City Journal

L. Gordon Crovitz
Taking Rent Control to Court
The winning legal argument against New York City's rent-control laws has never been tried. It may be soon
Spring 1991

L. Gordon Crovitz, a lawyer, is assistant editorial page editor of The Wall Street Journal, where his “Rule of Law” column appears weekly.

New York City’s rent regulations have long seemed invulnerable, not only in the Legislature but in the courts, which have been turning down legal challenges to rent control since the 1920s. Now, however, a combination of surprising economic circumstances and an untried legal argument raises the possibility that the entire system could be overthrown.

What is the unexpected case against rent regulation? The fastest-ticking time bomb is contained within the language of the rent-control law itself. New York City’s rent regulations are authorized by a state law that allows the system to continue as long as a “housing emergency” exists. According to the statute, however, if the rental vacancy rate exceeds 5 percent, either overall or “in any particular class of housing accommodations,” then the emergency must be declared over, and those apartments “shall be forthwith scheduled for orderly decontrol.” In most cities a 5 percent vacancy rate is far from unusual, but in New York the rate has long been much lower, which critics of rent control attribute to the system itself.

Since the 1987 stock market crash, however, the overall vacancy rate in New York City has climbed rapidly, and rents have begun to fall rapidly in many areas, particularly in luxury apartments. According to John Gilbert of the Rent Stabilization Association, New York’s overall vacancy rate climbed steadily from 2.4 percent in 1987 to an estimated 4 percent in 1990. Furthermore, the overall vacancy rate is biased downward because it includes subsidized public housing, for which there are long waiting lists.

Even if the overall vacancy rate is still short of the 5 percent threshold, however, the vacancy rate for luxury apartments is much higher. The city’s own triennial Housing and Vacancy Report, last conducted by housing economist Michael A. Stegman in 1987 (well before the latest market plunge), found a vacancy rate of 5.83 percent on apartments renting between $750 and $999 a month, and a 6.56 percent vacancy rate on apartments renting for $1,000 or more. By 1988, according to a study by the Arthur D. Little Company, the numbers were even higher: 7.1 percent on apartments that rent for $750 or more. A 1989 study conducted by Harvard’s Joint Center for Housing Studies for the Rent Stabilization Association found that apartments renting for as little as $520 or more have a vacancy rate of over 5 percent.

Based on these numbers, the Rent Stabilization Association petitioned the State Division of Housing and Community Renewal, which administers New York City’s rent-control laws, to decontrol apartments renting for $750 or more per month. Such a ruling would not be unprecedented: Three times, in 1957, 1964, and 1968, luxury apartments have been decontrolled.

The Division of Housing and Community Renewal denied the Rent Stabilization Association’s petition. The division argued that the vacancy rates for luxury apartments were determined by sampling a smaller number of units and therefore were not as precise as the overall vacancy rates. Because of the smaller sample size, the argument went, one could not say that the vacancy rate on high-rent apartments was 7.1 percent in 1989 with the same degree of confidence that one could say the overall vacancy rate was 3.3 percent. New York’s rent-control law, however, does not demand statistical certainty about the precise vacancy rate, but only a reasonable guarantee that the vacancy rate is over 5 percent. In February 1990, the Rent Stabilization Association filed suit in Queens County Supreme Court challenging the denial of its petition, but lost. It will, however, appeal.

Of course, even if the Rent Stabilization Association had won its suit, the State Legislature could simply amend the law, changing the definition of a housing emergency and reimposing controls. Indeed, it could do that even if the city’s 1990 survey, which should be published in a few months, shows the vacancy rate exceeding 5 percent. It is not absolutely clear, however, that the Republican Senate would cooperate. Moreover, such an attempt to change the rules in mid-game might strengthen the most powerful threat to rent control: a new challenge to the constitutionality of the law.

Surprisingly, though rent regulations have been challenged in court many times, the argument most likely to pass muster—an argument that grows stronger every year—has never been made in a New York court.

Rent-control laws, first passed after World War I, were immediately challenged on constitutional grounds, including apparent violations of the Takings Clause, which requires compensation to anyone whose property is taken for some public Interest, and the Contracts Clause, which seems on its face to prohibit states from interfering with privately arranged contract obligations, including leases.

Nonetheless, in 1921, the Supreme Court upheld the rent-control laws in Washington, D.C., and New York. In Block v. Hirsh, which upheld Washington’s rent-control ordinance, Justice Oliver Wendell Holmes stressed the “public health” consideration created by the temporary emergency in housing arising from the end of World War I.

In 1921, the highest court in New York could in good conscience write that rent-control laws “do in measurable degree promote the convenience of many, which is the public convenience, and the public welfare and advantage in the face of the extraordinary and unforeseen public exigency, which the legislature has, on sufficient evidence, found to exist.” But this very decision suggested that the Legislature’s power to impose such controls is not infinite. In the case People ex rel. Durham Realty v. LaFetra, the New York Court of Appeals upheld rent control, but warned that such emergency police powers could not be “arbitrary, unreasonable and not designed to accomplish a legitimate public purpose.” The test of what is arbitrary, wrote the court, “must be decided by common sense applied to a concrete set of facts.”

Under existing constitutional law, state legislatures are given wide latitude to pass laws regulating economic rights. As the U.S. Supreme Court wrote in upholding New York’s price controls on milk in Nebbia v. New York (1934), due process “demands only that the law not be unreasonable, arbitrary or capricious, and that the means selected shall have a real and substantial relation to the object sought to be attained.” In other words, so long as there is some rational relationship” between a legitimate government interest and a regulatory statute, the statute is constitutional.

The rational-relationship test has been criticized by defenders of economic liberties because it provides a very weak barrier to state intervention. By contrast, when rights other than property rights are at stake, a court may demand that the law be It substantially related” to an important state interest, or even, when such “preferred” rights as freedom of speech are at issue, that the state must have a “compelling” or “overriding” interest. Rational relationship is by far the lowest level of review. When a court invokes the rational-relationship test it almost always defers to the legislature and upholds the law. Almost, but not always.

New York courts have occasionally invalidated economic regulations on rational-relationship grounds, especially when it was proven that the laws served some purpose other than the one claimed by the legislators. In 1943, the New York Court of Appeals held the State Legislature could not rationally invoke concerns about unsanitary peddlers to prevent Good Humor vans from operating on the streets. In a 1957 case, the court overturned an Albany ordinance requiring street vendors who attract children to hire two attendants. The court ruled that the true motive of the law was not to protect health and safety but to protect local merchants. New York courts have used a rational-relationship test to invalidate a law requiring undertakers to be licensed embalmers, a law prohibiting real estate agents from offering property without written authorization from the owner, and a law prohibiting the sale of magazines without covers.

One case in particular could hold the key to a rent-control challenge. In the 1956 case of Defiance Milk Products v. DuMond, the Court of Appeals invalidated as unconstitutional a statute prohibiting the sale, to individuals, of evaporated skim milk in containers of less than 10 pounds. The statute would effectively prevent retail sales of evaporated skim milk, to the advantage of the whole-milk industry. The judges found “no rational ground for so arbitrary and unnecessary a prevention of the sale of a wholesome food product.”

The court further noted that although a police power enactment may have been or may have seemed to be valid when made, later events or later-discovered facts may show it to be arbitrary and confiscatory.” This reasoning may be at least as applicable to rent regulations as to bans on skim milk, for the case against rent control, only theoretical in the 1920s, has strengthened dramatically in recent years.

This may be the reason that, despite numerous challenges to rent control in both state and federal courts, no court has yet held a trial on the merits of whether New York’s rent-control laws meet the Nebbia test: that economic regulations bear a rational relationship to a legitimate government aim. Lawyers at the New York firm of Paul, Weiss, Rifkind, Wharton & Garrison exhaustively reviewed the many legal challenges to New York rent control a few years ago. They found that no case has made what may now be the winning argument. On the accumulated evidence of 50 years, rent regulation fails to meet even the minimum test of constitutionality: The rules so patently fail to achieve their stated goal of making more and better housing available that they cannot be said to be rationally related to that goal.

It is a common saying that 10 economists would hold 15 opinions, but not on rent control, perhaps the single issue on which economists most agree. A vast body of scholarly research now points to one conclusion: Rent control has made housing less plentiful and more expensive, less healthy and more crowded, less safe and more dilapidated, less affordable and more exclusive. A 1984 study published in the American Economic Review found that fewer than 2 percent of economists in the U.S. generally disagreed with the proposition that a “ceiling on rents reduces the quantity and quality of housing available.” Thus, economists of all political stripes testify that in the case of rent control, experience for once matches theory: More rent control has meant less housing at higher prices.

A rational-relationship case against rent control would make several core arguments; in each case the available evidence and expert testimony would overwhelmingly support abolition:

Rent regulation punishes the poor and the working class, both as renters and as small property owners. Here an overwhelming argument can be made that experience corresponds with unnerving precision to economic theory: In the last several decades, several hundred thousand rent-regulated housing units have been abandoned or forfeited by their owners, largely because the city’s complex of rent regulations rendered them uneconomical. Moreover, most of these units had been occupied by low- and middle-income New Yorkers. The city’s own housing officials have implicitly conceded that rent regulation causes abandonment: When the city takes over abandoned properties, or transfers them to new, politically favored owners, it routinely raises the rents on the grounds that the previous rents failed to pay even operating expenses.

Nor are the landlords who own rent-regulated apartments necessarily well-to-do. A study in 1985 by Arthur D. Little found that 60 percent of New York landlords owned only one building, 54 percent of owners had incomes of less than $40,000; 53 percent were immigrants, 44 percent owned 10 apartments or fewer, 37 percent lived in their own buildings, and only 5 percent received all their income from rental housing.

Rent regulation disproportionately benefits affluent New Yorkers. Because so many apartments have been abandoned, rent regulations are now doing very little to hold down rental prices in poor neighborhoods, or in Brooklyn and the Bronx where most of the abandonment took place. Instead, rent regulations now hold down rents mostly for the well-to-do.

According to a 1989 study by Henry O. Pollakowski from Harvard’s Joint Center for Housing Studies, rent regulations save the average New Yorker in a regulated apartment $44 per month off the market rate. But in Manhattan’s better neighborhoods this rent-control discount averages from $362 to $432, depending on apartment size and location. In fact, if these neighborhoods are excluded, the market rent is actually an average of $9 below the regulated rent.

As Peter Salins and Gerard Mildner concluded, after an exhaustive review of the literature on New York City rent control:

After years of rent control, rents in New York bear little relation to tenants’ ability to pay.... The most affluent households in New York had an average income over twelve times the poorest, but paid only two and a half times as much rent.

Rent regulation endangers public health and safety. Though rent regulation is meant to serve the public welfare, by any measure of housing quality New York’s housing stock is more dilapidated than that of other cities. According to the Federal Government’s American Housing Survey for the United States, for example, New York apartments are twice as likely to have cracked walls, broken plaster, holes in the floor, and exposed wiring as apartments in any other large city. Chicago, often cited by social theorists and economists as the city that can best be compared to New York, does not have rent regulation, and its housing stock is in much better shape.

As such evidence has accumulated over time, here and in other cities with rent controls, courts around the country have begun to take notice.

In 1986, in the case of Hall v. City of Santa Barbara, the United States Court of Appeals for the Ninth Circuit overturned a Santa Barbara rent-control ordinance that required mobile-home operators to grant leases of unlimited duration. Writing for the majority, Judge Alex Kozinski argued that such controls “may well hinder rather than assist lower-income families seeking access to rental units in mobile home parks.” He also noted “a growing consensus that ’rent control causes a reduction in the quality of the existing rental housing stock and discourages investment in new property,’” concluding, “the rationality of rent control vel non may have to be reassessed in light of this growing body of thought on the subject.”

In a concurring opinion for the United States Court of Appeals for the Seventh Circuit, in the 1987 case Chicago Board of Realtors v. City of Chicago, Judges Richard Posner and Frank Easterbrook noted: “A growing body of empirical literature ... [shows] the market for rental housing behaves as economic theory predicts: If price is artificially depressed, or the costs of landlords artificially increased, supply falls and many tenants, usually the poorer and the newer tenants, are hurt.”

Though they upheld a rent-control ordinance, Judges Posner and Easterbrook suggested they might have been willing to overturn it, had the landlords made a case on rational-relationship grounds. They concluded that “the ordinance, is not in the interest of poor people. As is frequently the case with legislation ostensibly designed to promote the welfare of the poor, the principal beneficiaries will be middle-class people,” such as people who prefer to buy their apartments anyway or who will be preferred rent-control tenants.

There is even some evidence that New York courts are beginning to take judicial notice of the revival of economic rights. The New York courts, for instance, have recognized that takings cases trigger a more strict review of government action, such as the “substantially related” test imposed by the Supreme Court in Nollan v. California Coastal Commission, which struck down a state regulatory agency’s decision requiring a homeowner who sought a renovation permit to grant, without compensation, a public easement over his property.

In the 1989 case of Seawall Associates v. City of New York, the New York Court of Appeals found an unconstitutional taking when the city passed a law prohibiting owners of single-room-occupancy boarding houses from demolishing their buildings. indeed, the law required owners to restore all their units to habitable condition and lease them at controlled rents indefinitely. The court said this was “facially invalid” under the takings clauses of both the federal and state constitutions.

Similar reasoning was also used in the case of 520 East 81st Street Associates v. Lenox Hill Hospital, decided in May 1990. Here, the Appellate Division of the State Supreme Court struck down a law which gave Lenox Hill Hospital employees a permanent right to occupy apartments in a nearby building. The owners of the building successfully argued that this amounted to an unconstitutional permanent taking of their property.

All these, of course, were takings cases, not rational-relationship cases. They point, however, to a new willingness by New York courts to take economic rights seriously. A rational-relationship case should be far easier to win than a takings case, especially for a law of broad and general application such as rent regulation. All that is needed is a lawsuit that can forcefully demonstrate that the regulations have no “rational relationship” to the law’s stated goal of promoting better and cheaper housing.

The growing controversy over where the vacancy rate actually stands may itself play a part in such a case. Should the state, faced with a finding that the vacancy rate has slipped above 5 percent, change the long-standing definition of a housing emergency, or should the city’s analysts play fast and loose with the data to keep the official rate below 5 percent, the plaintiffs would have in their hands devastating evidence that, even in the minds of the lawmakers, New York’s rent regulations have little to do with their stated goals.

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