pays to relocate the tenants. So again, huge interference with the fundamental property rights.
Prior to the 2019 amendments, a property owner could convert a rental building into co-op or condo using a non-eviction plan, and only approval of 15 percent of the tenants was required as long as the plan was not going to result in eviction. The 2019 amendments eliminated that requirement and said you must get agreements from 51 percent of the tenants, even for a non-eviction plan. So in other words, this transfers from the property owner to the tenants the power to decide whether the property can be disposed of through a co-op or condo conversion.
So our theory is when you take all of these restrictions together, they are so burdensome on long-recognized property rights that they amount to a physical taking. Our opponents, the state and the city, say, “No, there’s no permanent occupation. That’s what’s required for a physical taking.” But as I’m sure we’ll talk about as we get into the constitutional issues in the case, the Supreme Court has been very clear that a permanent occupation is not required. An occupation of all the land is not required. The Court has said that easements that allow individuals to traverse property can constitute physical takings and that even the occupation of a small piece of property, as when a tenant cannot be removed from property, can, in some circumstances, amount to a physical taking. So our position is when you roll up all of these restrictions together, it’s hard to imagine how that couldn’t be a physical taking of property.
Our third argument is a regulatory taking of property. That’s a pretty familiar principle. The Supreme Court in the Penn Central case laid out a whole bunch of factors that are considered in determining whether there’s a regulatory taking. We think if you look at all of those factors here, it’s quite clear that they weigh decisively in favor of finding a taking. First of all, the law has a very significant effect on property values, no surprise. We conducted a study of the law’s impact prior to the 2019 amendments, which have only increased the burdens, as I said, and found that buildings with predominantly rent stabilized units have only 50 percent of the value of buildings with predominantly market rate units. And even New York City’s property assessment guidelines concede that fact.
The 2019 amendments, given the restrictions that I’ve discussed, are going to have an additional dampening effect on property values, not just because of those restrictions, because of some other ones that limit property owners’ ability to recover for improvements in their property. For example, many of these apartments, because of the attractiveness of the rent, when they become vacant, it’s only after a very long period of occupancy. So to bring the apartment up to code and up to market conditions, investments are required, often as much as $50,000 or more. But the 2019 law says no matter how much the property owner invests, she can only recover $15,000 for those kinds of improvements over a 15-year period, regardless of the actual cost.
In addition, prior law allowed landlords to recover for what were called major capital improvements, again, the ability to improve the building and recover for those kinds of investments. The new law dramatically reduces the ability to recover for those investments. And again, it’s hard to imagine anything that is literally more obviously a taking than saying no matter how much you invest in your property, even if it’s required to bring the apartment up to snuff after a long occupancy, we are simply not going to allow you to recover.
Not surprisingly, the consequence of that has been a dramatic reduction in construction activity and rehab activity for these apartments. It’s been reflected in layoffs in the construction industry and a decline in building permits in New York and, obviously, is going to have the dramatically counter productive effect of a diminishing equality of New York City’s housing stock, which is exactly the opposite of what this law is supposed to do.
The other thing, talking about more conventional rent regulation, is the way the law has been applied to limit landlords’ ability to increase rents to cover increased costs. In New York City, there’s a Rent Guidelines Board that sets the amounts of permissible rent increases. The Rent Guidelines Board has its own index of owners’ costs, and if you look at that index from 1999 to the present compared to the rent increases that have been allowed, it’s a striking comparison. The cost increase has increased 5.4 percent annually, on average. The rent increase that’s been allowed is exactly half, 2.7 percent, on average. Obviously, continued rent increases that are held below the increased costs are, again, the very definition of a taking.
Now, finally, most property regulation, if you think back to first year property and zoning laws, are justified on the theory of reciprocal benefit. It may be that the zoning law restricts me as a property owner in what I can do with my property that’s zoned for a single family house, but I also get the benefit of the fact that the property around my property is similarly zoned. And that provides an increase in value because I won’t have a gravel pit located right next door to my house.
The rent law doesn’t provide any reciprocal benefits to the owners of the regulated property. They don’t get tax breaks. They don’t get any benefits. They are subject to the same expenses as people who own market rate apartments, but they are burdened by all of these restrictions.
And indeed, it’s quite interesting that in the context of an unrelated proceeding, the New York State Court of Appeals, which is the highest court in New York, has held that a tenant’s rights under a rent stabilized lease are a local public assistance benefit. And it said while the rent stabilization laws do not provide a benefit paid for by the government, they do provide a benefit conferred by the government through regulation and to the population the government deems in need of protection. It’s a public assistance benefit, the court said, through a unique regulatory scheme applied to private owners of property.
But, as the Supreme Court has long held, the whole purpose of the Takings Clause is to prevent the government from forcing some people alone to bear a public burden that should be borne by the public as a whole. That’s exactly what the New York State Court of Appeals said the rent stabilization law does, and that’s why we think we have a very strong argument that the law would be set aside as a regulatory taking.
Why don’t I stop there? There’s a lot more than can be said, but in the interest of turning to the broader constitutional issues, I’ll stop and turn the platform over to Professor Epstein.
Prof. Richard Epstein: Thank you very much, Andy, for that introduction of the multiple layers of this particular case in connection with the labyrinthine scheme in this situation. I’m going to do a couple of things. I’m going to start trying to delineate the common law system of property rights and the various evolutions of these property rights that take place under different courses of rent control in order to come up to the climactic situation where today there is nobody who makes an estimate as to the effect upon the unit value of these various places subject to the rule about how expensive it is. The total aggregate diminution in property values in New York City is probably in the tens of billions of dollars, given the draconian nature of these rules relative to those everywhere else.
One of the things that was striking about the brief that the city submitted and the state submitted in response is they basically treated all rent control rules as though they were cut out of the same piece of cloth so that if you went in for one of them and found it constitutional, you have to think exactly the same way with respect to all others. But that really is a very serious mischaracterization of the earlier laws, and once you start to see the differences start to go, you can understand why, in fact, Andy’s conclusion that these things should be struck down is, in fact, a sound one.
The tragedy, of course, that we have to deal with these cases is that if you are dealing with this in state court, the New York state courts are unremittingly hostile to any attack on the rent control system. And there’s certainly a lot of that in the Second Circuit as well. The political economy, of course, has now changed. The Seventh Circuit is now, I think, majority Republican after the recent Trump appointment, and so that introduces a level of uncertainty about the extent to which the past can bind the future.
If you want to go back to the common law to understand what’s going on, the basic protection that you gave for landlords was an action in trespass which allowed somebody to remove from his premises anybody who was on there without his consent. In the usual situation, what typically happened was that somebody owned property and somebody else walked down, and what you did is you simply got him off. If there was an encroachment, that is, you started to build something on the land, the common law rule said if you’re encroaching on my property, generally speaking, I can require you to take that thing off so I can return it to the particular state in question.
This situation is a little bit more complicated when it turns out that a particular party is let into the premises with the consent of the landlord, and that could either be by a short term license or it could be by a lease. And so long as the consent is given under these particular cases, there’s no wrong that is associated with the entry by the outsider.
But now let us suppose that the consent has been revoked and let us suppose that there’s no contract that prevents this revocation from taking place. The common law rules going back to the Six Carpenters’ Case around 1620 said essentially if you have a situation where the consent has been revoked and you stay on afterwards, you’re a tenant at sufferance and you can be evicted from the premises or forced to pay a rent to it which is going to be advantageous to you.
The whole theory about this situation is once the connection between the two parties has been severed because the landlord now wants to reassert this title to the particular property in question, the outsider goes back to being an outsider, and the insider gets everything that he had when he started. Otherwise, what you would do is you have kind of a grotesque situation which says I let you in for a day or for a week, and since I consented to the entry subject to a time limitation, we ignore the time limitation and treat you, in effect, as though you’re in the property perpetually without any ability for the landlord to force you off.
So the question is how do you stop that? Well, the first of the rent control statutes was not in 1940. It was a famous case in Washington called Block v. Hirsh which involved rent control system that was put into place in D.C. at the end of the First World War. And the basic concern that existed in the District of Columbia was the view that there were huge numbers of people pouring into this particular area, and that something had to be done to stabilize the rent against this huge surge in demand.
The kind of response that they put there was very different from the one that you have now in these cases. There was no rent stabilization board of immense complexity of the sort that there has been in New York State since 1969. Instead, there was a very simple statue which said for the next two years, given the necessity in question, we are going to allow people to stay in the premises or to rent the premises out at the prevailing rates that existed before these steps taken. And so what you did is you just carried over an old system of rates into a new system of rates, and they only were prepared to do it for two years because they said by that time all of the maladjustments that took place from the movement of people at the end of the First World War would more or less be over.
They actually meant more or less what they said. A couple of years later, there was a case called Chastleton in the United States Supreme Court. And the argument was, well, necessity seemed to last forever, and so we’ve got to redo this again and again and again just as with respect to the 1969 rent stabilization law. Every three years, they found the same necessity over and over again and kept renewing. But the United States Supreme Court took a very different attitude, and it sent the case back down again because they said there’s no evidence in this particular case that the necessity has continued and therefore it looks as though this situation is one in which we should revert back to the standard common law rule that at the expiration of a lease, a tenant is a trespasser who may be forced to leave the premises in question.
And that’s the situation, in effect. And then there’s absolutely nothing in the early cases that support a system which essentially is a perpetual lockdown of a landlord’s property to the tenant subject to a system subject to a system of rate regulation what was never put in there.
The New York State rent control law in the 1940s took a much more draconian form. And what it did is it allowed the landlord only increases that were justified. And rent control really meant nothing was justified until the unit turned over and so that you can stay there forever. And they held this system to be constitutional, given the so-called dislocations of the war. And it’s very much more aggressive.
I can recall that when I was a student, my next door neighbor owned one of these apartments. Somebody had moved out. The law allowed him to get, in fact, a 15 percent increase. He wanted to rent it to me because every time -- when I left after graduating, he’d get another 15 percent increase. And he sent in the bill. I still remember seeing the disposition. The rent was -- so this particular two bedroom apartment was to be $75.04, and it came back from the Rent Control Bureau corrected to $75.03. They were not going to allow an extra penny to move into the hands of a landlord. And that system, in effect, eventually broke down because you have constant rates and rising costs. The whole system will topple.
So in 1969, they put the stabilization system into place and that’s a system which essentially says we’re going to treat you as though you’re under a public utility model. And what we’re going to do is to say the unit may appreciate wildly, but the only thing that you’re entitled to is a kind of a fixed rate of return on your initial investment like a public utility company. So if your costs go up by 10 cents, ideally, you would get 10 percent increase in costs which, of course, you do not get. But if the unit goes up in value 50 percent, the rest of that increase belongs to the tenant.
So you have a situation where there’s a fundamental unfairness in which you now have a set of rules. If the value of the property goes down, as it sometimes can, the landlord has to take that risk. If the value of the property goes up, all of that benefit starts to go to the sitting tenant. In the meantime, as Andy indicated, what happens is the rest of the housing market is not left unaffected. Rent stabilization did not apply to new construction at that time, and so when these units come in, it turns out that the systematic underutilization of those units that are subject to rent stabilization law means there’s an excess demand for these. And so these units will rent for very, very much higher prices.
And the differential in rates, roughly speaking, in, say, Manhattan or fancy parts of Brooklyn could be a four, five total. The maximum you could get under rent stabilization is $2,700. If you want to have $2,700 in the unregulated market, you’d be lucky if you could find a studio somewhere. A typical one bedroom on the upper west side rents for something in excess of $4,500, and the larger units go for $12,000 or for $10,000 or $14,000 depending on condition and location. So there’s this huge two-tier system.
And so looking at this, I think that the pathologies are pretty evident in just the way that Andy explained, and so then the question is what kinds of theories do you want to deal with this particular situation? And from my point of view, I think that I’m more of a unitary theory guy than most people, so what I’m going to do is to start with what I think to be the correct theory which is the straight takings theory and then branch out to see what can be done in the event that that theory is not going to be accepted for reasons that I frankly regard as rather dubious.
So the first thing to understand about this basic body of law is that we have a situation where the distinction between a physical and a regulatory taking is one if somebody, that is, the government, sits on your property, that’s a taking. If the government then authorizes somebody else to sit on your property, that’s a taking as well by the state because its authorization has insulated the private party from any attack by the landlord. A
And the rule in a case called Loretto is these are per se confiscations. So the great genius of the Loretto decision, which is intellectually bankrupt on this point, is that if you put a little box of telecommunications on the roof of a building, that’s physical occupation, and we’ll give you something. Turned out, they only gave them $2, but that’s another mistake that they made in the case. But if somebody sits in your apartment, they are somehow or other not in possession of the apartment, and how that comes about is simply a mystery to everybody. Of course, they’re in possession of the apartment. And when you start looking at all the rules, the rules start to talk about when you can evict somebody, and you cannot evict somebody from premises unless they are already in possession of them.
So the entire body of law rests on the wrong side of a distinction. They treat these things as though they’re regulations when, in fact, they’re possessions. The per se rule with respect to these things means, in effect, that the tenant is either going to have to be forced out or you’re going to have to have a situation where you say that this taking is for a public use, and then you have to pay just compensation.
First of all, can we say that this is for public use? And I regard this as a fanciful argument. I can’t think of anything more private than the ability of a single person to keep exclusive possession of a single apartment. But other people will say, “Oh, no. So long as there’s a systematic public scheme, this is really for public use.” I think that’s wrong. I think the correct analysis is if a thousand people are doing the same thing and it’s wrong for one person, it’s wrong for a thousand persons. So instead of having one public use, you have a thousand violations of private use.
But put that aside and then ask the question what about just compensation? Well, the basic rule in every other context in the world is that there has to be a full and fair and perfect equivalent of the property that’s been surrendered. And that happens to be a market base of rental. There is a decision known as Pennell which has a concurrence by Justice Scalia back in the 1980s in which he said quite perceptively, “While you really want to rent this thing out to somebody, anybody, particularly a rich person, at one-fourth market rates, there’s a way to do that. You pay the landlord the full value. You sublet the apartment thereafter to the tenant. And what the state does is it gets $2,500 from the tenant and pays the landlord $10,000, and the $7,500 has to come out of the public coffers.”
And as you heard Andy say, that’s consistent with the rule in the Armstrong case, which said, “If you think this is a benefit for the public at large, the public ought to pay for it, not an individual landlord under these circumstances.” But the allocative effect is if you put these things on budgets and told people that the government is now going to have pay some rich person $7,500 a month, close to $100,000 a year, so they could take the extra money and spend it on a vacation home in Connecticut, you’re going to get a huge negative reaction.
And so what happens is the secret is keeping all of this stuff off budget in the forms of rent reduction so that it doesn’t go on the public payroll. And that’s utterly inconsistent with any decent system of democratic allocation where there ought to be transparency in the way in which public expenditures are done. And so if you were to do this by taxation and payment, everybody would be opposed to it. Now, you do it by a covert regulation. All of a sudden, this thing becomes wonderful. It can’t be right.
So if you put this thing together, essentially, what’s happening is tenants are getting something for not quite nothing but, say, for 25 percent of the value. Well, maybe there’s a police power justification. And the early case of police power was you own a fertilizer factory and you stink everybody else out of town, private nuisance actions may not work, so the government brings one and they say nobody, but nobody, has claim. They’re all private units in New York City. All public nuisances are private nuisances. You have to actually do something by way of polluting activities in order to fall into that category. So there’s no police power justification.
So if you put all of this stuff together and you treat it as a matter of first principle, the problem about rent control is how on earth could this thing have lasted as long as it did when it’s such a terrible violation of everything that goes on? Well, the folks in the city then come back and they make another argument — I’ll stop in a minute or two — and they say, “Well, there’s some kind of public necessity about this.”
But at this particular point, there’s another joke that gets introduced which is the other perversion of the notion of necessity in connection with cases of this sort. If you go back to all the historical cases, including even the early rent control cases, a necessity is something which is external to the way in which things operate within the system that force massive adjustments. That includes wars and it includes plagues. It includes earthquakes of one kind or another, floods, and by definition, these things are temporary. To claim that a 5 percent vacancy rate or less is a public necessity is to basically say that self-inflicted necessities, i.e., the fact that the vacancy rate is so low because the rents are so constrained by the state, means in effect that there will always be a necessity. So the concept becomes drained of all conceivable meaning.
And what used to happen for many years is first every two years, then every three years, they remembered what Mr. Holmes had said back in Block v. Hirsh, and they said, “We have to find necessity again.” And every time they found the same jokey theory of necessity to work, so the whole thing has this kind of fundamental farcical quality about it insofar as you take ordinary common law concepts and you give them both, with respect to the definition of what’s a taking and with respect to the definition of what’s a police power violation, meanings that are utterly at variance with ordinary situations. So this case should be DOA if you had anything that was done right. And it’s only the precedents, all which have badly reasoned, that come out in the opposite direction.
Now, Andy also mentioned that there was a regulatory taking theory here based on Penn Central, and let me explain why it is that this theory simply has no sensible application in this case. The standard justification for rate regulation is that it is an offset against a monopoly power that somebody had. And so this theory going back to the 1890s is we’re going to give you a monopoly, or you’re going to get one because of natural circumstances. And if that’s the way in which the system is going to operate, what we’re going to do is we’re going to force you to constrain rates to make it look competitive.
Well, these guys essentially are already in a deeply competitive market, and in those units which are not covered by rent control, today that market works perfectly well. People move in and out. The rents are stable. They don’t even get to the ceiling. So if you now take somebody who gets a competitive rent, and what you do is you lower the rent that they get and vastly increase their costs, by definition, mathematical necessity, they’re below the particular level in question. And so this whole theory is extremely odd from start to finish because it gets rid of the justification for rent control that was in all the classic cases.
And so what you now see is just a crazy situation under New York where they say, “Well, we don’t think you’re getting too much of a profit. We’ll give you this much. We’ll give you that much,” no evidence paid whatsoever to sufficient rate of return. And then recently in New York, they had another feature in there that says, “Well, we think conditions are bad in the city. We don’t have to give you any rent control increase at all.” So the tenants become a plaything.
And I’m just going to end on one note. We take these two theories and you put them together. If the Supreme Court says about the Armstrong theory that the public at large should bear the costs that are for the public rather than putting them on a given private party, and you treat that theory as wrong, then anything goes because you can allocate any course to anybody. This is what Justice Brennan did in his Penn Central decision where he said, “I can’t figure out what the right rule was, and so the answer is if you don’t try, you’ll never get anything right.” And I’ve written some articles that indicated he managed to misread and misrepresent every single case on which he relied for that proposition.
And so what you do now is you have this incredibly weak system of property rights, and you can start to see that the city is going to implode. Are there going to be fewer sales of particular properties? The maintenance and the upkeep of the properties are going to go down. The defaults and mortgages are going to start to increase as people can’t pay their outside situation. The conditions of repair in these buildings are going to start to go down. The units are going to be less vacant by landlords who say that if I’ve got somebody under this new law, I’m worse off than if I hope the storm will pass.
And so what they’ve done, in effect, in the state legislature of New York is to create a perfect storm. And it turns out that when you have a storm that’s that perfect, it manages to engulf everybody inside the situation. So I think with that, what we should do is open it up to public questions.
Wesley Hodges: Very good. Thank you so much, Professor, and thank you, Andy, for your remarks. Looks like we do have one question right out of the gates. Here’s our first caller.
Edward Hochman: Good afternoon. My name is Edward Hochman. From 1994 to 2001, I had the misfortune to be the Chairman of the New York City Rent Guidelines Board. Before I get to my questions, which may sound a bit as if I’m even-handed or even pro-tenant, I can assure you I wish you absolutely the best in this lawsuit. And by the way, just one of my pet irks — and I know others have questions so I won’t to on too many tangents — when I was Chairman of the RGB, there were at least 7,400 units which had more bedrooms than people occupying them, meaning there was the widow whose three kids had left so the one person was living in a three bedroom apartment. There was one on Sutton Place, which is a very wealthy area of New York City, where she was paying $640 a month. We all know these horror stories.
My question is this: My family also had the misfortune to own land in the Pinelands in New Jersey which were subject to a regulatory taking. What do you say to the argument that as long as the landlord gets some value, that that’s okay? The landlord may not get market value, but land lord will get some value. And my second question — then I’ll shut up — is when it comes to determining affordability and the impact and all this, whether the law is making any sense or not, what do you say to the argument that that’s up to the legislature to decide, not to a court?
Prof. Richard Epstein: I will take this one first, and then Andy can chip in. Constitution talks about just compensation, not minimal compensation. And what it meant in the case of the occupation of land is that you have to give a full and fair equivalent, dollar for dollar, of everything that’s taken. And so if you wanted to condemn these buildings outright, and they were worth a million dollars before, and you offered $999,000, they could not take it. How could it then possibly be under the circumstances that if you’re subject to the rent control which cuts them in half, that that $500,000 worth of compensation would disappear? This is not constitutional law. That’s sort of a twist of the Constitution there. Lots of ambiguities in the Takings Clause, that isn’t one of them.
And the second argument is the argument against the legislative dominance is the same here as it is in every other case. Popular democracy means that 51 percent of the population can vote the other 49 percent out of their property. Well, in this particular case, Democrats take over all Houses of Congress and they don’t vote you out of your property, they don’t take 100 percent of it, but they take a very large fraction of it. And as Madison told us, the dangers of faction are rife in all of these particular areas. They are Exhibit A in this particular case. And so the very fact that you have such a strong democratic majority doing this is a good reason for saying that the statute is indeed obviously unconstitutional.
Andrew Pincus: Just to follow up, I think, and we make this argument in our response to the city and the state’s motion to dismiss, our view is that first of all, obviously, this question of sum value doesn’t apply at all to the physical takings claim. But in the world of the regulatory takings claim, we think a fair reading of the Supreme Court’s decisions is that all value does not have to be taken. The amount of value taken is one of the factors along with some of the others. Professor Epstein listed noxious use, reciprocal benefits, the character of the intrusion; all those are things that are weighed in the balance. If none of those factors were relevant unless there was a taking of all value, then it would be -- regulatory takings would be a much easier test to apply. But the Court has never applied it that way.
And we think when you look at the amount of value that’s taken here, and then you look at all these other factors, the nature of the intrusion — even if it’s not a physical taking, it’s a dramatic physical intrusion — the lack of any reciprocal benefit, the lack of any noxious use, we think that balance weighs pretty decisively in favor of finding a taking here.
Prof. Richard Epstein: Yeah, one little just further comment. I think you could actually even be more precise about the relevance of these factors. And so the average reciprocity of benefit is, in fact, a perfectly good test. But simply because one guy benefits and the other guy benefits doesn’t mean that they’re reciprocal. Both of them could lose. There are many zoning cases which, in fact, have enormous transfers of wealth from the people who are allowed to build industrial and the guy next door who is not. And in my view, those are unconstitutional because there is no average reciprocity of advantage. It’s just another disguised wealth transfer for the zoning system.
And so the good cases — and this came up in the Penn Central case — suppose you take somebody’s air rights and what you give them in exchange is the right to build over somebody else’s building. These are called transferable development rights, TDRs in the jargon. Well, I think the answer is those count as compensation. But you can’t presume that it’s equal to the rights lost, and you have to value it. And suppose the right loss was a million dollars, and the right that you get is $200,00, you’ve got a down payment of $800,000 -- or rather, $200,000 and you’re still $800,000. You can’t do what Justice Brennan said is, “Well, I’ve got this, I’ve got that. Ignore the relative values. So long as you give me something that looks valuable, I don’t have to value either it or the thing that was lost.”
And then you’ve got the noxious use point, but there’s no noxious use in either the Penn Central case or in any of these rent control cases. So sure it’s a factor. You show me the fertilizer leaking out of the buildings, I’ll show you a noxious use claim. So you can talk about all these things, but it’s not just enough to say, oh, they’re all involved in this case.
And to make it even worse, New York City said, “Ah, we get stabilized rents for the tenant.” This is just a partial wrong analysis because stabilization on one side means a huge residual risk on the other side because now all the vast fluctuations are not going to be spread between the two parties by contract but they’re going to be saddled exclusively on the landlord, which is another indicia of a huge wealth transfer of the sort that the Takings Clause is designed to prevent.
Wesley Hodges: Thank you very much. Next caller, you are up.
Caller 2: Hello. Good afternoon, Professor Epstein and Mr. Pincus. I had questions about a couple of other arguments, if you planned on making them. One is the Contracts Clause argument, and the second argument would be possibly a corporate free speech argument. If the landlords -- if their ability to use their property for anything other than stabilized housing is taken away from them, do you think there would be a plausible argument for corporate free speech, especially after it was broadened after the Expressions Hair Design v. Schneiderman Supreme Court case?
Andrew Pincus: Let me start. I think there surely are some property owners who have Contracts Clause claims because they were in the middle of condo or cost conversions because that had entered into financing arrangements because they’d entered into rental arrangements. Because we wanted to bring a facial challenge, we felt that it was going to be hard to make the Contracts Clause claim a facial one and so we didn’t rely on it here. But I know that there are other cases in which that claim is being asserted based on the particular facts of a particular property’s situation.
The free speech claim is interesting. I think it would probably also be a little fact specific depending on what the property owner was thinking of doing with his or her property, but definitely something, I think, also worth thinking about.
Prof. Richard Epstein: My view about it is slightly different. There have been a number of Contracts Clause claims that have worked quite effectively. The most famous of them is Winstar. But in order to make a Contracts Clause claim, generally, as opposed to a property claim, what you have to do is to show a specific agreement between the government on the one hand and the private entity that’s claiming a breach of contract on the other. So in the Winstar case, what you did is you had a government in a banking reorganization case said, “You, bank, can include in your base capitalization the amount of supervisory goodwill that you get.” And then later on, it’s changed its mind and says, “That stuff doesn’t count. It’s got to be a hard asset.” And Chuck Cooper, the lawyer in the case, said, “Look, this is an ordinary contract. You told use we could do something, then you said we can’t do something under the contract. Gone.”
Now, the reason this is never applied — and it’s not necessarily a good reason — to the cases that you have here is it’s generally thought that when you have basic regulation that affects everybody, it’s not a contract as such, and so therefore you can’t make Contract Clause arguments, even thought it’s in connection with an action by the state as opposed to the federal government. And so I think it’s going to be a very hard situation for anybody who doesn’t have that kind of situation, which is virtually all the landlords going on here, to make the argument. I’m sure if there’s anybody who actually has a lease with the city or with the state that’s going to be subject to these kinds of restrictions, that would become a credible argument.
The speech argument, again, it’s going to be very difficult because these are not pure speech cases. You can say whatever you want about the rent control laws. It’s going to have to be an argument of the sort that we wish to transfer to a kind of use that is subject to a free speech claim like we want to close this unit down and put up a newspaper. Generally speaking, those claims have failed. And I think they’re likely to fail here because on the boundary line question about levels of scrutiny, you have low scrutiny given by most courts wrongly, in my view, on the takings cases, much higher scrutiny on the speech cases. So you have to figure out which side of the borderline you’re on. And for the most part, if these are land use issues, they tend to be treated as though they’re property cases, not free speech cases.
Wesley Hodges: Thank you very much.
Andrew Pincus: I was just going to say maybe while we’re waiting, there’s one point, I think, worth mentioning about the evolution of the Supreme Court’s jurisprudence. And I can tee it up, and Professor Epstein probably has some thoughts on it as well. So one of the interesting arguments that’s being raised in the motion to dismiss that was filed and that has been raised in prior cases is this argument that you bought your property knowing that New York — this was true, obviously, for some property owners — you bought your property knowing that New York had a rent stabilization law, so essentially you have acquiesced and can no longer challenge that regulation.
And I think before a case called Palazzolo in the Supreme Court and the more recent Horne case, maybe that was a valid argument. And it’s actually one of the reasons that the Second Circuit rejected a prior challenge to the rent stabilization law a couple of decades ago. But the Supreme Court has pretty clearly in the Horne case, which folks may remember involved raisins and government appropriation of raisins, and Palazzolo, which involved property regulation, the Court said taking title with notice of government regulations doesn’t deprive you of the ability to challenge those regulations and basically squarely rejected that argument. It’s one of the reasons why part of the evolution of jurisprudence that I think really opens the door to the kinds of claims that we’re making that were much more difficult based on past jurisprudence.
Prof. Richard Epstein: The argument that Andy talks about is one that has been made multiple times. And if it’s correct, then in effect, you could never challenge anything for a taking. Buildings regularly turn over. Sometimes they’re sold to strangers. Sometimes they’re distribution. So one of the situations you see is we put a restriction on land use and the property is now in the corporation. And then what you do is you liquidate the corporation and you distribute it to the individual owners. And somebody says, “Hey, you individual owners took this with knowledge of the restriction, and so, therefore, bad buyer.”
The correct analysis is exactly the opposite way. If, in fact, there has been a regulation that is put on the property, the owner now has two assets. One of them is the land subject to the restriction and the other is the takings claim that can be brought in an effort to undo that. And in those cases where the claim is 100 percent solid, there’s going to be no diminution in value if you ignore the transactions clause associated with the situation.
If, in fact, now there’s a transfer before the claim can be brought, you’ve got the following situation: What happens to that right of action? Well, you could say one of two things. You could say, “Well, it is retained by the original owner.” Why would anybody want to keep a right of action against the government in these kinds of situations? Why would you want to do that if it turns out that you’re never going to pursue it?
And so the sensible way to do this is to say, “Look, you sold to this guy everything that you had. That included both the land subject to the restrictions and the cause of action, so the transfer survived.” And then in accordance with the usual rules of assignment, what usually happens is you then say, “The assignee takes subject to the defenses, so the position with the transferee is identical to what it was to the transferor.” If a takings claim was valid against the first guy, it’s transfer won’t revive it. If it was good, the transfer should preserve it.
That’s the correct analysis in all of these cases because otherwise what happens is everybody knows about the existence of the rent stabilization law in 1969, so anybody who bought or sold property in the interim is on notice and so, therefore, they’ve assumed the risk. What you’re saying, in effect, by that claim is the government just has to wait a little bit, and then the moment there’s a voluntary transfer, there’s a stripping of rights. And that’s the proposition that Palazzolo stood against. I don’t think it explained it quite the right way as I would have it be done, but it certainly reached the right conclusion.
Wesley Hodges: Very good. Looks like we do have two questions in the queue. Next caller, you are up.
Edward Hochman: Hi, Ed Hochman again. I hope that you can just expand a little bit on the necessity argument. There was an article in The Wall Street Journal today that rent regulated sales plummeted in the last half of 2019 by about $4.1 billion, which would seem to bolster your claim. However, they then quoted State Senator Hoylman who was one of the sponsors of the bill who said, “Yeah, that may be true, but there was an 18 percent drop in evictions since the law passed. The human cost of eviction is staggering, contributing to the homeless crisis we are witnessing across the city.”
So is there any merit to the necessity argument? And by the way, when I was chairman, New York City’s population increased by about 750,000, and we certainly didn’t build housing for that many people. So is there anything left to the necessity argument?
Prof. Richard Epstein: Well, his argument strikes me as beyond bogus in terms of the way in which it’s put. First of all, if you’re trying to deal with these situations, that argument would mean that nobody could ever evict any tenant for nonpayment of the rent, at which particular point nobody has any incentives to pay the rent. The necessity argument is not an argument that says that people need housing. It’s an argument which says that some external circumstances make it impossible for people to perform a contract.
The second thing is what the fellow ought to do is to look very hard into the mirror and say, “Maybe I’m responsible for all this with the way in which I’ve created these chaotic laws to begin with.” And now, in effect, what happens is it turns out that the reduction in evictions going over there, you can’t even say that that’s a good thing. If tenants are staying in, and they’re noisy and they’re boisterous, and they’re going to wreck the particular premises and make life difficult for everybody else, why is this regarded as some kind of a social good?
So what’s happened is this is a kind of hopelessly ad hoc, totally perverse argument made by someone who simply doesn’t want to own up to the consequences of the fact that he has destroyed beyond recognition all, but all, of the sensible market correctives. You do not have these kinds of eviction rates, you do not have these kinds of distortions in any city that does not have rent control. You could go to Chicago and you don’t have one one-hundredth of the sagas that take place in this particular case.
And so to attribute all this to the vile behavior of landlords, that’s crazy. Landlords pretty much have the same motive to try to survive in a competitive market everywhere. What he has to do is to find the asset that has the differences, and the difference is the system of regulation that he praises is the source of all the grief that we’ve had to face in New York City for 52 years.
Andrew Pincus: Yeah. A change in tenants costs landlords money. The apartment’s going to be vacant for some period of time, so landlords don’t want to get rid of tenants who are good tenants who are paying their rent. If there’s a problem with evictions, that’s a totally different problem.
But what this law does for the reasons I said is it’s going to degrade the housing stock. It’s preventing the use of property to expand the number of units available, which is the real problem in New York. And as you yourself said, it leads people to stay in apartments where they have too much space for what they need because they’ve got the lottery ticket that they don’t want to give up, and that prevents a family that could actually use all of that space from getting the apartment. So the mismatch that this creates on all levels basically is to diminish the availability of housing.
Prof. Richard Epstein: Well, as Andy said earlier on, the moment a widow stays in a four bedroom or a three bedroom apartment, you’ve lost, in effect, the three bedroom spaces because of this system. She will not leave that unit because she pays $2,700 there, and to downsize into a unit that’s more sensible, she’s going to have to double her rent. And so you distort relative prices, and therefore, you make sure of massive resource allocation.
You just got rid of a rent control system, I would think, by simply allowing rents to go up freely 10 percent every year. All of a sudden, you create a vast new source of housing supply, and you increase the tax base of the city. So what happens is it is just wrong for anybody to talk about hardship stories of individual people when what you really have to do is to talk about the system. So I would like our particular hero in this particular case to explain to a landlord who has now gone into bankruptcy and to foreclosure why it is that his harm doesn’t count while that of an evicted tenant does. You cannot use the sob story as a replacement for a rational argument.
Wesley Hodges: Thank you, sir. Here is the last caller of the day.
Adam Griffin: Hi. This is Adam Griffin. Thanks for a great discussion and thanks for taking this case. It sounds like it’s a really good one and much needed. My question is about the Due Process Clause claim. It sounds like you have good facts on the rational basis, that this lacks even a rational basis. But I’m wondering what the legal support is that this kind of depravation or infringement on property rights could receive heightened scrutiny, and what the legal arguments are for that, and if there’s a place that we can access the complaint?
Andrew Pincus: We do think we have a good argument on a rational basis, but property -- the Constitution recognizes property rights. And the idea that they get no heightened scrutiny when the interference with them is at this kind of level is something that we think the courts should address.
In terms of where the complaint is, we have a website called www.unlawfulrentregs.com that has a lot of the complaint and relevant articles about the lawsuit and the rent regulation law, so I’d invite people to go there.
And I wanted to say one more thing about the eviction story that we just heard about. One of the things we recognize in the complaint is that there’ll be transition issues and probably a fight about what would replace the current New York law, but our view is that the courts really have to set the rules of the road on what the limits are of permissible regulation in this area. We don’t seek damages in this lawsuit. We don’t seek to displace any tenants. But what we seek is that a rational system that will give New York City a regime that will open the door to the construction of new affordable housing, which is really what the city desperately needs.
Prof. Richard Epstein: Just to add to this, the rational basis stuff has always been completely uneasy because it does not apply to the Loretto-type cases where it’s much more per se rule. That doesn’t mean absolute. You can certainly invade because of the various kinds of necessities dealing with plagues and things of that sort. The Horne case which essentially applied a more pre se rule with respect to the raisins and the more recent Knick v. Township of Scott case which said property rights are basically of same coordinate status as everything else, allowed a 1983 action. This is a 1983 case brought in federal court, gives you a higher standard, and so there’s a lot of tension in the law.
If you look only at the narrowest recent cases on stabilization, you get one sort of a result. But if, in fact, you look at this against a broader background, it’s the rent control cases that are the outlier. And given the massive social dislocations that they create, it seems to me to be perfectly respectable to say you just look at a garden variety takings analysis, whether you do it through the possessory taking or the regulatory taking, this system fails by so much that it cannot possibly survive. So if Andy is lucky enough to get a fresh look by the judges who look at this, he will win.
Wesley Hodges: Well, with that, we are at the end of our time. I want to turn the mike back to Andy and Professor Epstein to see if they have any closing remarks. Andy, would you start?
Andrew Pincus: I don’t really have any. Thanks. It’s been a great discussion and thanks again to The Federalist Society for putting it together.
Prof. Richard Epstein: My view about it is, “Go, team.” I think there are other suits. I think that one of the reasons why we have to be so worried about this is there’s now a movement afoot by people who don’t understand how this works to try to get rent control in place on a national level.
I think one of the other things that we didn’t talk about in this case is that the stabilization regime now extends to units that were previously outside of it. We’re creating more grief. And unless there is somebody prepared to put a break on this system, the ruinous consequences that you see in New York could be duplicated elsewhere.
Wesley Hodges: Well, very good. On that note, I would like to thank our speakers for the benefit of their valuable time and expertise today. We welcome all of your feedback by email at [email protected]. Thank you all for joining us. This call is now adjourned.
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