Pennell v. San Jose

485 U.S. 1

Case Year: 1988

Case Ruling: 6-2, Affirmed

Opinion Justice: Rehnquist

FACTS

In 1979 the city of San Jose, California, enacted a rent-control ordinance that allowed landlords to raise rent as much as 8 percent annually. If, however, the landlord desired to raise rent in excess of 8 percent and the tenant objected, a hearing was required in order to determine if the proposed increase was reasonable. The hearing officer was instructed to consider several factors in reaching a decision, including the issue of whether the rent increase would impose a hardship on the tenant. Landlord Richard Pennell and the Tri-County Apartment House Owners Association filed an action to declare the rent-control ordinance--and especially its “tenant hardship” provision--unconstitutional as a violation of the Takings Clause of the Fifth Amendment and the Due Process and Equal Protection Clauses of the Fourteenth Amendment. When the California Supreme Court upheld the ordinance, Pennell and the association appealed.

 

CHIEF JUSTICE REHNQUIST DELIVERED THE OPINION OF THE COURT.

... [W]e first address appellants’ contention that application of the Ordinance’s tenant hardship provisions violates the Fifth and Fourteenth Amendments’ prohibition against taking of private property for public use without just compensation. In essence, appellants’ claim is as follows: 5703.28 of the Ordinance establishes the seven factors that a hearing officer is to take into account in determining the reasonable rent increase. The first six of these factors are all objective, and are related either to the landlord’s costs of providing an adequate rental unit, or to the condition of the rental market. Application of these six standards results in a rent that is “reasonable” by reference to what appellants contend is the only legitimate purpose of rent control: the elimination of “excessive” rents caused by San Jose’s housing shortage. When the hearing officer then takes into account “hardship to a tenant” pursuant to 5703.28(c)(7) and reduces the rent below the objectively “reasonable” amount established by the first six factors, this additional reduction in the rent increase constitutes a “taking.” This taking is impermissible because it does not serve the purpose of eliminating excessive rents--that objective has already been accomplished by considering the first six factors--instead, it serves only the purpose of providing assistance to “hardship tenants.” In short, appellants contend, the additional reduction of rent on grounds of hardship accomplishes a transfer of the landlord’s property to individual hardship tenants; the Ordinance forces private individuals to shoulder the “public” burden of subsidizing their poor tenants’ housing. As appellants point out, “[i]t is axiomatic that the Fifth Amendment’s just compensation provision is ‘designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.’” First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, (1987) (quoting Armstrong v. United States(1960).

We think it would be premature to consider this contention on the present record. As things stand, there simply is no evidence that the “tenant hardship clause” has in fact ever been relied upon by a hearing officer to reduce a rent below the figure it would have been set at on the basis of the other factors set forth in the Ordinance. In addition, there is nothing in the Ordinance requiring that a hearing officer in fact reduce a proposed rent increase on grounds of tenant hardship. Section 5703.29 does make it mandatory that hardship be considered--it states that “the Hearing Officer shall consider the economic hardship imposed on the present tenant”--but it then goes on to state that if “the proposed increase constitutes an unreasonably severe financial or economic hardship ... he may order that the excess of the increase” be disallowed. 5703.29. Given the “essentially ad hoc, factual inquir[y]” involved in the takings analysis, Kaiser Aetna v. United States(1979), we have found it particularly important in takings cases to adhere to our admonition that “the constitutionality of statutes ought not be decided except in an actual factual setting that makes such a decision necessary.” Hodel v. Virginia Surface Mining & Reclamation Assn., Inc. (1981).... [I]n this case we find that the mere fact that a hearing officer is enjoined to consider hardship to the tenant in fixing a landlord’s rent, without any showing in a particular case as to the consequences of that injunction in the ultimate determination of the rent, does not present a sufficiently concrete factual setting for the adjudication of the takings claim appellants raise here.

Appellants also urge that the mere provision in the Ordinance that a hearing officer may consider the hardship of the tenant in finally fixing a reasonable rent renders the Ordinance “facially invalid” under the Due Process and Equal Protection Clauses, even though no landlord ever has its rent diminished by as much as one dollar because of the application of this provision. The standard for determining whether a state price-control regulation is constitutional under the Due Process Clause is well established: “Price control is ‘unconstitutional ... if arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt....’” Permian Basin Area Rate Cases (1968) (quoting Nebbia v. New York(1934)).... [A]ppellants do not dispute that the Ordinance’s asserted purpose of “prevent[ing] excessive and unreasonable rent increases” caused by the “growing shortage of and increasing demand for housing in the City of San Jose,” 5701.2, is a legitimate exercise of appellees’ police powers. They do argue, however, that it is “arbitrary, discriminatory, or demonstrably irrelevant,” for appellees to attempt to accomplish the additional goal of reducing the burden of housing costs on low-income tenants by requiring that “hardship to a tenant” be considered in determining the amount of excess rent increase that is “reasonable under the circumstances” pursuant to 5703.28. As appellants put it, “[t]he objective of alleviating individual tenant hardship is ... not a ‘policy the legislature is free to adopt’ in a rent control ordinance.”

We reject this contention, however, because we have long recognized that a legitimate and rational goal of price or rate regulation is the protection of consumer welfare. Indeed, a primary purpose of rent control is the protection of tenants. Here, the Ordinance establishes a scheme in which a hearing officer considers a number of factors in determining the reasonableness of a proposed rent increase which exceeds eight percent and which exceeds the amount deemed reasonable under either 5703.28(a) or 5703.28(b). The first six factors of 5703.28(c) focus on the individual landlord--the hearing officer examines the history of the premises, the landlord’s costs, and the market for comparable housing. Section 5703.28(c)(5) also allows the landlord to bring forth any other financial evidence--including presumably evidence regarding his own financial status--to be taken into account by the hearing officer. It is in only this context that the Ordinance allows tenant hardship to be considered and, under 5703.29, “balance[d]” with the other factors set out in 5703.28(c). Within this scheme, 5703.28(c) represents a rational attempt to accommodate the conflicting interests of protecting tenants from burdensome rent increases while at the same time ensuring that landlords are guaranteed a fair return on their investment. We accordingly find that the Ordinance, which so carefully considers both the individual circumstances of the landlord and the tenant before determining whether to allow an additional increase in rent over and above certain amounts that are deemed reasonable, does not on its face violate the Fourteenth Amendment’s Due Process Clause.

We also find that the Ordinance does not violate the Amendment’s Equal Protection Clause. Here again, the standard is deferential; appellees need only show that the classification scheme embodied in the Ordinance is “rationally related to a legitimate state interest.” New Orleans v. Dukes (1976).... In light of our conclusion above that the Ordinance’s tenant hardship provisions are designed to serve the legitimate purpose of protecting tenants, we can hardly conclude that it is irrational for the Ordinance to treat certain landlords differently on the basis of whether or not they have hardship tenants. The Ordinance distinguishes between landlords because doing so furthers the purpose of ensuring that individual tenants do not suffer “unreasonable” hardship; it would be inconsistent to state that hardship is a legitimate factor to be considered but then hold that appellees could not tailor the Ordinance so that only legitimate hardship cases are redressed. We recognize, as appellants point out, that in general it is difficult to say that the landlord “causes” the tenant’s hardship. But this is beside the point--if a landlord does have a hardship tenant, regardless of the reason why, it is rational for appellees to take that fact into consideration under 5703.28 of the Ordinance when establishing a rent that is “reasonable under the circumstances.”

For the foregoing reasons, we hold that it is premature to consider appellants’ claim under the Takings Clause and we reject their facial challenge to the Ordinance under the Due Process and Equal Protection Clauses of the Fourteenth Amendment. The judgment of the Supreme Court of California is accordingly Affirmed.

JUSTICE SCALIA, WITH WHOM JUSTICE O’CONNOR JOINS, CONCURRING IN PART AND DISSENTING IN PART.

I agree that the tenant hardship provision of the Ordinance does not, on its face, violate either the Due Process Clause or the Equal Protection Clause of the Fourteenth Amendment. I disagree, however, with the Court’s conclusion that appellants’ takings claim is premature. I would decide that claim on the merits, and would hold that the tenant hardship provision of the Ordinance effects a taking of private property without just compensation in violation of the Fifth and Fourteenth Amendments....

Once the other six factors of the Ordinance have been applied to a landlord’s property, so that he is receiving only a reasonable return, he can no longer be regarded as a “cause” of exorbitantly priced housing; nor is he any longer reaping distinctively high profits from the housing shortage. The seventh factor, the “hardship” provision, is invoked to meet a quite different social problem: the existence of some renters who are too poor to afford even reasonably priced housing. But that problem is no more caused or exploited by landlords than it is by the grocers who sell needy renters their food, or the department stores that sell them their clothes, or the employers who pay them their wages, or the citizens of San Jose holding the higher paying jobs from which they are excluded. And even if the neediness of renters could be regarded as a problem distinctively attributable to landlords in general, it is not remotely attributable to the particular landlords that the Ordinance singles out--namely, those who happen to have a “hardship” tenant at the present time, or who may happen to rent to a “hardship” tenant in the future, or whose current or future affluent tenants may happen to decline into the “hardship” category.

The traditional manner in which American government has met the problem of those who cannot pay reasonable prices for privately sold necessities--a problem caused by the society at large--has been the distribution to such persons of funds raised from the public at large through taxes, either in cash (welfare payments) or in goods (public housing, publicly subsidized housing, and food stamps). Unless we are to abandon the guiding principle of the Takings Clause that “public burdens ... should be borne by the public as a whole,” this is the only manner that our Constitution permits. The fact that government acts through the landlord-tenant relationship does not magically transform general public welfare, which must be supported by all the public, into mere “economic regulation,” which can disproportionately burden particular individuals. Here the city is not “regulating” rents in the relevant sense of preventing rents that are excessive; rather, it is using the occasion of rent regulation (accomplished by the rest of the Ordinance) to establish a welfare program privately funded by those landlords who happen to have “hardship” tenants.

Of course all economic regulation effects wealth transfer. When excessive rents are forbidden, for example, landlords as a class become poorer and tenants as a class (or at least incumbent tenants as a class) become richer. Singling out landlords to be the transferors may be within our traditional constitutional notions of fairness, because they can plausibly be regarded as the source or the beneficiary of the high-rent problem. Once such a connection is no longer required, however, there is no end to the social transformations that can be accomplished by so-called “regulation,” at great expense to the democratic process.

The politically attractive feature of regulation is not that it permits wealth transfers to be achieved that could not be achieved otherwise; but rather that it permits them to be achieved “off budget,” with relative invisibility and thus relative immunity from normal democratic processes. San Jose might, for example, have accomplished something like the result here by simply raising the real estate tax upon rental properties and using the additional revenues thus acquired to pay part of the rents of “hardship” tenants. It seems to me doubtful, however, whether the citizens of San Jose would allow funds in the municipal treasury, from wherever derived, to be distributed to a family of four with income as high as $32,400 a year--the generous maximum necessary to qualify automatically as a “hardship” tenant under the rental Ordinance. The voters might well see other, more pressing, social priorities. And of course what $32,400-a-year renters can acquire through spurious “regulation,” other groups can acquire as well. Once the door is opened it is not unreasonable to expect price regulations requiring private businesses to give special discounts to senior citizens (no matter how affluent), or to students, the handicapped, or war veterans. Subsidies for these groups may well be a good idea, but because of the operation of the Takings Clause our governmental system has required them to be applied, in general, through the process of taxing and spending, where both economic effects and competing priorities are more evident.

That fostering of an intelligent democratic process is one of the happy effects of the constitutional prescription--perhaps accidental, perhaps not. Its essence, however, is simply the unfairness of making one citizen pay, in some fashion other than taxes, to remedy a social problem that is none of his creation....

I would hold that the seventh factor in 5703.28(c) of the San Jose Ordinance effects a taking of property without just compensation.