CITIES BEGIN TO IMPOSE STRICTER REGULATIONS ON LANDLORDS -THE POTENTIAL IMPACT ON PRIVATE PROPERTY RIGHTS

2/24/2020 | Articles & Alerts

San Francisco and New York City have recently sought to impose tighter regulatory controls on multi-family landlords. These controls will likely cause landlords to incur unforeseen additional costs that will impact the economic value of their investment. The question is whether courts will allow constitutionally protected property rights and investment-backed expectations to be eroded by such regulation.

Today, many landlords will not remember when Philadelphia had its own form of rent control, principally because it was struck down by the Pennsylvania Supreme Court in 1955. In the last 65 years, there has been no meaningful desire to see its return. However, in New York and San Francisco, rent control is the law. Oregon recently passed its own rent control law, and Massachusetts may not be far behind. Experts disagree on the effectiveness of rent control. Some believe it tends to accelerate gentrification by incentivizing landlords to convert rental housing into higher-end condominiums. Others believe it may reduce the displacement of lower-income tenants and the elderly.

New York state lawmakers recently approved a package of bills allowing communities to establish rent-control policies when they face severe housing shortages. These initiatives expanded rent stabilization rules that were already in place in New York City and a few surrounding counties. A group of New York landlords have responded by challenging aspects of the new laws in court; particularly those provisions no longer allow units to become unregulated when tenants leave. Landlords allege such laws are unconstitutional takings of private property without compensation. Unfortunately, this argument has been previously tried and failed in many jurisdictions.

Large parts of California are currently facing intense gentrification pressures. Local activists argue that the displacement crisis has been fueled by greedy speculators and actions taken by banks, private equity, and Wall Street firms that encourage displacement. In San Francisco, the proposed Community Opportunity to Purchase Act, will allow nonprofit housing organizations to buy an apartment building before it goes on the open market, thereby protecting tenants from displacement and preserving their homes as permanently affordable. California lenders and investors are also being asked to embrace an Anti-Displacement Code of Conduct.

The Washington Supreme Court recently heard arguments about the constitutionality of two Seattle housing laws that affect how landlords select tenants. In 2016, the city council passed a “first-in-time” law requiring landlords to lease their rental units to the first person to submit an adequate application. Under the law, landlords have no flexibility to use their own judgment in selecting a tenant. A second law prohibits landlords from inquiring about criminal history, running a criminal background check, or relying on criminal history when considering a rental applicant. The two laws represent a trend in regulation aimed at limiting a property owners’ ability to exercise discretion in the rental process. It is doubtful that the court will rule that such laws constitute a “regulatory” taking of property. Alleging a regulatory taking is often perceived to be less of a constitutional issue and more like a tired landlord refrain about making less money than usual.

While this region has largely been immune from heavy-handed property regulation, the current political climate may portend changes. Hoping for the best is not a strategy I would recommend that landlords think seriously about preventive measures rather than hoping for the best.

For further information, please feel free to contact Neil A. Stein, Esquire at (610) 941-2469 or nstein@kaplaw.com.