Tackle the Everlasting Rent-Control Mess

 

The Buckeye Institute and I have submitted to the US Supreme Court an amicus curiae brief urging the court to review the constitutionality of 2019 amendments to New York’s Rent Stabilization Law. That law further tightened the wall-to-wall restrictions, by among other things removing the provisions for vacancy decontrol when rents reached a certain level, last set at $2,774.76, and eliminating landlords’ previous option of raising rents by up to 20 percent between unrelated tenants. The challenge to that law in 74 Pinehurst LLC v. New York (2023) was brushed aside by a unanimous Court of Appeals for the Second Circuit on the basis of its view of established law.

That decision should be regarded as the next chapter of a self-inflicted tragedy that has cost the city and its citizenry billions of dollars in real economic growth. It is a progressive fantasy that price controls of this sort simply transfer wealth from greedy landlords to helpless tenants. The truth is otherwise.

The laws that mandate wealth transfers create a perverse set of incentives on both sides of the market. Potential developers are reluctant to invest in building or maintaining rental properties if their returns can be snatched away by legislative fiat. Current tenants, all local voters, will lobby for a system of price controls, from which they receive huge benefits, sufficient to fund their second homes in New England. Yet local tenants don’t care that everyone else—including new arrivals to the city—gets hurt when supply shrinks and quality of services declines because of insufficient revenues, thereby cutting needed tax revenues because of sagging property values. The administrative costs of running, or complying with, the city’s euphemistic Tenant Protection Laws add tens of millions.

There is a strong consensus among economists that rent-control laws reduce the available housing stock, ruin nearby neighborhoods, and, ironically, make it far more difficult to redevelop cities after earthquakes and other emergencies. But no matter, said the Court of Appeals, for its job is not “to second-guess legislative judgments” just because they conflict with some expert opinions, without citing any studies to the contrary.

Given the local rigidities, a constitutional attack is long overdue. Yet the federal courts have so degraded the constitutional command of the Fifth Amendment—“nor shall private property be taken for public use, without just compensation”—that ever more misguided rent-control laws pass muster with flying colors on the grounds that any benefit to sitting tenants as a class more than offsets the losses to everyone else. It takes a genuinely perverse set of constitutional doctrines to make that happen, and 74 Pinehurst adopts them all. Its basic methodological premise is that whatever has worked for centuries as the private law of landlord-tenant relations may by legislation be deemed necessarily defective in the public arena.

The key rule of law in play here is that any tenant who holds over at the expiration of an existing lease can, solely at the landlord’s option, be evicted unless the two parties agree on a new lease. Under rent control, the new rule is that the tenant can obtain indefinite renewals on terms set by the state at some price below market levels, so long as the landlord is not instantly bankrupted. These differences are not rounding errors, for as landlord increases are tied to costs, all increases in market value go to the tenant, so that a unit that rents at the maximum $2,770 figure could easily fetch six times that amount if removed from rent control.

Faced with this massive disparity, the Second Circuit shrugs. It insists first that “the Rent Stabilization Law does not compel landlords to refrain in perpetuity from terminating a tenancy. Instead, the statute sets forth several bases on which a landlord may terminate a tenant’s lease, such as for failing to pay rent, creating a nuisance, violating the lease, or using the property for illegal purposes.” Given that these leases are worth hundreds of thousands of dollars, no tenant fails these statutory tests. But to the Appeals Court, it matters not that in 99,999 out of 100,000 the leases are in fact perpetual. Thus, any taking via rent control is permissible unless it bankrupts the landlord. The rules that regulate direct occupation of land by or with the authorization of government are not subject to any such giant loophole.

In order to buttress its position, the Second Circuit resorts to two utterly misguided propositions from the Supreme Court’s decision in Yee v. City of Escondido (1992).

The first is in constitutional Newspeak: “On their face, the state and local laws at issue here merely regulate petitioners’ use of their land by regulating the relationship between landlord and tenant.” The refusal to acknowledge that a party can only “use” real estate that he occupies is meant to defang the rule that there is a per se takings in cases of physical occupation under the 1982 rule in Loretto v. Teleprompter, which applied that per se rule to a small “permanent” cable box on a building (with a useful life of perhaps five years), while inexplicably exempting rent-control rules from its reach.

But the rationale for per se takings applies fully here. As the Supreme Court said in Armstrong v. United States (ignored in Loretto), the Takings Clause applies to partial takings as much as it does to outright confiscation of the entire property, so that when the government sails boats out of Maine waters to dissolve a materialman’s lien for work done on the hulls, it has to pay under the fundamental principle that the takings prohibition “was 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.” The boats at issue in Armstrong were built for the benefit of the public, not the subcontractor. But in Penn Central Transportation Co. v. City of New York (1978), when New York City took air rights (fully protected under state law), an “ad hoc balancing” test was used to sustain the constitutionality of a landmark preservation statute, without once asking why, if the city wanted those rights so much, it did not just condemn them for their market value.

Ditto for rent-control laws: if the city wants to rent these properties at below-market rates, then pay the market rate to the landlord and then subsidize reletting to preferred tenants at below-market rates, as suggested by the late Justice Scalia in Pennell v. City of San Jose (1988). Any covert wealth transfers through rent control undermines democratic institutions by allowing government to use off-budget schemes to conceal the true social cost of its largesse from the public.

Yee’s second indefensible rule states that since landlords “voluntarily open their property to occupation by others,” they cannot expel them at the end of the lease. Not so. The voluntary surrender of property is only for the lease period, not for the involuntary extension. The rule suggests that if you lend your car to a friend, he can keep it forever; or you hire a worker for a day, he can remain on forever. It is sheer madness to limit a landlord to two choices: keep the property off the market or submit to the virtual uncertainty of a perpetual lease.

To make matters worse, the Second Circuit appeals to history to claim that the validity of rent-control statutes is “the necessary result of this long line of consistent authority.” But the earliest case cited, Block v. Hirsh (1921), tells a different tale. In 1919, Congress passed a two-year rent-control statute that kept rates at historical levels to cope with a post–World War I influx of people into Washington, DC. Justice Holmes wrongly thought this wartime influx “monopolized the control [of real estate] in comparatively few hands,” when market structure remained wholly unchanged. But he meant it when he said this “regulation is put and justified only as a temporary measure.” Thus, in Chastleton Corp. v. Sinclair (1924), writing for a unanimous court, he struck down an identical 1922 extension of the 1919 law because the circumstances that “justified interference with ordinarily existing property rights as of 1919 had come to an end by 1922.”

In contrast, New York’s “emergency” remains as long as the vacancy rate in New York City is below 5 percent, which it has been for the more than sixty years that the Rent Stabilization Law has been effect. That transformation of the Block rule distorts the standard list of public emergencies—military invasion, flood, earthquakes, and storms—none of which can be laid at the feet of the New York legislature. Sadly, 74 Pinehurst neither examines nor defends any of these difficulties. But it offers the touching hope that “even improvident decisions will eventually be rectified by the democratic process,” after a century of movement in the opposite. Entrenched local monopolies mean that either the Supreme Court intervenes, or the current legal morass and local economic catastrophe will remain, in perpetuity.

© 2023 by the Board of Trustees of Leland Stanford Junior University.

Published in Law
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