Can New Rent Laws Pass Constitutional Muster?

The sunset provisions that extended affordable housing protections—which can be traced back to World War II—to the roughly one million apartments within New York City covered by the Rent Stabilization Law of 1969 and Emergency Tenant Protection Act of 1974 (collectively, the RSL), were set to expire on June 15, 2019. Therefore, it came as no surprise that Gov. Andrew Cuomo signed the Housing Stability and Tenant Protection Act of 2019 (HSTPA) into law on June 14, 2019, the day after it was passed by the Legislature, extending rent regulation statewide. However, the HSTPA, which also came on the heels of Mayor Bill de Blasio’s recent pronouncements that New York City is in the midst of a major affordable “housing crisis,” went radically beyond simply extending the prior protections afforded by the RSL.

HSTPA’s Radical Changes to the Rent-Regulation Laws

The HSTPA totally abolished both high-rent and high-income and high-rent luxury deregulation, and repealed vacancy increases and longevity bonuses. Beyond this, through the imposition of stringent caps, the HSTPA essentially eviscerated the rental increases from which owners previously benefited under the RSL for making Individual Apartment Improvements and Major Capital Improvements to their buildings. Effectively, the HSTPA allows owners to deregulate only under very narrow circumstances.

Additionally, the HSTPA strictly limited the recovery of regulated apartments for the owner’s own use to one unit insofar as the landlord can also show that it has an “immediate and compelling necessity.” RSL §26-510(j). Previously, an owner could recapture their rent-regulated apartment if the owner or owner’s immediate family member could demonstrate a good faith claim to occupy the unit as their primary residence. What constitutes an “immediate and compelling necessity” under the HSTPA will be defined by future case law, but, for example, an owner’s claim to be restored to possession to attend school in the City, which typically satisfied the prior law, will most likely not suffice under the current law.

Two Sides of the Same Coin

Given the seismic changes to New York’s rent-regulated landscape produced by the HSTPA, tenants are now armed with much longer and sharper swords to combat landlord abuse, generally, in the form of strong-arming of buyouts and harassment. Tenant groups have championed the new law as leveling the playing field against their more powerful landlords who have much deeper pockets. One of the main reasons for making it virtually impossible to deregulate under the HSTPA was to deter widespread illegal deregulation of rent-regulated housing, where owners simply falsified improvements that were made within their units and buildings in order to meet the required monetary deregulation thresholds. Invariably, this has led to the improper deregulation of thousands of rent-regulated units in the past few years alone, which has only worsened the affordable housing shortage crisis in the City.

Conversely, landlord groups claim that the HSTPA will have disastrous financial consequences on New York’s entire economy, and that the new law de-incentivizes apartment improvements by owners, which will predictably deter repairs, leading myriad units to fall into disrepair. By stripping owners with the ability to augment rents after making improvements in their units, many groups, including tenants, believe that owners will stop improving their apartments. Landlords allege that the private equity conglomerate, the Blackstone Group’s, recent announcement that it is halting improvements on 11,000 units in the Stuyvesant Town and Peter Cooper Village housing complexes is a testament to this, and that more owners will be following suit. Further, landlords charge that rent-regulation does not assist affordable housing, but rather protects white, wealthy, older tenants, who acquired their units many years ago. Notably, recent studies show that outside of Manhattan in areas where affordable housing is most needed, market rate rents closely mirror rent-regulated rents and therefore rent regulation does not actually protect affordable housing.

In addition to finding the HSTPA wildly unpopular from a pecuniary standpoint, landlords believe that the law should be overturned on constitutional grounds.

Landlords’ Constitutional Challenge of the HSTPA

On July 15, 2019, a group of landlords banded together and filed a lawsuit in the U.S. District Court for the Eastern District of New York entitled Community Housing Improvement Program v. City of New York, 19-cv-04087 (the Landlord Action). The 125-page lawsuit alleges that the HSTPA violates the federal due process clause, which applies to the state of New York by virtue of the 14th Amendment to the U.S. Constitution, because it is not rationally related to its purpose of maintaining socio-economic and racial diversity, and will not help to abate the current housing crisis. Critically, the suit charges that since there are no income qualifications for obtaining rent-regulated apartments, as procuring one is based upon luck of the draw or having a relationship (familial or quasi-familial) with someone who resides in one, it does not meet its objective in providing affordable housing to those who really need it. Furthermore, the complaint relies on studies performed over the last half-century which show that rent-regulation actually reduces diversity.

Secondly, the lawsuit claims that the HSTPA results in a taking of owners’ properties without just compensation. Since the new law mandates owners to provide indefinite rent stabilization rights to tenants, along with any of their successors, it provides tenants with a life estate with rights of inheritance. Additionally, the suit states that the onerous standards restricting owners in recapturing only one of their units for their own use, coupled with a requirement to show an “immediate and compelling” necessity, equates to a physical taking with no recompense.

Thirdly, the suit alleges that the HSTPA constitutes a regulatory taking that poses a significant adverse impact on property values that are composed of mostly rent-regulated apartments, which, in turn, interferes with owners’ lending opportunities vis-à-vis their properties.

Analysis of Landlords’ Constitutional Challenges

We must begin our analysis with the premise that legislative enactments carry “an exceedingly strong presumption of constitutionality.” Barklee Realty Co. v. Pataki, 309 A.D.2d 310, 311 (1st Dept. 2003). Thus, the Landlord Action must clearly overcome a very high evidentiary and legal threshold to be successful.

Moreover, in Harmon v. Markus, 412 Fed. Appx. 420 (2d Cir. 2011), the U.S. Court of Appeals for the Second Circuit dismissed a prior case brought by landlords specifically finding that the RSL did not violate the Takings Clause, the Contracts Clause, the Due Process Clause, or the Equal Protection Clause of the US Constitution. Similar to the present Landlord Action, the landlords in Harmon principally argued that the RSL effects a permanent physical occupation of their property on the ground that it provides their tenants with rights akin to fee ownership (i.e., life estates). In tossing the landlords’ case, the Harmon court relied upon Yee v. City of Escondido, 503 U.S. 519 (1992), where the Supreme Court held that when “a property owner offers property for rental housing, government regulation of the rental relationship does not constitute a physical taking.” Fed. Home Loan Mortg. Corp. v. N.Y. State Div. of Hous. Cmty. Renewal, 83 F.3d 45, 478 (2d Cir. 1996); see also Rent Stabilization Ass’n of N.Y.C. v. Biggins, 83 N.Y.2d 156, 172 (1993).

As enunciated in Yee, 503 U.S. 519, “where the government merely regulates the use of property, compensation is required only if considerations such as the purpose of the regulation or the extent to which it deprives the owner of the economic use of the property suggest that the regulation has unfairly singled out the property owner to bear a burden that should be borne by the public as a whole.” See Penn Central Transportation Co. v. New York City, 438 U.S. 104, 123-25 (1978).

The Yee court further found that the California state and local laws at issue which imposed rent controls on mobile homes merely regulated petitioners’ use of their property by regulating the landlord-tenant relationship. In fact, the Supreme Court has routinely affirmed that states have “broad power to regulate housing conditions in general, and the landlord-tenant relationships in particular, without paying compensation for all economic injuries that such regulation entails.” (quoting Loretto v. Teleprompter Manhattan CATV, 458 U.S. 419 (1982); see also FCC v. Florida Power, 480 U.S. 245, 252 (1987) (statutes regulating the economic relations of landlords and tenants are not, per se, takings).

It is likewise well-settled that when a landlord decides to rent his property to tenants, the government may regulate the rents that the landlord can charge. See Pennell v. San Jose, 485 U.S. 1, 12, n. 6 (1988); Heart of Atlanta Motel v. United States, 379 U.S. 241, 261 (1964); see also PruneYard Shopping Center v. Robins, 447 U.S. 74, 82-84 (1980).

Recently, in Knick v. Township of Scott, No. 17-647, 588 U.S. ___ (2019), a sharply divided (5-4) Supreme Court recast the procedural requirements for takings claims holding that a property owner may bring a takings claim under 42 U.S.C. §1983 in federal court upon the taking of an owners’ property without just compensation by a local government. Although the Knick court has made it easier for owners to bring takings claims, it did not discuss Yee, or any of the prior takings cases specifically related to state imposed landlord-tenant regulations. Nonetheless, landlords hope that a shift in the balance of power on the Supreme Court bench towards a more conservative bastion will increase their chances of overturning the HSTPA on constitutional grounds.

Conclusion

Whether the Landlord Action makes its way to the Supreme Court on certiorari remains to be seen, and unless there is a major recomposition of the Legislature, there is a very low likelihood that the HSTPA will be legislatively nixed, as those politicians who drafted the law would be committing political suicide. Perhaps if the economy is so drastically devastated by the ramifications of the HSTPA as landlords predict, it may force the Legislature’s hand, but given the broad powers and great due deference that the Legislature possesses with the regulation of property within the confines of its state, especially within the landlord-tenant context, a finding that the HSTPA is unconstitutional by the Judiciary would be quite remarkable.

Massimo F. D’Angelo is a partner at Adam Leitman Bailey, P.C.