Supreme Court Decision Eliminates Key Argument Against Rent Control

By Jorge Casuso

June 1 -- Rent control foes were dealt a major blow last week when the U.S. Supreme Court invalidated the key argument used to challenge a government's right to regulate rents charged by private property owners.

In a May 23 decision, the nation's highest court rejected a challenge to a Hawaii law that capped rates for gasoline stations, ruling that a government regulation could not be considered a taking of property even if it did not substantially advance a legitimate state interest.

"We hold that the 'substantially advances' formula is not a valid takings test, and indeed conclude that it has no proper place in our takings jurisprudence," Justice Sandra Day O'Connor wrote for a unanimous court in Lingle v. Chevron.

The 5th Amendment's Takings Clause -- which has been prominently used to challenge Santa Monica's 25-year-old rent control law -- was most recently the basis of an ongoing legal challenge arguing that rent control furthers “no substantial governmental interest in giving rich tenants low rents.”

"All our attacks on rent control that are pending are based in part on that argument," said Rosario Perry, an attorney for ACTION Apartment Association, a local landlord group that has filed numerous suits, including the ongoing case. (see related story)

"Since the late eighties, courts have been using the argument," Perry said. "Now we have to approach rent control in a different way. We have to go back to the drawing board. It's a huge, big deal."

In fact, some local landlord attorneys predict the ruling will for all practical purposes end legal challenges to Santa Monica's rent control law.

"These attacks on rent control in the courts are over," said a local landlord attorney, who asked that his name not be used. "Attacks will have to be made in the political arena."

The ruling was hailed by government officials, including Hawaii Attorney General Mark Bennett, who said it "reaffirmed that it is the legislative and executive branches of government that set economic policy in this nation.

"Had this decision gone the other way, it could have had devastating consequences for states and municipalities throughout the United States," Bennett, who argued the case before the Supreme Court, said in a statement issued shortly after the ruling.

The decision, he said, "brings back clarity to an area of the law in which it had been sorely lacking for several decades."

In the case, Chevron used the takings clause to challenge a 1997 Hawaii law designed to keep state gasoline prices fair and competitive by capping the rent oil companies could charge dealers who leased their service stations.

The oil company argued that the regulation failed the "substantially advances" test, and both a federal judge in Hawaii and the 9th U.S. Circuit Court of Appeals agreed that the law was an unconstitutional taking that would not lead to lower gas prices or advance Hawaii's other stated interests.

But the Supreme Court rejected the validity of the test altogether.

The "substantially advances" approach, O'Connor wrote, "reveals nothing about the magnitude or character of the burden a particular regulation imposes upon private property rights. Nor does it provide any information about how any regulatory burden is distributed among property owners.

"In consequence, this test does not help to identify those regulations whose effects are functionally comparable to government appropriation or invasion of private property; it is tethered neither to the text of the Takings Clause nor to the basic justification for allowing regulatory actions to be challenged under the Clause," O'Connor wrote.

The decision was immediately viewed as a major blow to property rights advocates, who had used the takings argument to challenge government regulations since the Supreme Court had set the "substantially advances" standard 25 years ago.

In its 1980 decision in Agins v. City of Tiburon, the court upheld that city's zoning ordinances and ruled that they advanced legitimate governmental interests.

By taking the standard set by that case to "its logical conclusion," O'Connor wrote, the lower courts revealed the standard's "imprecision."

"Today we correct course," O'Connor wrote.

The court’s decision closes the door on the use of the takings clause in other cases because the test was not only untenable, it also posed "serious practical difficulties," O’Connor said.

"It would require courts to scrutinize the efficacy of a vast array of state and federal regulations -- a task for which courts are not well suited," O'Connor wrote.

"Moreover, it would empower -- and might often require -- courts to substitute their predictive judgments for those of elected legislatures and expert agencies," O’Connor wrote.

The ruling has already had an impact on the case filed last December by ACTION and local landlord Mathew Millen, which claims Santa Monica’s rent control law benefits the wealthy, not just the poor and needy, and punishes landlords with burdensome restrictions.

Although the case was dismissed last week, the plaintiffs have the right to file an amended complaint that takes into account the Supreme Court ruling, Perry said.

Instead of challenging the constitutionality of rent control under the takings clause, the plaintiffs will argue that rent control for wealthy tenants is “so arbitrary and irrational” it is “not furthering a government interest,” Perry said.