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SR-1100-006 ,~ C1. RLK 9-25-7~ Council Htg: .--1-78 . \ ,I \ V)J, ?}!)2 L Santa Monlca, Callfornla Sept~~ber 25, 1978 TO: Mayor and Clty Counc~l FROM: City Attorney SUBJECT: Rent Regulatlon Ir.troductlon At ltS meetlng of September 26, 1978, as agenda ltem number SA, the Clty Councll w211 dlSCUSS posslb1e solutlons to problems assoclated wlth percelved lmproper ~ncreases in resloentlal ren~al charges. ThlS staff report contalns a descrlptlcn of varlOUS alternat1ve Solutlons to ~he perc€lved problem, and an analysls of the costs and rlsks. The report dlscusses common features of rent regu1atlon, a~alyzes speclflc alternatlve proposals, and notes other conslaerations relatlng to rental regulatlon. The report wlll state the professlonal oplnlon of the Clty Atto=ney that inter~erence wlth the free market 1n ~he form of rental regulatio~ 1S counter-productive, detrlmental to both landlords and tenants and would lmpalr the quallty of life of all cltlzenS~ln Santa Monlca.1 The report, however, does submlt an alternatlve proposal which addresses each of the objectlves and WhlCh curbs abuses while In some part avoidlng some of the ob]ectlonab1e features of rent control. I. COM!'10N FEATURES OF RENT REGULATION Based upon an analysls of rent control measures -1- -!. CA 9-25-78 e-- e-, throughout the Un~ted States and Appellate dec~s~ons, legally suff~c~ent rent control measures have the followkng features ~n common: (a) A declarat~on of pur~oses and flnd~n9s of fact. Cal~fornia Supreme Court stated ~n B~rkenfeld v. Berkeley2 that a control measure \.,ras a permlssible exerClse of pol~ce power only ~f the regulation was reasonably related to a soc~al problem that had been found to actually exist. Thus, the f~rst section of any measure passed must state a C~ty Council flndlng tha~ a partlcular situat~on eXists that lS detr~mental to the health, safety and welfare of the community. The Cal~forn~a Court has not found lt necessary that a speCific emergency be declared, bu~ lf the Councll seeks to aoopt an ordinance to be effect~ve ~~medlately speclflC findings wlth regard to an emergency must be made. The Councll must determine that there lS some aberratlon iL the houslng market that affects the welfare of a slgnlf~cant number of c~t~zens whlch the operation of the free market cannot control. Once thlS f~ndlng ~s made, the rent control measure may be upheld If the means ~t employs are reasonably appropriate to effect the purposes for wh~ch ~t was enacted.3 (b) ~ llml~atlon on scope of coverage. Rent control measures must be limited ln scope to be legally - 4 valle. Ordlnari1y, such measures do not lnclude commerclal property or gover~~ent hous~ng. So~e ordlnances exclude famlly dwelllngs or owner occupied rental propert~es with three (3) or less units. Beverly Hll1s has recently excluded -2- CA 9-25-78 tt- e long term leases and apartments renting for over s~x Hundred ($600) Dollars per month. In add~t~on, as wll1 be dlscussed below, rental ordinances typlcally contaln a deflnltlon of Consumer Price Index and Fa1r Rate of Return, Wh1Ch concepts a~e complex and technlcal. Rent control measures gener~lly have an effectlve date and a terrnlnatlon date. Courts have generally held that rent controls are )ustifled to solve short term hous~ng problems and are not lntended to be permanent . d ~ h . 5 so~ut1on5 to long term hoas1ng nee s or t.e co~~un~ty. The selectlon of the effect1ve date may have far reachlng pollCY and legal Dmpl1cat1ons partlcularly if the date lS selected Wh1Ch may 1mpalr eXlstlng leasehold contracts. 6 (c) Rent Control Mecha~lsm. All rent control ordlnances establlsh a base rent effect1ve on a given date. They then 1mpose a cel11ng wlth regard to future increases. ThlS may be e1ther a percentage or a dollar amount. Some rent control measures reCUlre that all lnc~eases be subm2tted to an adm~nlstratlve board.7 Many ordinances regu~re c2sclosure of flnanClal data and Justlf1cat10n of a rent lDcrease. These dlsclosure prov1s1on5 may be mandatory for all lDcreases or may be trlggered by 1ncreases exceedlnq the gUldeline. Governmental costs of rent control lncrease in pro- portlon to admin1stratlve involvement and the complexity of the decislon to be made. Whatever procedu~e lS e~ployed must provide for an adJustment mechanlsm sufflcient to permlt a landlord to recover his cost and to earn a falr rate of return on his lnvestment.8 -3- CA 9-25-78 - e~ != this ~s no~ done in a falr, speedy and accurate manner the ord~nance w~ll be struck down as conf~scatory.9 A rnechan~sm wh~ch appears reasonable on its face but does not meet these 10 obJectives in practlce is lnvalid, unconstltut~onal and vOid. (d) Dlspute Resolution Proce~ure. Some rent control ord~n~nces refer dlsputes to rnedlators, arbltrators or boards. Other ordlna~ces provide for resolut~on of rent disputes by the Court. The various dispute resolution pro- cedures o~her than recourse to ~he Courts are descrlbed ~n the Clty Manager's Staff Report. As a general ruler the more formal and adversarial a Cispute resolution proceedlngs, the greater wlll be lts cost. Addltlonally, increased formallty and adversarlness I inherently results 1n delay. If the dispute resolv1ng pro- cedures 1S excesslvely d~latory o~ cumbersome, It may be held to work a denial of due process of law, thereby defeating 11 the pu=pose of the entire measure. - Dispute resolut~on procedures mus~ be carefully draftee so as not to confl~ct w~th s~ate law governing landlord-tenant d~sputes, In particular the Clv~l Code sect~ons relat~nc to tenantabilitv.12 ~ ~ (e) Enforcement. Rent control may be enforced by C1V1l or cr1m~nal sanctlons.13 An ordinance may provide that part~es may seek recourse to the Court to enJOlr. unlawful rent 14 lncreases or to award damages In an approprlate case. In some ordlnances, an unlawful rent increase lS made a ffilsdemeanor punlshable by f1ne and lmprisonment. It l5 also posslole to draft an ord~nance simply declar1ng that -4- CA 9-25-78 - .~ increases in excess of a stated gu~deline are vOld untll proved to be ~a1r and reasonable. SOIDe rent control ord~nances have provlslons regulrlng that eVlct10ns be for "good cause," prohlbltlng eV1ctlons In retallatlon for protest against rent lncreases, or prohlbltlng rent increases upon lnvoluntary vacatlon or an a apartment. Because rent cOntrol is an exerClse of the pollce power, lf the ordlnance as a whole lS valld, It 15 proper to enforce lt by elther a C1Vll or crlminal sanctlons. II. ALTERNATIVE MEANS OF REGULATING RENT The followlng alternatives are stated In order ranglng fro~ the most regulatory to the least regulatory. (a) Comprehenslve Rent Control Measure Slmilar to PrOposltlon P. Such a measure would feature a rollback of rents, a rent control board wlth full admlnlstratlve control over rent lncreases, restrlctlons on retallatory eVlctlon, and varlOUS unlawful practlces. (b) rrOposltlon 13 Property Tax Rebate. As a result of the passage of PrOposltlon 13 there has been a demand for a pass through of proJected savlngs createc by the passage of 13 to renters. ThlS rebate prOV1Slon is offered in conJunctlon wi~h a comprehenslve rent control crdlnance of some type. Standlng alone a pass through of property tax 15 probably legally deflclent as havlng no ratlonal relatlon 15 to a valld pollee power obJectlve. -5- CA 9-25-78 e- e~ (c) The Los. Angeles Type of Rollback w~th a Med~at~o~ AdJustment. Los Angeles C~ty Cou~c~l recently enactec an ord~nancel6 that prov~des for a rollback of rentSI a freeze on future increases of one (1) year duratlon and a DrOVlSlon for adJustment of rent lncreases to accoun~ for capltal lmprovernen~s and necessary repalrs. NO freeze lS l~m?osed upon apartments volunta~lly vacateo. Apartments lDvoluntarl1y vacated are subJect to the freeze provlslon. Complalnts are channelled through a Medlatlon Boare establlshed . h d 17 - - .&' t ~ t" unoer ~.e or lnance; gU~Qe~~nes Lor t~e opera ~ons o~ hlS Board are 1~ the process of be~ng establlshec. ThlS ordlnance ~s currently under attack In Superlor Cou=t ~n Los &~geles; a ?etlt~on for a p~elup.:.nary lnJunct~on prohlbltlng the f & h d h b - ~ 18 en orcement o~ ~ e or lnance as een aenleo. Some proposec (d) Controls on EVlctlon. measures requ~re that eVlctlon be for cause o~ prohlblt eVlct~ons for fa~lure to pay an lncreased ~enti other ordlnances prohlt~t eVlct~on ~n retal~atlon for complalnts about rent ~ncreases. The Callfornla S~preme Court lr. Blrkenfeld olstlng- ulshed between the establlshrnent of a substantlve defense to the nonpayment of rent and the lmpos~tlon of an addltlona1 cond~tlon on eVlctlon procedures.19The former is perffi~sslblei the latter 1S ln confllct w~th the Code of C1Vll Procedure governlng unlawful detalner actlons. (e) Self-Executlng GUlcellnes. An ordlnance may establlsh a rent celllng pegged to a cost of 11vlng standard such as the Consumer Prlce Index.20 Increases -6- CA 9-25-78 e-- e-- w~thin the gUldellne are permltted wlthout control. A rent lncrease In excess of the gUldellne can only be Justlfled 1f 1t 1S shown that It lS necessary ln order to obtaln a Fair Rate of Return. The Falr Rate of Return may be determlned by the med1at1on or arb~trat1on process or by a formula. In order to curb the practlce of speculatlon in rental property followed by exceSSlve rent lncreases, Cltles may adopt llmlts on the number of rent lncreases perrolsslble within a glven tl-me perlod. (f) Moratorlum Untll Referendum. If the COUDCll des1res that the matter of rent control be decloed by a vote of the people, sho~t moratorlum duratlon pendlng an lnltlatlve or referenda~, would probably be permiss1ble If It dle not go beyond the Aprll electlon.2l In our oplnlon a rnora~orium beyond the Aprll electlon would be lnvalld unless 1t ~ncluded an adequate adJustment prQV1S~On allow~ng a fa~r rate of retu~n. If a :a1r rate of return was D,..,... '-' '- earned durlng the moratorlUffi, rents could ~e adJusted after the exp~ration of the moratorlU~ to make up for the loss. (g) Taxes. A speculat~on tax on the buslness of speculat~ng ~n real estate could be adopted prov~ded that such tax ~s approved by a vote 0= two-th1ros (2/3) of the 22 voters ~n conformlty wlth Propos~tlon 13. (h} S?ec~al Zonlng PrOVls~ons w~th Regard ~o Elde~~y or Low and Moderate ~ncome Hous~ng. The zonlng orClnance would be amended wlth the recommendatlon of the -7- CA 9-25-78 -- er- Plar.n~ng COIT~~SS~O~ ~o prov~ce for special regulat~ons dealing w~th hous~ng for low or moderate ~ncome hous~ng and the elderly. Courts have held, however, that it lS lmperml551ble to regulre a lcndlord to SUbsldlze elderly or low ~ncome resldents through 23 the lmposlt1on of rent control. (i) No Actlon. The no actlon alternatlv~ 15 always an aV31lable alternat~ve and would leave the resolutlcn of the problem up to the free market and voluntary actlon by landlords and tenants. (J) Falr Rent CO~.lssloner. Appropr1ate 530,000 to appolnt a staff person to collect data, faCll~tate med1atlon and asslst 1n housing problems concernlng rent. 7he dut~es of responslbil1ty of this commlSS1oner would be determlned by ~he C1ty Manager basea upon general Counell gUldellnes. III. RELATED CONSIDERP.TIONS. Courts have cons1stently held that rent control 15 1Dtended to a:levlate short term houslng problems caused by aberrat10ns 1r. the free market. They have cautlonec that rent control lS not a Subst1tute for zonlng and that the pollce power lS not 1ntended to be used to solve long te~~ complex hous1ng ?roblems. Rent control w111 lnev~tably have some affect on comolex hou~~~cr matters such as the rate of condom- - - lnlUffi converSlon, the ownerjrer.ter ratlo throughout the C1ty, and other factors of thlS ~ature tha~ are orolnar1ly addressed through the pLann1ng and zon1ng process. -8- CA 9-25-78 e e~ Wlth reference to the Proposltl0r. 13 pass through, there does not appear to be any reasonable nexus between the adoptlon of Proposltlon 13 and the creation of a rental crlS1S. There may, however, be a nexus between the eX1stence of a rent control inltia~lve and the pendency of such a measure and the deSlre of landlords to ralse rents prlor to the tkffie ~hat such a measure may be adopted. One of the greatest lrnpetus to rls1ng rents may be the fear or. the part 0= landlords that rent controls may come abou~. Even the utll1zatlon of a Consumer Prlce Index formula O~ - ~ 0 FalT Rate of Return formula may spur landlords to utl11ze thiS standard and ralse rents when they have not In the past lntended to do so for fear that lf they do not they will be barred In future years from dOlng so. If the ordlnance itself and the varlOUS app11catlons were subjected to legal attack, the burdens on the operatlon of the Cl~Y Attorney could become catastroph~c. It could well be beyond the power of the Clty A~torney to defend such aut~ons and credlbly defend other actlons agalnst the C1ty. Trial costs have been sa~d to be at least $750 a day, and probably $1,000 a day ~n Santa Monlca. The cost of attorney tlme could be staggering. Wlth respect to bllghted or decl~nlng housing, partlc- ularly 1n the strlp between L~ncoln and Cloverfleld north of Plce, rent 24 control will have an effect on the tenantab111ty of rental property. BUlldlngs Wh1Ch are currently below code standards may be retalned in below code standard condltlon -9- CA 9-25-78 e e- In order to permlt a ?ro=~t frow c~rrent rentals. There ~s also the lncreaSl~g guest~on of whether the landlord shall be permitted to pass on to his tenants costs of brlng1ng his build~ngs up to code. On the Santa Mon~ca beach front area, the Coun~~l has wltnessed an upgrading of many apartment unlts which had been "hot beds" for cr~me. In la~ge part thls transrormatlon has been caused by concentrated bUlldlng ane flre law enforce- ment ane rlSlng market forces. A rent control measure could cause such rehab~11~at1ve progress to cease. Perhaps the greatest problem ln addresslng the re~t control lssue, 15 In prec~sely definlng ob)ect1ves and In determlning whether the means of control relate spec1flcally to these OD]ectlves. If dlsplacement of the poor and elderly, or speculatlon, or gouglng are problems, then thev should be ... addressed spec1f1cally. Blanket standards are lneffec~ual to control specific proble~s ane may be lllegal 1f they unlawfully dlscrlm~nate or deny a landlora a falr rate of return. Cost of 11vlng lndexes may provlde a gouger wlth a guarantee that he may contlnue to go~ge and landlord operatlng at a loss that he may never real~ze a reasonable rate of return. If a consumer prlce lndex mode of rent control lS nevertheless des1red, we recommend that ~t perm1t lncreases in excess of the CPI when necessary to afford a reasonable rate of return on 1nVeStMent, that the falr rate be determ1ned by -10- e e- spec~flC formula, that no boards adm~nlster the program, and that the sole remedy =or v~olatlon be fo~dab~l~tv of ~ncreased rent over the fa~r rate of return and mlsaeameanor prosecutlon. Perm~t~lng rent 1ncreases for new tenants while controll~ng the rent of pr10r tenants leads to disparltles 2n rent not based on need or ratlonal crlter1a, and may result ~n abuses by landlords, who may arb~trar11y eVlct or by tenants who may move out and sublease at a prof~t. RecoffiJ.-nenda tl.on After conferr1ng w2th several members of the Clty COUDcll, Cl~y Staff, Wl.th econOffilsts ana after rev1ewlng case author~ty and relevant Ilterature, we reco~~end that rent control In any form not be adopted. We fur~her recommend that the Clt.y Counc11 proceed wlth alternat~ve "J", wh2ch could be lr.st~tutec 1rnmedlately. An L~pl~entatlon orclnance or resolutlon could be adopted thereafter. The reason for thlS recommendat~on 1.S that there 1S lnsuf::2.Cle!1t lnIorrnatlon aval1able to )ustlfy any of the other alter~atlves at the present tlme. The relevant factual lssues are slmDlv not known. ~ - Is there a rental hOUS10g cris~s In Santa Monlca? If so, what lS tne degree of such criS1S? If there is a crisls, is it a result of exorbltant rents, or goug1ng, or ls there some other explanatlon such as lncrease of costs of opera~~on and general market forces? -11- CA 9-25-78 e e- Is there speculat~on go~ng on, 1f so, how much? In addltlon the creatlon of a Falr Rent CO~~lssloner would allow government to operate as a catalyst to the free market systew wlthout lnterfer1ng wlth It. Dlsputes could be handled on an ~ndlvidual basis; those persons most greatly lD need could be helped, med1atlon or arbltrat~on could be set up where approprlate, and spec~flc abuses could be remedlec ~lthout creatlng a maSSlve adm1nlstratlve structure appllcable to landlords who have not been gUllty of abuse. The no actlon alternative does not address t~e problem at all a~d 15 therefore not recommended. The other alternatlves are oOJect1onable because they open the door to l~tlgatlon and admln1stratlve costs, and are no~ effectlve means of solv~ng the proble~ presented to the C1ty CaunCll. The legallty of any rent control measure lS lnextrlcably affected by the ecanomlC, polltlcal, and soclal factors lD Santa Mon1ca. The Clty Counc11 lS ln the best posltlon to Judge these factors, and ltS posltlon wlll not ordlnarily be overturned If the facts can be ampirlcally demonstrated and the decls10n lS reasonable and nondlscrlm~natorv. ~ SlIT,llar pol~cy conslderatlons govern the evaluat10ns of the Clty Attorneys, publlc lawyers, and courts. Our reco~~endatio~ leaves open the door for counc~l resolution of the problems, w~thln legally relevant parameters. Prepared by: R~chard L. Knickerbocker, Clty Attorney Stephen Shane Stark, Assistant Clty Attorney RLK:lcb -l2- CA 9-25-78 e e-- FOOTNOTES l. The Clty Attorney is not alone 1n th~s evaluation. Vlrtually every economlst of any stature concurs. See The Economics 0: PubllC Issues, 3rd Ed., Douglas North and Roger Seroy Mlller pg. 3i-39, The EconomlC Way of Thlnking, Paul L. Heyne, pg. 4l-42, Baslc Econom1cs, Rlchard S. Echaus, ~08-5l9, all attached. In addltlon Professor Mlchael Intrilllgator of UCLA wlll be avallable for questlons. 2. B~rke~feld v. C1ty of Berkeley, 17 Cal.3d 129, 130 Cal. Rp~r. 463 (1976). 3. Callfornla Constltutlon Artlcle 11 ~7 The Blrkenfeld court, supra, found rent control to be a valld exe~Clse of local pollee power. 130 Cal.Rp~r. at 474. As such, rent control 15 ~lthln the pollce power 1f lt5 operat1ve provlslons are reasonably related to the accomplish- ment of a legltlrnate governmental purpose. Supra, at 486, 49l. In Blrkenfeld, however, the Court held that under the charter amendment ln guest.l.on "the comblnatlon of the roll back to base rents and the lnexcusably cumbersome rent adJustment orocedure lS not ~easonablv related to the amendments stated purpose of preventlng exce~slve rents and so would deprlve the plalDtlff landlords of due process of law If perrnltted to .....-. ~. t II S t .19'" ~oKe e~~ec. uFra, a ; I. 4. Rent control measures are ~l.Ir.ited l.n scope ''If they are reasonably calculated to e12m1nate excessive rents and at the same t~me p~ovlde landlords wlth a Just and reasonable return on theJ..r property." B1.rkenfe1d, supra, at 491. 5. Apartment ~ Offlce BUlldlng AssOclatlon of Metropol1tan Washlngto~ v. Wash1.ngtonr 381 A.2d 588, 592 (1977). 6. Ca11fornla Constltutlon Artlcle I s9. 7. Propertv O~~ers Assoclat1on of North Beraen v. the Townsh1D of North Bergen, 378 A.2d 25, 29 (19771 i Hutton Park Gardens ~ v. Town Cauncll of the Town of West Orange, 350 A.2d l, 16 (1975) . 8. E2rkenfeld, supra, at 49l. H~tton Park, supra at lS. Tro)' Hills Vlllage v. TOwTlsh1pCOuncll o~ the Townshl? of Parslppany - Troy Hllls, 350 A.2d 34, 43 (l975). 9. Blrkenfeld, supra, at 491. Hutton Park, 'supra, at 14-15. Washlngton, supra, at 591. Troy Hllls, supra, at 42. . . e e~- 10. Blrkenfeld, supra, at~493-494. ll. Id. l2. Clv~l Code S1940-1945. 1 - -j. Santa Monica Mun1c~pal Code, Art. 1, Ch. 2, Sl200. 14. B~rkenfeld, 17 Ca1.3d, at 174-180. 15. Enslgn B~ckford Realty v. C~ty Counc1l, 68 CA3d 467, 474, l31 Cal.Rptr. 304, (1977); B~rkenfeld~ supra, at 486-487. l6. L.A. Clty Ordinance :151, 415 l7. L.A. Clty Ordlnance ~l5l, 415 S7 lB. Kober, et al. v. September 22, 1978. Cltv of Los Angeles, ,. C253886. DeClded 19. Blrkenfeld, supra, at 479-482. 20. Hutton Park, supra, at 17 - l8. Troy Ellis, supra, at 48-49. Brune~~l v. 5orough of New Mllfcrd, 350 A2d 19, 22 (1975). 2l. Kober, supra. Hutton Park, supra at 13-14. A?artme~t & Of:lce 5~11dlng Ass~., supra, at 591-592. 22. proposltlon 13, 54: "CltleS, countles and spec1al dlstrlcts, by a two-thlrds vote of the guallfled electors of suc~ dlstrlct, may lrnpose speclal taxes on such dlstrlct, except ad valorem taxes on real property or a transactlon tax or sales ~ax on the sale or real property wlth~n such C1ty, county or speclal dlstr lCt. II 23. Nort~ Bergen, supra at 31. 24. "Untenantablllty" lS eXpllC.l.tly deflned lD. C1Vll Code ~1941.1.