Apartment & Office Building Ass'n of Metropolitan Washington v. Washington

381 A.2d 588, 1977 D.C. App. LEXIS 280

Opinions

KERN, Associate Judge:

This is the latest litigative episode in the continuing legal struggle over the imposition of rent control within the District of Columbia which commenced with the enactment by Congress in 1973 of the District of Columbia Rent Control Act, D.C.Code 1974 Supp., § 45-1621 et seq. The prior decisions rendered by this court in Apartment and Office Building Association of Metropolitan Washington v. Washington, D.C.App., 343 A.2d 323 (1975) (hereinafter AOBA I), and Apartment and Office Building Association of Metropolitan Washington v. Moore, D.C. App., 359 A.2d 140 (1976) (hereinafter AOBA II), detail the past litigation that has occurred. This appeal presents for our determination the validity of the District of Columbia Rental Accommodations Act (the Act), D.C.Law No. 1-33, enacted by the City Council on November 13, 1975.¹ The appeal is taken from the trial court’s denial after hearing testimony and argument of appellants’ Motion for Permanent Injunc-tive Relief which sought to have enforcement of the Act enjoined on the ground it was unconstitutional and contrary to the holding in AOBA I.

The Act, inter alia, established: a nine-member Rental Accommodations Commission whose members are appointed by the Mayor with the advice and consent of the City Counsel and whose responsibilities in essence are (1) to promulgate rules for the administration of the Act, (2) to hear and decide appeals brought by landlords and tenants with respect to maximum permissible rents fixed by the Act, and (3) to report to the Council at fixed intervals on “the trends ... of tax, operating and maintenance costs” and to recommend “adjustment,” if necessary and desirable, “in the formula [in the Act] for computing the rent ceiling.” § 45-1632(a) and (b). Further, the Act established a Rental Accommodations Office, headed by a Rent Administrator, whose function is to “carry out, according to the rules and procedures established by the Commission, the rent stabilization program established under [the Act].” §§ 45-1633, -1634(a).

The Act imposes a rent ceiling computed on the formula of taking the rent charged by a landlord for a housing accommodation per month as of February 1, 1973, and adding 4% of that rent, and thereafter, adding an amount equal to 8% of the above sum, and finally permitting the landlord to charge the tenant a further addition to the rent as will generate a “rate of return of no greater than eight percent.” § 45-1644(a)(3)(A).

The Act defines the term “rate of return,” as used in the formula fixing the rent ceiling, to be the “net income,” viz., gross income less operating expenses, property taxes, management fee, depreciation expenses and amortized costs of capital improvements, divided by assessed market value. § 45-1644(a)(3)(B).

The Act provides for the Rent Administrator to audit, if requested by a tenant, the registration statement of any landlord who increases his rent to achieve the rate of return of 8% under the formula and to award the amounts collected as a result of this increase to the landlord, in whole or in part, pending the audit. § 45-1644(h)(3).

The Act declares that the rent ceiling for a rental unit may be increased or decreased to allow for an increase or decrease in related services, e. g., repairs, maintenance, utili ties, answering and elevator services, trash removal and janitorial services; the cost of substantial rehabilitation; and, adjustment for vacant accommodations. § 45-1644(b).

The Act provides for a landlord to file a “hardship petition” if (1) he “can show a negative cash flow after consideration of debt service,” even after he has raised his rent to the point of generating a rate of return of 8%, or (2) even if he is not suffering a negative cash flow, his rate of return still does not reach 8% after raising the rent in accordance with all steps contained in the formula described above. § 45-1649(a) and (b); see also § 45-1644(c).

The Act further provides for the Rent Administrator to adjust rents by means of a decision of record upon petition by either landlord or tenant after formal hearing, if requested. An “aggrieved party” has the right of appeal to the Commission, and judicial review is provided for any person “aggrieved by a decision of the Commission or by any failure on the part of the Commission to act.” § 45-1652(a) and (g); § 45-1673(a).

In essence, appellants first contend that, absent wartime conditions, imposition by the Council of controls on rent charged by landlords is constitutionally unwarranted; in their view, the Act was not a valid exercise of police power by the Council since no such emergency existed. To the contrary, appellants view the Act as really an effort to apportion the tenant’s increased living expenses with his landlord and point to City of Miami Beach v. Fleetwood Hotel, Inc., 261 So.2d 801, 804 (Fla. Sup.Ct.1972), in which the Florida court struck down as invalid a legislative effort appellants deem similar to the Act at issue.² But the Council’s Findings and Intent with respect to the Act state that “extension of a rent control program in the District of Columbia is a necessity, in view of the continuing housing crisis. Documentation presented to the City Council . . .indicated ... a vacancy rate in the District ... so low . . . as to constitute an emergency according to the U.S. Department of Housing and Urban Development. . . . [T]his critical housing shortage, particularly for lower income families, is continuing to accelerate . . [T]he projected long range housing crisis and the need to stabilize rents over an extended period of time require enactment of a rent stabilization program . .” Council of the District of Columbia Report, May 19, 1975, pp. 28-29. Accordingly, we are unable to say that the Act was an unwarranted, and hence invalid, exercise of police power or was an attempt to “subsidize” tenants at the expense of landlords; rather the Act is a legislative response to a shortage of housing for District residents which the legislative body has found to exist.

Appellants next turn to this court’s decision in AOBA I and argue that it established the proposition that a landlord has the constitutional right to pass on to his tenant the increased costs of his utilities, maintenance, etc., and that since the Act here in question contains no such “pass-through rights” for landlords it violates the Constitution. We read AOBA I, however, to have focused on whether the Council’s rent control enactment in that case, pursuant to a specific Act of Congress then extant, complied with the congressional intent expressed that the landlord must be enabled to pass on his increased operating costs to the tenant in any rent control program the Council might enact. In sum, this court in AOBA I was called upon to determine if the Council had met the express mandate of Congress; we concluded that it did not. Thus, the basis for this court’s decision in AOBA I was the construction of legislation enacted by Congress and the Council, not the interpretation of the Constitution.³

Appellants next contend (Reply Brief at 20) that even assuming arguendo that the justification enunciated by the Council for imposing rent control had validity and that the Constitution does not require a pass-through mechanism in the Act, the 8% rate of return for the landlord provided by the Act is so low as to be “confiscatory.” They argue that this percentage is not a reasonable return given (a) the present risk of investing in rental housing, and (b) the prevailing rates of mortgage interest on buildings similar to apartment houses, viz., 10% to 12%. Whether regulation by the government of a rate of return from private property is so unreasonable as to constitute a taking without just compensation, viz., a confiscatory rate, is not easily determined. In making such determination the judiciary must strike a balance: it cannot substitute its own judgment of what is wise or unwise for that of the legislature, see Bowles v. Willingham, 321 U.S. 503, 515, 64 S.Ct. 641, 88 L.Ed. 892 (1944), but at the same time, it must exercise its responsibility to protect the individual from any legislation that is so unreasonable as to constitute a taking of his property.⁴ It has been said in this jurisdiction that the provisions of rent control must be “so plainly and palpably unreasonable as to make their enforcement equivalent to confiscation of property.” Kennedy Brothers, Inc. v. Sinclair, 52 App.D.C. 398, 403-04, 287 F. 972, 977-78 (1923) (court comments that rent control fixing a rate of income which falls appreciably below “legal rate” of interest would be confiscatory).

Certain factors persuade us that the rate-of-return proviso in the Council’s rent control legislation is not so “plainly and palpably unreasonable” to the landlord as to be confiscatory. First, the Act directs the Commission, a body composed of landlord, tenant and public members, to review continuously trends of operating costs in the District and recommend to the Council at fixed intervals any adjustment necessary or desirable in the formula for fixing the ceiling on rent charged. This constant scrutiny of trends of operating costs by a reasonably balanced and knowledgeable body and the mandate to this body to recommend at intervals change in the rent control formula when necessary or desirable are reasons for the court not to intrude its judgment in evaluating the rate of return unless such rate becomes, unequivocally, unreasonable.⁵

Second, the Act provides for “hardship” petitions by landlords in circumstances either (a) where their rate of return reaches 8% but their cash flow is negative, or (b) where despite rent increases the landlord still has not generated an 8% return rate. This protection accorded landlords does militate against a conclusion by this court that the rate of return, on its face, is unequivocally unreasonable in today’s market.⁶

Third, the formula for fixing rent to be charged does in fact take into account the increases in a landlord’s costs of utilities and maintenance so as not to require him to bear this ever-increasing financial burden alone. In short, the formula for fixing a rent ceiling, as a practical matter, does provide a sort of “pass-through” of costs from the landlord to the tenant, although conced-edly not to the degree Congress directed in its 1973 legislation. However, as pointed out above, that Act has expired and the Council has imposed the present rent control legislation under the authority vested in it by Congress under the District of Columbia Self-Government and Governmental Reorganization Act. P.L. 93-198, 87 Stat. 774 (Dec. 24, 1973).

Fourth, the Rental Accommodations Act is temporary since it is by its own terms applicable for a two-year period and designed to meet an emergency found by the Council to exist due to the shortage of housing, particularly for low income families.

Nor are we persuaded that the Act’s limitation on the rate of return for the landlord of his rental property produces such an unreasonable return, viz., eight percent, as to require this court to intervene and declare the Act invalid. See Block v. Hirsh, 256 U.S. 135,158, 41 S.Ct. 458, 65 L.Ed. 865 (1921). It is true, as appellants assert, that risk inheres in the rental of property and that investment of capital in other ventures will provide a return in excess of 8%; however, this has not been recognized as requiring the conclusion that rent control is invalid on the ground that the rate is unreasonable. Troy Hills Village v. Township Council, 68 N.J. 604, 628-30, 350 A.2d 34, 47 (N.J.Sup.Ct.1975). In assessing the reasonableness of an 8% return on investment,⁷ we note that the rate of return, while not equalling the interest rates owners must pay on their purchase money loans, nevertheless exceeds the rate of interest payable on savings accounts and certificates of deposit as well as judgments obtained in court.

Appellants’ final argument is that since any adjustment in the nature of an increase in rent requires either an audit or a formal hearing by the Administrator and since there are some 45,000 rental buildings in the city, the Act has necessarily created rent-control machinery “inherently incapable of functioning.” (Reply Brief at 25-6.) Thus, as appellants see it, the Act’s provisions for rent increases landlords may charge are not workable and hence the ceiling on rent has in effect become confiscatory. This court in AOBA I pointed out the near-chaotic condition of the rent control administrative machinery under the former Act. The Council appeared to recognize these difficulties in the administration of rent control; thus, when enacting the present Act, it expressed concern with the need to improve the administration of rent control. The legislative history of the Act before us now reflects serious efforts by the District to overcome the administrative deficiencies recognized by all and pointed out by this court in AOBA I. Specifically, both the Council and the Mayor have provided budgetary increases for the administration of the instant Act; this affirmative action contrasts with the absence of resources to administer the 1973 Rent Control Act, which this court in AOBA I struck down as incompatible with the Congressional mandate directing “pass-through” in any rent control enacted.⁸ We are not prepared to say on this record that the provision by the Act for upward adjustment of rent by landlords is inherently unworkable so as to render the Act confiscatory.⁹

The dissent relies on Karrick v. Cantrill, 51 App.D.C. 176, 277 F. 578 (1922). We must disagree with our colleague’s statement that the decision in that case “necessitates our concluding that the Rental Accommodations Act is unconstitutional.” The decision in that case did not hold the rental act there in question to be unconstitutional; it held only that the rental income fixed by the Commission for one particular landlord of from 2.63% to 3.5% is so unreasonable as to amount to a taking of property without due process. The rental act under consideration there had been declared constitutional by the Supreme Court in Block v. Hirsh, supra. The same day the Circuit decided Karrick v. Cantrill, it said in a companion case: “The appeal is here to contest the constitutionality of the rent law, but this is no longer an open question.” Karrick v. Colman, 51 App.D.C. 183, 184, 277 F. 585, 586 (1922). No doubt it is for this reason that in the previous litigation in this court involving the District of Columbia Rent Control Act of 1973 its constitutionality was not attacked.

Affirmed.

Footnotes

1

. D.C.Code 1977 Supp., § 45-1631 et seq.

2

. Specifically, appellants argue (Reply Brief at 12-13):

[A] property-owner who increases rents by no more than the amount needed to cover the increased operating costs is not engaged in “rent profiteering” .... [I]f he is prevented by a rent control law from obtaining such rent increases ... he is being forced to subsidize the residents of his building by absorbing the increased cost [of living] . . . . [S]uch a law is “not in itself a justification” for rent controls. [Emphasis added.]

3

.Appellants repeatedly refer to a single sentence in the majority opinion, viz., “a workable pass-through mechanism is a necessary concomitant of a rent control program,” AOBA I, supra at 330, as constituting a holding that a pass-through mechanism is constitutionally required of any rent control legislation. When this oft-quoted language is viewed in context, we think it declares that “pass-through” was there necessary because of the statutory requirements imposed upon the Council by Congress. Moreover, given the comprehensive and carefully constructed opinion, we would expect a pronouncement of Constitutional law to be enunciated in more detail than a single sentence, particularly when the New Jersey Supreme Court has recently reached just the opposite result, viz., “The constitution [does not] . . . oblige the municipality to permit landlords to uniformly pass their costs through to their tenants.” Troy Hills Village v. Township Council, 68 N.J. 604, 632, 350 A.2d 34, 48 (N.J. Sup.Ct.1975).

4

. Mr. Justice Holmes warned in Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415, 43 S.Ct. 158, 160, 67 L.Ed. 322 (1922), that: “The protection of private property in the Fifth Amendment presupposes that it is wanted for public use, but provides that it shall not be taken for such use without compensation. . . The general rule ... is that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.”

5

. We recognize that the Council in the exercise of its lawmaking prerogative may choose to reject the Commission’s recommendations; nevertheless, the Act has provided a mechanism for ongoing review by a knowledgeable body and submission of its findings and recommendations to the Council.

6

. Of course an 8% rate of return to the landlord in a changed economy might become so unreasonable as to require a court to intervene on constitutional grounds.

7

. Appellants argue that the formula for determining rate of return employs the assessed value of the rental property rather than its fair market value, thus creating a significant difference. See City of Miami Beach v. Forte Towers, Inc., 305 So.2d 764 (Fla.Sup.Ct.1974) (assessed value only 75% of fair market value so skews the rate of return as to render rent control formula invalid). In the instant case, evidence showed the assessed values of realty sold to comprise, on the average, 88% of their sales price. Considering impact of inflation on real estate values generally within the city, the assessed value seems reasonably approximate to its fair market value. See Troy Hills Village v. Township Council, supra, 350 A.2d at 44.

8

. It must be remembered that in AOBA I we were dealing with the assertion that the Council had ignored an express Congressional mandate for pass-through to the tenant of the landlord’s costs. The government’s contention, in response, was that such mandate was indeed met by the “hardship” provision contained in the Council’s legislation. This court concluded that the administrative tangle, clearly established on the record, prevented that particular “hardship” proviso from meeting, as a practical matter, the Congressional requirement that pass-through of costs be accorded landlords.

9

. The trial court in the instant case (Memorandum Opinion and Order, p. 19), held that “[a]bsent some empirical evidence regarding actual administration of the legislation, it is without sufficient basis to hold that the Act is unreasonable or unworkable.” No such “empirical evidence” is contained in the supplemental material filed by appellants subsequent to argument.