PENNELL v. SAN JOSE

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ORAL ARGUMENT BY HARRY D. MILLER, ESQ. ON BEHALF OF APPELLANTS

Chief Justice William H. Rehnquist: We will hear argument.

First this morning No. 86-753, Richard Pennell v. City of San Jose.

Mr. Miller, you may proceed whenever you are ready.

Mr. Miller: Mr. Chief Justice, may it please the Court:

The City of San Jose has enacted a unique provision that it has added to an otherwise valid rent control ordinance.

That provision raises the question whether or not a supplier of goods and services can be required to provide financial assistance to a consumer solely because of the consumer's ability to pay.

This case arises on appeal from the California supreme court that reversed a decision of the trial court and a decision of the district court of appeals that had held that this provision violated the "just compensation" clause, the "equal protection" clause, and the "due process" clause.

The California supreme court rejected those arguments and found that the provision was valid under all three clauses.

The Opinion of the California supreme court found in effect that,

"as long as a rent control ordinance provides a fair and reasonable return to the landlord, that the city has to power to use the excess funds for any other public purpose. "

Our challenge in this case is based primarily on the "just compensation" clause in reliance on the Rule announced by this Court in both Agins and in the Nollan case.

We do not challenge the one aspect of the Nollan rule; we do not challenge that we have been denied the economic viability of the use of our land.

We do challenge its provision under the other part of the Nollan test, and that is that this provision fails to substantially advance a legitimate state interest under the reasoning of the Nollan Decision, that is to say, that there is no cause and effect, no nexus between any conduct by the landlord and the hardship of the tenant or the necessity to provide financial assistance to a tenant.

Unidentified Justice: Is there not some problem with the "just compensation" clause applying at all to this case?

There really has been no taking, certainly in any physical sense, of your property.

Mr. Miller: There had been a taking of money, Your Honor.

The way the ordinance works, if a landlord wants more than the rent that is otherwise provided by the mathematical formulas, he then establishes in his own mind what he believes is a reasonable rent, and he can then either petition the city to approve that additional rent as being reasonable, or in the alternative, the landlord can give a 30-day notice to the tenant, establishing this higher rent, and then the tenant has the opportunity to file a petition with the city.

In either event, the hearing is held and the hearing officer looks at various factors... the factors he looks at are primarily the economic factors from the point of view of the landlord; his rent, his expenses, et cetera... how well he is maintaining the property, et cetera.

Based upon those factors, the hearing officer establishes what rent would be reasonable under the circumstances.

Now let me use an example: assume after examining all those factors, the hearing officer determines that a reasonable rent for this unit would be $400 a month.

If the tenant... if the unit is not occupied by a hardship tenant, then that would be the rent that the landlord could charge... the $400.

However, if this unit is occupied by a hardship tenant, then he can reduce the rent to let us say, $375.

It is our position from that reduction of the rent from a reasonable figure of $400 down to another figure of $375 is a taking of the rent from the landlord.

Unidentified Justice: But that is a very hypothetical situation.

You are just attacking the ordinance on its face, are you not?

You do not have any particular fact situation?

Mr. Miller: That is correct, Your Honor.

Unidentified Justice: Is there any guarantee that that is how a hearing officer would handle that sort of an inquiry?

Mr. Miller: It is our position, Your Honor, that the lack of validity of this provision appears on the face of the ordinance and an application would not do anything to assist this Court in resolving this dispute.

The ordinance provides on its face expressly that the hearing officer must consider the financial ability of a tenant to pay.

It is our position that that is a totally unconstitutional standard, that they cannot look at the tenant's ability to pay.

It would be for example as if the ordinance provided that the hearing officer could consider the religion or political affiliation of a tenant.

Unidentified Justice: Who do you represent?

Mr. Miller: We represent Mr. Richard Pennell who is a property owner of an apartment house and, more importantly, the Tri-County Apartment Owners Association, that is an unincorporated association of rental property owners.

Unidentified Justice: But surely the ordinance is not unconstitutional with respect to those groups of people... or let us assume that example of yours, I suppose that if the landlord could collect the $400, it is not... the ordinance is not unconstitutional as applied to him?

Mr. Miller: That is correct.

Unidentified Justice: And it is only those landlords with hardship tenants?

Mr. Miller: Correct.

Unidentified Justice: Well, do we have, I suppose by... saying among your association members there are some landlords of hardship tenants?

Mr. Miller: That is correct, Your Honor.

In fact, we are the supplier of goods and services.

We supply units and we supply them to everyone.

We supply them to both hardship and non-hardship tenants.

Unidentified Justice: But even with respect to landlords with hardship tenants, the hearing officer is not obliged to reduce the rent below $400?

Mr. Miller: That is correct, Your Honor.

Unidentified Justice: So that how do we know that he ever would?

Mr. Miller: Because there is no constitutional way that the hearing officer could even consider tenant hardship.

That is our position.

Unidentified Justice: I know that is your position.

It sort of has to be, I suppose.

Mr. Miller: There is no way that this can be applied constitutionally.

It does not become more or less unconstitutional merely because it is applied.

Unidentified Justice: Well, you just answered to the contrary in your example, if the landlord is allowed to collect $400, there would be no problem.

Mr. Miller: That is correct, Your Honor, but this ordinance goes one step further.

Unidentified Justice: But even if the landlord had a hardship tenant, if the hearing officer allowed the $400, the statute would not be unconstitutionally applied to him.

Mr. Miller: That is correct, Your Honor.

Unidentified Justice: In fact, taking it one step further, Mr. Miller, as I understand the supreme court of California's Opinion, the minimum that you can get has always got to give you a fair return on your investment.

Mr. Miller: That is the interpretation.

Unidentified Justice: So that if they decided in your case that $375 would not give you a fair return, then he would not be permitted to give the $375?

Mr. Miller: That is correct your Honor.

Unidentified Justice: Yes.

Mr. Miller: But I think that I can show the Court that even though the $375 in my example is an otherwise... it meets the constitutional minimum rent, I believe I can show this Court that the city does not have the power or the authority to take away from us that increase that otherwise be determined to be reasonable.

Unidentified Justice: What if I did it in reverse and said that if you had $375 as a reasonable return, that if you had tenants who are multi-millionaires, you can charge them an extra $10?

Mr. Miller: I think you would come out with the same result, Your Honor.

Unidentified Justice: That would be unconstitutional too?

Mr. Miller: For the wrong reason: the City of San Jose could say that,

"all you could have is $375, and that is a fair and reasonable, and it meets the constitutional minimum. "

What they cannot do is say you can have more but then take it away from you for the wrong reason.

That is exactly what happened in Nollan and this Court said you could not do it.

Unidentified Justice: What constitutional provision would my hypothetical violate if they said,

"the normal rent is $375 but if you have a very wealthy tenant, you can charge him an extra $25? "

Would that be clearly unconstitutional also?

Mr. Miller: Yes.

Unidentified Justice: What portion of the Constitution would that violate?

Mr. Miller: I believe that would violate the "just compensation" clause under the same reasoning that we presented here, Your Honor.

The wealth of the tenant is not a legitimate consideration in establishing the rent.

If you are going to say that rich people can pay more than--

Unidentified Justice: It is a legitimate consideration in establishing income tax rates.

Mr. Miller: --Yes, Your Honor, we do have income tax rates that are based upon wealth.

Unidentified Justice: Dentists sometimes take into account the wealth of their patients, I think.

And doctors and lawyers do.

Mr. Miller: There is a substantial difference, however.

Unidentified Justice: What is the difference constitutionally?

Mr. Miller: Constitutionally what you have is a charge that is applied to everyone and is being applied equally.

Here you have a charge that is being applied from one individual to another individual.

A single landlord is selected at random and being told that he would have to reduce his rent to his tenant.

And I think your question raises a problem because this ordinance has been depicted in briefs and in newspapers as a "robin hood" type of an ordinance, taking from the rich and giving to the poor, and that is not the effect of this ordinance.

The average landlord owns less than twelve rental units.

Many landlords are hardworking people who have invested their money in small units to provide for their own security and their own retirement.

On the other hand, by the statistics of HUD, the median income in San Jose is over $43,000.

A tenant becomes automatically a 34,000.

Unidentified Justice: What about a state law that required lawyers to devote ten percent of their time to public service?

Mr. Miller: Yes, Your Honor, in California we had such an ordinance.

Unidentified Justice: This was unconstitutional.

Mr. Miller: This was held invalid in the Cunningham case under the "equal protection" clause, that a lawyer that was providing goods and services to the public cannot be required to provide pro bono services in civil suits, and in civil suits we have the public defender.

And for the same reason I believe this ordinance falls under the same province... has the same problem.

Unidentified Justice: Did you make this very argument before the California supreme court?

Mr. Miller: Which argument?

Unidentified Justice: On the "just compensation" clause?

Mr. Miller: Yes.

The "just compensation" clause.

Unidentified Justice: Because I do not... they recite that you concede that you do not rely on confiscatory rents.

Mr. Miller: Well, Your Honor, we made two arguments before the California supreme court.

The first argument was that by definition, when the hearing officer establishes a reasonable rent, and then reduces it, we are being denied the constitutional minimum.

The supreme court disagreed with us on that and we are not presenting that issue to the Court because we know that you will accept the California court's interpretation.

But our next position, which was actually pushed more hard, was that even if we are receiving the constitutional minimum, that you cannot take away the excess for the wrong reason.

We see no difference... if there is a housing shortage, we agree that the police power--

Unidentified Justice: Is that position in your brief filed with the California supreme court?

Mr. Miller: --That we are... that even if we are receiving minimum rent?

Yes, Your Honor.

That was their argument and their decision that, even though there is a fair and reasonable rent--

Unidentified Justice: So they necessarily rejected that when they--

Mr. Miller: --Yes, Your Honor.

Unidentified Justice: --Even if they did not seem to in their Opinion?

Mr. Miller: Well, they did in that--

Unidentified Justice: They just talked about "equal protection".

Mr. Miller: --Yes, they talked about "equal protection".

I think you will find a footnote on "due process", and another provision, another passage where they talked about "just compensation".

Of course, in defense of our supreme court, they did not have the Nollan case in front of them when they made this decision, but they did have the Agins Rule.

We did not, in explanation, Your Honor, present the argument as clearly focused, as we are now presenting it to this Court.

We made the same arguments but not as clearly focused.

Having thought about this for such a long period of time, we boiled this case down to a very simple issue: the housing shortage--

Unidentified Justice: Mr. Miller, before you go on, just one more question on the standing: is it the case that a landlord who has a hardship tenant and wants to sell his property, the purchaser from him would be subject to the same ability of the California authorities to require the charging of a lower rent?

Mr. Miller: --Yes, Your Honor.

Unidentified Justice: He does not sell out from under that provision?

Mr. Miller: No, Your Honor.

Unidentified Justice: So the asserted authority by the State of California does amount to in effect a sort of cloud on his title to the premises?

Mr. Miller: It definitely does, Your Honor.

Unidentified Justice: It is an asserted ability of California to require that those premises, at least as long as this occupant is in them, will bring less income?

Mr. Miller: That is correct, Your Honor.

Unidentified Justice: And might that affect the sale price that an individual is able to get for a unit that has a hardship tenant?

Mr. Miller: It definitely will.

By reducing the rent you reduce the value by definition.

And that tenant potentially can stay there until he dies, because as long as he does not default, he has a right to remain in possession.

Unidentified Justice: And that cloud is effective whether or not you know in advance whether in fact the hearing officer will reduce it?

The mere risk of his reducing it makes that unit less valuable.

You mean if a unit is leased for a term of years that the tenant can hold over indefinitely at the lower rent by virtue of this law?

Mr. Miller: Yes ma'am.

Unidentified Justice: He cannot be evicted?

Mr. Miller: That is correct.

Except for default.

Unidentified Justice: Notwithstanding the existence of a leasehold period that has expired?

Mr. Miller: That is correct, Your Honor.

There are anti-eviction provisions in the ordinance which we are not attacking, however I think it impacts on the effect.

We can only evict a tenant... it is worded somewhat difficult, but somewhat in effect they can only evict a tenant for a default.

Unidentified Justice: Are you arguing, then, this is like a physical taking or is it a regulatory taking?

Mr. Miller: It has an aspect of physical, Your Honor.

Unidentified Justice: Well, which is it?

How do we know?

Mr. Miller: We consider it as a hybrid, Your Honor.

It is not a pure regulation test as in Agins or MacDonald.

And it is not a pure, physical possession, as in Loretto.

Rather it is a hybrid, as in Nollan.

Nollan was a regulatory case.

However, because the public was given the right to pass back and forth on the easement, it also has an aspect of physical possession.

And we have the same.

We admit that this is a price regulation as such, but the Nollan test should apply because it also has the aspect of the physical possession.

The tenant is given this possessory life estate and, because it affects possession, it is our belief that, under the Nollan standard, it is intermediate scrutiny standard, it should also apply to this case because we have the similar aspect of physical occupation by the tenant.

Unidentified Justice: The majority of the supreme court of California, in answering one of your contentions, said that the

"City of San Jose could elect to regulate only landlords with hardship tenants. "

And thereby achieve the same results.

Do you disagree with that statement?

Mr. Miller: I agree, Your Honor, but make sure we define what we are talking about.

If there is adequate justification that there was a shortage of low-rent housing, but there was an adequate supply of high-rent housing, I see no problem under the police power for them to rent, to regulate, only low rent housing.

What they cannot do is regulate housing, the price of housing based upon the income of the tenant.

Unidentified Justice: But would that not be very much what they were doing if they regulated only low rent housing?

Mr. Miller: No, Your Honor.

Anyone can occupy low rent housing, without any basis of what type of income they earn, anyone... if they say

"all units of $500 or less we will regulate. "

and there was a shortage of such units, I would have no problem with that.

But if they say

"we are only going to regulate those units for people with certain income. "

they are now telling the landlord that

"you have to subsidize this tenant because of what he earns. "

Unidentified Justice: Why is one permissible and another not in your view?

Mr. Miller: Because you cannot regulate... establish, price regulation based upon the consumer's ability to pay, Your Honor.

Let us take for example a grocery store: if a grocery store is offering goods at a reasonable price, he has a right to charge a reasonable price to the consumer, regardless of the consumer's ability to pay.

We do not tell the groceryman that he has to reduce the price of his milk because the customer cannot afford to pay.

We recognize that the ability to pay is a public problem.

Unidentified Justice: You can tell the grocer that he has to raise the price of his milk above what he wants to charge?

Mr. Miller: Yes, Your Honor.

That is the Nebbia line of cases.

Unidentified Justice: If you could require him to raise it, why can you not require him to lower it?

Mr. Miller: The justification for Nebbia v. Bordens, that line of cases, Your Honor, gave a justification for a general regulation just as you have a justification for a general rent control ordinance.

What they said in Nebbia was that

"we have a problem of oversupply and this oversupply is causing destructive competition. "

"In order to protect the public we have to maintain a minimum price so that the supplier can maintain a minimum profit. "

That was to protect the public, just like rent control.

Unidentified Justice: But what if the legislature, the city council, says,

"we have a problem of starvation: there are a lot of people that cannot afford to buy milk.... "

you know, there you are talking about eight cents... but now let us say $1.80 or something?

"So we are going to say that you have to sell it at $1.60. "

Mr. Miller: And I would say that would be unconstitutional, Your Honor.

My reasoning is this--

Unidentified Justice: No, you would not.

You would not say that if they did it for everybody, would you?

Mr. Miller: --I misunderstand the question.

I understood the--

Unidentified Justice: I understood your position to be that the state could not require a lower price across the board.

Mr. Miller: --Yes, they can.

Unidentified Justice: Not conditional upon what the economic status of the particular purchaser is.

Mr. Miller: Thank you, Justice Scalia.

I misunderstood your question, Mr. Chief Justice.

Unidentified Justice: I am not so sure you did.

I think maybe Justice Scalia has qualified it.

0 [Mirth.]

Mr. Miller: I do believe, Your Honor, that because of market conditions the grocer is able to charge... because of market conditions, the groceryman was able to charge let us say $1.80 for his milk and that was an unreasonable price because of market conditions, that the state could come in and say

"we will regulate all milk at $1.50. "

What they could not do is say,

"you can charge anyone in the population $1.50, but if a customer comes in and he cannot afford to pay $1.50, you have to lower your milk to $1.35. "

"We have always recognized that the assistance of our impoverished citizens is a public burden. "

"We are not saying that we should not be helping those who need help. "

"That is not the question. "

"The question is, who is to provide that assistance? "

"We are suggesting that it is the public burden, and they cannot select randomly different individuals to provide that financial aid. "

What we do, for example, with the grocery store, is we say,

"groceryman, you do not have to reduce your rent below what is reasonable; we help the impoverished by providing food stamps. "

"Just like we tell the druggist,. "

And before the San Jose ordinance came along, what we said was,

"Tenant, if you cannot afford to pay a reasonable rent, a rent that has already been reduced by rent control, if you cannot afford to pay a reasonable rent, we will provide for you a Section 8 subsidy. "

What they are trying to do is the City of San Jose is trying to take a public burden to those who need assistance and try to shift that burden onto the individual.

Unidentified Justice: Mr. Miller, what about rate regulation?

Could a public utility commission require the supplier of electricity to charge a higher price to industry, just as industry may pay a higher tax rate, and a lower price to the homeowner?

Mr. Miller: Yes, Your Honor, in fact, I think there are some rate regulations that have done something similar to that.

Unidentified Justice: What is the difference?

Mr. Miller: The difference is you are taking it and applying it across all the consumers.

Unidentified Justice: No, well, all the consumers... all the consumers who are less able to pay large sums of money for their utility bills.

Mr. Miller: In the rate cases, Your Honor, with either working with a utility, which is a monopoly, or if you are talking about a gas rate case, which is a near-monopoly, you have a situation where you do not have normal market forces operating.

The state comes in and says,

"we have given you a permit to operate a monopoly and there are certain things we can tell you to do. "

"One of the things is we can tell you what kind of prices you can charge, and we can tell you that we are going to require you to reduce those charges to certain consumers and not to others. "

But that charge is spread out over everyone.

San Jose is not--

Unidentified Justice: But by hypothesis it is not spread out over everyone.

It is a higher rate to those who are better able to pay, namely the very large users.

But maybe it does not exactly work that way.

But I am using this as a hypothetical.

Mr. Miller: --Yes, I agree, Your Honor, except with the utility, one supplier is supplying thousands of people.

Unidentified Justice: Well, one landlord is renting apartments to thousands of tenants, and some of them are better able to pay than others.

We just make a different kind of classification.

Mr. Miller: But keep in mind, Your Honor, this ordinance is not based upon an ability to pay.

Unidentified Justice: But you are saying it is constitutionally impermissible to take ability to pay into account?

Mr. Miller: That is correct.

I agree.

Unidentified Justice: But you would not contend that it was unconstitutional in the rate regulation context to take ability to pay into account, say, as a class, homeowners are less able to pay than factory owners, is that constitutionally impermissible?

Mr. Miller: No it is not, Your Honor.

Whenever the state gives--

Unidentified Justice: Mr. Miller, you can make a utility give its services for free, can you not?

A regulated public utility?

In fact, many of them do.

Cable systems provide their services for free to municipalities and are required to.

Mr. Miller: --That is correct, Your Honor.

It is perfectly--

Unidentified Justice: But that would be a "taking" for a private person would it not, to require it give it away for free?

Mr. Miller: --That is a distinction, Your Honor.

If it was a public utility where the state is given a monopoly permit, you can do one thing.

But you cannot go out to the private entrepreneur and do the same thing.

That is not our economic system.

It just will not go.

Unidentified Justice: Is there anything in your argument that would not knock out rent control as such?

Mr. Miller: No, Your Honor.

Rent control is well-established as a valid exercise of the "police power".

Whenever there are those circumstances where a housing shortage permits rents to go too high, the state has a right to come in and protect itself.

No, Your Honor, this goes one step further.

Unidentified Justice: It involves rent, does it not?

Mr. Miller: Yes, it is a rent-control ordinance.

Unidentified Justice: But if it involves rent it controls rent.

Mr. Miller: Yes, but it is controlling it for the wrong reason and on the wrong basis.

The rest of the ordinance, Justice Marshall, we are not attacking.

The rest of the ordinance that looks into what is a reasonable rent for the landlord we have no problem with.

If they did not add this one provision that says,

"landlord, you have to reduce your rent merely because this one tenant cannot afford to pay. "

That is our challenge.

This is a very important question: it is important because there are over 200 jurisdictions in this country that have rent control ordinances and if the California decision is allowed to stand, you can be sure that they are going to follow.

But more importantly, in California--

Unidentified Justice: How do you know you can be sure?

It may not be a fairly wise ordinance because it may discourage the rental of units to low income people.

Mr. Miller: --And it will, Your Honor.

Unidentified Justice: So I am not sure you are right there and people will follow it for that reason.

Mr. Miller: All right, Your Honor, the next step is in California, every rent control ordinance that I am aware of... and there are between 40 and 50, all provide that the hearing officer can take into consideration "any relevant factor".

And if this California supreme court Opinion stands, then those jurisdictions, which I think is about all, then the hearing officer can thereafter take into consideration the tenant's ability to pay, and more importantly, we will not even know it, because we do not know what goes through the hearing officer's mind necessarily in establishing this rent.

Unidentified Justice: You are just saying they may be doing it already?

Mr. Miller: We hope not, but one last point, if the Court please: we are not only challenging this ordinance under the "just compensation" clause, but also under the "equal protection" clause.

We find no difference in this case between that and the unanimous decision of this Court in Webb's Pharmacy.

In Webb's Pharmacy the interpleaded funds were filed with the Clerk of the Court.

The Clerk did not have to put those into an interest-bearing account.

So that there was no requirement or constitutional right for the depositor to have interest.

But then the state said,

"when you put it into an interest-bearing account, we can take the interest and use it for a public purpose. "

And we say that is the same thing they are doing here in San Jose.

They do not have to give us the higher rent.

What they cannot do is allow the higher rent and then take it for a public purpose, the public purpose being to support the underprivileged.

I think the same philosophy would follow from your Decision in Marino, which was another "equal protection" where food stamps were denied to persons who were living to another unrelated person.

There is no... this Court held that there is no correlation between the taking, the fact that they were unrelated persons, and food stamps.

And although there is no constitutional right to food stamps, you cannot give them and then take them away for the wrong reason.

And that is substantially our argument.

Chief Justice William H. Rehnquist: Thank you, Mr. Miller.

We will now hear from you, Ms. Gallo.

ORAL ARGUMENT OF JOAN R. GALLO, ESQ. ON BEHALF OF APPELLEES

Mr. Gallo: Thank you, Mr. Chief Justice, and may it please the Court:

It seems to me that Appellants predicate their opposition to the ordinance on a number of incorrect assumptions, that there is only one rational purpose for rent control, and that is to correct a non-competitive market.

It seems to me that there are a number of possible purposes for rent control, including for example, as an anti-inflationary measure.

Even where an ordinance, as ours is, is directed at a housing shortage, it can be directed towards correcting the social ills which result from the exploitation of the housing shortage, not just the market imbalance itself.

In our case the social ill that we are attempting to address is the dislocation of tenants in possession.

Not only does that kind of dislocation negatively impact the individual tenant, but it also affects the community as a whole.

If you develop a pattern of residential instability, it undermines the neighborhood sense of unity.

Also today we increasingly find that homelessness which results from the escalating market rate of rents is an increasing problem for our city.

The city has a variety of other programs which address the problem of finding affordable housing for low and medium income tenants who are looking for housing.

This particular regulation is addressed at protecting those who are already in possession of the unit.

The tenant hardship provision directly and substantially furthers that purpose.

It prevents the landlords from taking unfair advantage of the housing shortage at the expense of those tenants who are on limited and fixed incomes.

Unidentified Justice: But you take the position that it is perfectly valid for the city to require a landlord with let us say ten units to perhaps be asked to allow a particular income, a low-income tenant, to remain indefinitely in the premises at a rent which is lower than the reasonable rent that has been allowed for other tenants generally in the same building, is that right?

Mr. Gallo: The ordinance... yes, essentially, with some exceptions.

It is hard to say "yes", because I think there are certain assumptions--

Unidentified Justice: But it could work that way?

Mr. Gallo: --To the extent that your question is

"is the landlord permitted to free himself from the constraints of rent control by evicting a tenant, he cannot. "

Unidentified Justice: At the end of a term he cannot and might have to keep this person indefinitely who happens to be a hardship tenant?

Mr. Gallo: He can evict the tenant for any reason other than the evasion of the rent control ordinance.

And the tenant hardship provision.

Unidentified Justice: Well, that does seem to be requiring the landlord to assume a public burden, does it not?

Mr. Gallo: It does not to me, because he continues... I think that the problem is the assumption that there is a reasonable rent and he is not entitled to that reasonable rent.

What he... what we are doing is limiting an excessive rent, and we are limiting it more stringently in that situation.

Any landlord may at any time have a hardship tenant.

Any hardship tenant may at any time leave.

We do have a vacancy decontrol provision that allows the landlord to set the rent at market rate whenever the unit is voluntarily vacated.

Unidentified Justice: Could the city require grocers to sell to hardship people at a lower price than to others?

Mr. Gallo: The answer to that I think is "yes", if there is a proper purpose.

In my mind probably a proper purpose would limit that to necessary items.

And if the store... if there was an administrative system that assured the storekeeper a fair return, I think that there is no problem.

It is very similar to the lifeline type of situation that appears in the utility context, or we do that with a variety of services that are provided, like garbage services, where you have to give the elderly and low-income people an opportunity for a lifeline service.

Unidentified Justice: Ms. Gallo, what about seeing this problem of the hardship tenants and to meet that same problem the State of California passed a law that said that,

"anyone who lives next door to an impoverished person has an obligation to help that person out. "

and make up the difference in the rent?

Mr. Gallo: I do not see that in that situation there is a connection.

Unidentified Justice: So we are just quibbling about whether the connection is close enough, is that right?

Mr. Gallo: I think that very much at the heart of the argument is--

Unidentified Justice: There has to be a relationship between the person you are putting the burden on and the nature of the hardship, is there not?

Mr. Gallo: --There has to be a rational relationship between the purpose of the regulation and the person who is being regulated.

Unidentified Justice: Well, no.

It is not just the purpose of the regulation.

It is the evil that is sought to be eliminated, is it not?

Mr. Gallo: Well, I think we are saying the same thing.

I think in our case the purpose of the ordinance is to protect tenants in possession from excessive rents charged by their landlords, but that is evil.

Unidentified Justice: You could protect them against excessive rents in a lot of ways such as making their next-door neighbor who is well-off, make up the difference, and you say that would be no-good?

Mr. Gallo: Because I do not think that there is a rational connection with the next-door neighbor.

Unidentified Justice: And you think it is a rational connection that I happen to be the landlord who rented to let us say an affluent person who loses a lot of money in the stork market and and whose income goes below $34,000.

That means that I am somehow responsible for his hardship?

Mr. Gallo: I do not think that you are responsible for his hardship.

And I do not think under the terms of our ordinance, the hearing officer would be likely to find that to be the kind of unreasonable severe financial hardship.

But I do think that since we could impose a lower rent ceiling for all landlords to allow many landlords to further exploit the housing shortage while limiting that exploitation in the case where the tenants were likely to be dispossessed by that fact, is a logical and rational distinction.

Unidentified Justice: What troubles me is that with respect to all landlords, with respect to all rent control in general, you can easily say that the reason for the inability of the public at-large to get affordable housing is the fact that all landlords are charging too much money taking advantage of a temporary shortage or whatever other rationale you might want to use.

There is a connection between the lack of affordable housing and what the landlords are doing.

There is a cause and effect relationship, but there is no cause and effect relationship whatever between the hardship of a particular individual and the landlord who happens to have been renting his apartment to that individual, either before or after the individual went into the hardship level.

Mr. Gallo: I think the connection is with the effect of letting the landlord take the maximum rent... we are allowing the landlord to have a rent that is well-above what is constitutionally mandated.

And to say to that landlord that the effect of your taking advantage of the housing shortage, that is not an increment of rent that the landlord has an entitlement to constitutionally.

He is entitled constitutionally to a fair return.

Unidentified Justice: He is not taking advantage of the housing shortage any more.

You have eliminated his taking advantage of the housing shortage when you have reduced his rent to what you say is a reasonable rent for everyone.

At that point the housing shortage is out of the question.

All you are addressing from there on is the poverty of this particular individual for which the landlord is no more responsible than anyone else in the world.

Mr. Gallo: I do not think so because what you are assuming is that we are allowing the landlords in the case of non-hardship tenants to take what is the reasonable rent, and I do not think that there is such a thing as "the reasonable rent".

I think we have an unusually generous ordinance that allows landlords to maximize their profits to a great extent, much more than other rent control ordinances.

And what we are saying is,

"we will allow you to do that to the extent your use of your property does not create a problem or a hardship for somebody else. "

"I think the word. "

hardship

"comes in two senses. "

"One is we are labelling the financial need of the tenant. "

"But I think it is also the hardship which is imposed on the tenant when the landlord maximizes his profit at literally the expense of the tenants. "

"I think you can look at any price or rent control or rate regulatory ordinance as a shifting of the benefit from the producer to the consumer. "

"To that extent, all of the price regulation creates a subsidy of the consumer by the producer. "

"We are saying in most cases that, landlord, you can really have the vast majority of the increment of rent increase that you would like to have, except to the extent that it is going to be harmful. "

And to that extent we limit it to some extent.

But at all points, we assure you the fair return on the value of your property,

"which is a very generous method of calculating fair return. "

The ordinance, when you look at the ordinance as a whole and you see that the landlord once he rents a new unit and sets the rate at market rate value, the following year can raise the rent up to eight percent and not even be subject to a hearing.

Eight percent, I think, probably provides him with fair return.

He can, however, impose a greater increase.

And as you have been told, he can do that by simply noticing the tenants.

The increase will be subject to a hearing only for a tenant that files and asks for a hearing.

At that hearing the hearing officer is required to allow the landlord to pass through all of his costs of capital improvement, operating and maintenance, and rehabilitation; plus the landlord receives five percent.

He can also pass through certain of the cost of debt service.

It seems to me that if the ordinance stopped here it would be facially valid, but the ordinance allows the hearing officer to grant an even greater increase if it is reasonable under the circumstances.

Unidentified Justice: But absent the ordinance the hearing officer would... the landlord, might be able to charge what the market might permit him to charge a lot more than the hearing officer would allow him after passing all these things through.

Mr. Gallo: That is correct.

Certainly it is the rent control ordinance and certainly it is intended--

Unidentified Justice: So it keeps rents generally down below what they would be if there were a free market?

Mr. Gallo: --That is correct.

I think it is a mistake to talk about a "free" market in the area of rental housing.

I think that the local government limits that market considerably at all times based on various land use and environmental constraints.

There is never a time when the free market works "freely" in this area.

I think it is also important to stress that the hearing officer in determining whether there is an increment of rent that can be charged above the other tests in the ordinance is required to ensure the fair return on the value of the property.

When it comes to the balancing test, he balances a variety of factors to determine what is a reasonable rent under the circumstances.

He may or may not determine that a particular tenant that... excuse me... a proposed increase constitutes an unreasonably severe hardship to the tenant, and even if he makes that determination, he may or may not limit that increment of rent.

He is required to look at all of the circumstances, including what the market rate rents are; including also what the past history of rent increases for the unit have been.

There is no particular formula mandated for determining fair return.

A "fair return" appears to be the

"reasonable cost to the landlord plus a fair profit. "

I do not believe that it is the "maximum possible return", and I do not believe, as Appellants argue, that it is the

"return he would receive in the absence of a housing shortage. "

Unidentified Justice: I presume if they could do this for hardship tenants they could do it for, let us say, the elderly?

Could they require, you know, give a hearing officer discretion to reduce it for the elderly?

Mr. Gallo: For the elderly if there were circumstances... a totality of circumstance.

Unidentified Justice: For police officers who are notoriously ill-paid?

Or simply the municipality wants to encourage people to enlist in the police and instead of giving them a higher salary they just give them this break on housing, would that be all right?

Mr. Gallo: I do not think that that would be all right because I do not--

Unidentified Justice: Why?

I am a landlord who has chosen to rent to a police officer just like these people are landlords who have chosen to rent to those who are in a hardship status.

Mr. Gallo: --I think that the purpose here is not to give money to the tenants.

The purpose here is to prevent society from having the problems that come from the dislocation of the tenant in possession.

I am not sure that I can articulate a purpose other than the purpose that you have articulated for a special rule for police officers.

Unidentified Justice: Well, but certainly the ordinance also relieves any urge that the municipality might have to subsidize the low-income people?

You can certainly subsidize these people.

Mr. Gallo: I think that the city has a wide variety of programs that are possible and our city is perhaps in the forefront of a variety of programs that go to providing affordable housing for tenants.

I do not think that that is... there is a particular program or only one particular way that a legislative body can determine to address certain problems.

The problem here we feel is the dislocation of these particular tenants.

And that is a problem which is addressed by one regulatory scheme that we have provided.

I think that with regard to the question of reasonable rents, I want to point out that the utility cases have developed a concept of a

"zone of reasonableness. "

"That zone is bordered at the producer's end, with the producer's interest against confiscation and at the consumer end of the continuum, by the consumer's interest against exorbitant rates. "

"Rates can be limited anywhere within that continuum above the lowest reasonable rate. "

"Our zone is bordered well-above the lowest reasonable rate because the landlord is guaranteed a fair return on the value of the property. "

At the other end of the continuum, at the consumer end of the continuum, the concern is to prevent the consumer against rates which are unreasonable under the circumstances, and tenant hardship is just simply one of the circumstances that is taken into effect.

I believe that there has been no taking in this case because, as Appellants agree, there has been no denial of the viable economic use of the property and I believe that the property substantially advances a legitimate state interest.

There are no facts; there are no factual allegations in this case to enable the traditional ad-hoc analysis.

It seems to me, however, that the economic impact under the circumstances of our ordinance where the landlord is assured a fair return on the value of his property will not be--

Unidentified Justice: You keep saying that.

That is a good test for public utilities.

You have to assure public utilities that.

But that is not the test of whether there has been a taking by the government or not, is it?

The mere fact that you are left with a fair return?

I assume that if I own property, I am entitled to get as much of a return as the market will give me.

If the government limits me without just reason to a fair return you would say that there has been on taking.

No constitutional violation.

Mr. Gallo: --I think you have both ends of the test.

One is the legitimate purpose and the other is the economic viability.

I think that all regulation, or most regulation, limits the return.

Certainly our zoning regulations limit the return that property owners would otherwise receive.

I think that is the test once you have established that there is a legitimate state interest, and I think that there is a legitimate state interest in preventing the dislocation of tenants who are in possession due to the landlord's taking advantage of the housing shortage.

Unidentified Justice: That may be.

My only point is you do not establish that that is so simply by the fact that a fair rate of return is provided.

That is not the end of the inquiry.

Mr. Gallo: I think that there are two tests, and I think that we meet them both.

But I think once you take as I do the fact that we have met the first test, of the state interest, I think the rest of your analysis is really an analysis of economics and I think that the FCC v. Florida Power Corporation case which this Court decided last Term, really is very, very much on point.

In that case, the rates charged were actually rolled back.

It was not simply a limiting of future increases, but literally a rollback of rates.

This Court found in fact that, because the rates were not confiscatory, that the ordinance could, or the regulation, could stringently limit the amount of money that was charged.

I think that certainly the City of San Jose does have an ordinance that transfers benefits and burdens but as the California supreme court said,

"oil price and rent control operates in the same fashion. "

I do not think that ours is really distinguishable.

I think if you look at it the way we do, what we are doing is preventing the landlord from unfairly profiting from the market condition at the expense of the tenants.

And I think the fact that we allow him--

Unidentified Justice: Excuse me.

It is not unfair any more once you have the initial reduction.

At that point you have handled the problem of the housing shortage.

The problem that remains after that... once you make the initial reduction along... on the basis of all of the factors except the hardship factor, you have eliminated the problem of unfair benefit to the landlord.

You have eliminated the housing shortage problem.

What remains after that is a poverty problem, is that not right?

I mean, the ordinary factors take care of excessively high rents.

Mr. Gallo: --Depending on the circumstances of the tenant, I do not see that the hearing officer takes the other factors and balances them and then comes up with what is a reasonable rent.

Unidentified Justice: But that is a poverty factor.

That is a poverty factor, not a landlord gouging the public factor, right?

Mr. Gallo: It is the determinant of how far we will allow him to gouge.

I think that once you get beyond the value of the fair return on the value of the property, we are allowing gouging, and in some cases we are allowing more gouging, not that we are requiring a reduction.

Unidentified Justice: The California supreme court, as I understand it, had found it unconstitutional for California... I guess it was a state law... to require children to pay the expenses of care for their impoverished parents in mental institutions?

And they found that unconstitutional?

Mr. Gallo: That is correct.

Unidentified Justice: Do you disagree with that Decision?

Mr. Gallo: I do not disagree with that Decision, but I agree with the California supreme court that that Decision is not applicable here.

And that our situations are very distinguishable.

I think in those situations there is no general connection.

We have here a rent control program.

Appellants have agreed that rent control is permissible.

We have the option of a much more stringent rent control ordinance and we are merely looking at the degree of return which will be permitted within that zone of reasonableness.

I think that from the perspective of "equal protection" that these kinds of distinctions are allowed.

I think that the controlling case is New Orleans v. Dukes.

I think that it is not essential that all people be treated with mathematical exactness.

Unidentified Justice: Ms. Gallo, before you sit down, I want to be sure... are you continuing to raise any issue about the standing of Pennell?

Mr. Gallo: I have very mixed feelings about the standing of Mr. Pennell.

I have been unable to find any case directly on-point.

I think that standing is determined at the time the jurisdiction is established for this court.

But on the other hand, I cannot find any way in which we have been disadvantaged or the situation has changed for us with Mr. Pennell coming in and out of ownership in the City of San Jose.

I think that if Mr. Pennell has standing, we have never felt that it was necessary to reach the standing of the Association.

Unidentified Justice: What if we thought it was necessary?

What do you think about it then?

Mr. Gallo: Then I would urge you not to find that there is standing for the Association.

I think that this is the kind of case where the association is asking for an advisory opinion.

Unidentified Justice: What you are really saying is that they should not be able to attack the ordinance on its face?

Mr. Gallo: That is correct.

Unidentified Justice: They should be... wait until there is an applied--

Mr. Gallo: That is correct.

Unidentified Justice: --Did Mr. Pennell ever claim to have a hardship tenant?

Mr. Gallo: Nowhere in the Record did Mr. Pennell claim to have a hardship tenant.

Unidentified Justice: So as far as he is concerned, I suppose you would have the same argument: he is not entitled to attack the ordinance on its face?

Mr. Gallo: I think that our "standing" argument is very much a species of our "ripeness" argument.

I think in the absence of a concrete case, we really do not know how the ordinance will operate, and that has created a problem for us.

I do think that we argued against the "ripeness in general" in that our "standing" argument is a species of that, but in addition, I think it is inappropriate for an association of this sort to be able to bring essentially a taking claim.

A taking claim needs the kind of analysis that depends on at least allegations with regard to particular situations.

The taking is not in general, it is in specific.

And we have felt disadvantaged all along in our inability to look at a concrete situation and be able to explain how the ordinance would operate.

Unidentified Justice: What if the ordinance says that the landlord can charge a higher rent unless the landlord is Black?

Mr. Gallo: That is an unconstitutional purpose.

Unidentified Justice: Why would you not say,

"well, wait to see if that provision is applied. "

"It is at the discretion of the hearing officer to rule out facial challenge. "

would you not?

Mr. Gallo: I would allow a facial challenge in that situation but not under the taking clause.

What we are really talking about at that point is the "equal protection" argument.

Unidentified Justice: Well, is not an "equal protection" argument being made here?

Mr. Gallo: The "equal protection" argument is being made here but the gravamen, I think as the Appellant said, is the "taking" argument.

Thank you very much.

Chief Justice William H. Rehnquist: Thank you very much, Ms. Gallo.

Mr. Miller, you have four minutes remaining.

ORAL ARGUMENT BY HARRY D. MILLER, ESQ. ON BEHALF OF APPELLANTS -- REBUTTAL

Mr. Miller: Thank you, Mr. Chief Justice.

I will make it short.

I think I would like to address Justice White's question on the facial challenge, as I can see his concern: I see no distinction on a facial challenge where the challenge is under the "equal protection" or under "just compensation".

The question is whether or not on its fact there is any possible way for this standard to be applied in a constitutional manner.

If we assume for a moment--

Unidentified Justice: But do we have anybody in front of us who is a landlord of property with a hardship tenant who would benefit from this statute?

Mr. Miller: --Yes, Your Honor.

We represent over half of the residential rental units in the City of San Jose.

Unidentified Justice: Well, there are no allegations that I have seen that say,

"we have hardship tenants and we are affected by this statute. "

Mr. Miller: We allege that we have... represent owners who are subject to the ordinance.

As I say, we represent most of the residential unit owners in the city and we have many hardship tenants.

Unidentified Justice: Being "generally subject to it" is not the same as "having units with hardship tenants", though, is it?

Because absent that there would be no application of the statute?

The ordinance?

Mr. Miller: That is true, Your Honor, but of all the hardship tenants in the City of San Jose, we necessarily have many of them since we are the suppliers of housing in the City of San Jose.

So necessarily if they are going to live somewhere, they have to live in our units.

Unidentified Justice: Yes, but if even a landlord with a hardship tenant, if the hearing officer in your example you used before, said a reasonable rate would normally be $400, and you have a hardship tenant, he could still leave it at $400.

Mr. Miller: Yes, Your Honor.

Unidentified Justice: And that would be a constitutional application, you told me before.

Mr. Miller: Yes, Your Honor.

Unidentified Justice: So you cannot say that this ordinance is incapable of constitutional application.

Mr. Miller: It is if he is ever at any time going to consider the hardship of the tenant in making his decision.

What, if you leave this decision stand, Your Honor, you are saying is that there is an unconstitutional law that is never going to be applied.

The only way that we can stop this from ever being applied unconstitutionally is to remove it from the Order.

That is the only possible way.

Unidentified Justice: Yes, but I take it your only ground for saying that, I suppose is that it is just unconstitutional under this ordinance to take wealth into consideration.

Mr. Miller: Correct.

Poverty.

Yes, Your Honor?

Unidentified Justice: Even though the consideration of poverty never leads to anyone's rent being changed in a particular case?

Mr. Miller: It may not, Your Honor, I agree with that.

However, there is no possible way they could even consider the factor and why should this Court leave an unconstitutional--

Unidentified Justice: Well, suppose... that you came up to this Court with a tactical case that had happened.

The hearing officer says,

"Landlord A has no hardship tenant. "

"He gets $400. "

"Landlord B, same identical property, hardship tenant, but I am going to give him $400 too? "

Nothing wrong... nothing anybody can do about that to say it is unconstitutional, is there?

Mr. Miller: --Not unless you say the hearing officer... just the fact that the hearing officer could--

Unidentified Justice: But it passes through his mind?

Mr. Miller: --could have took wealth into consideration and it did not make any difference to him.

Unidentified Justice: But just the fact that that factor may be taken into consideration invalidates this ordinance on its face, is that it?

Mr. Miller: The problem is that there have been many times that we may not even know, Your Honor.

Can I use an analogy?

Let us--

Unidentified Justice: Mr. Miller, is that all... are there not a lot of existing ordinances out there that permit any variety of factors to be taken into account?

Are then not also unconstitutional?

Because they may be doing the very thing you are objecting to?

Mr. Miller: --If they are sub rosa applying the standard, that would be correct.

Unidentified Justice: And that would make the ordinance on its face unconstitutional because they are permitted sub rosa to do that.

Mr. Miller: Without this Opinion of the California supreme court, it would not be anything invalid on its face.

It is only when the ordinance expressly says that this they must do.

They are required to consider the hardship.

Chief Justice William H. Rehnquist: Thank you, Mr. Miller.

The case is submitted.

Print this transcript Transcript: 

Argument of Chief Justice Rehnquist

Mr. Rehnquist: I have the opinions of the Court to announce in four cases and the first No. 86-753, Pennell against the City of San Jose.

It involves a challenge to a rent control ordinance enacted by the City of San Jose, California that allows a hearing officer to consider among other factors the hardship to a tenant when determining whether to approve a rent increase proposed by a landlord.

The suit came up to a California State Court, which upheld the ordinance.

As a preliminary matter we conclude that appellants have standing to pursue this appeal.

The appellants are the landlords in San Jose.

On the merits, we first conclude that it is premature to address the landlord's claim at the application of the ordinance tenant hardship provisions constitute a taking of private property without just compensation.

There is no evidence that the tenant hardship provisions have ever been relied on to reduce an otherwise reasonable rent increase, and the ordinance itself, does not require that an increase be so reduced, and so this does not present the case in the concrete factual setting that we ordinarily require to decide it.

For the reason stated in our opinion, we do conclude, however, that the mere fact that a hearing officer may consider the hardship of the tenant in fixing a reasonable rent does not render the ordinance facially invalid under either the Due Process Clause or the Equal Protection Clause.

So the judgment of the California Supreme Court is affirmed.

Justice Scalia has filed an opinion concurring on part and dissenting in part in which Justice O'Connor has joined.

Justice Kennedy took no part.