Zussman v. Rent Control Board of Brookline

359 N.E.2d 29, 371 Mass. 632, 1976 Mass. LEXIS 1212

• Court: Massachusetts Supreme Judicial Court
• Decided: December 31, 1976
• Status: Published

Opinions

Reardon, J.

This case comes to us on certification from the Appeals Court of its opinion in Zussman v. Rent Control Bd. of Brookline, 4 Mass. App. Ct. 135 (1976).

The facts as stated in that opinion are essentially as follows. The plaintiff, as trustee, owns an apartment complex in Brookline purchased by him in 1972 for $700,000. The purchase was financed with a $700,000 mortgage with an interest rate of approximately 9%. The plaintiff bought the buildings intending to convert them to condominiums. Twenty-six units of the premises are subject to rent control, the provisions of St. 1970, c. 842 (the rent control enabling act), having been accepted by Brookline in 1970.

In May, 1973, the plaintiff filed a petition with the rent control board of Brookline (board) seeking increases in the maximum rents applicable to the rent controlled units in the complex. This petition dealt with twenty-six units, the remaining five units having been converted to condominiums. After a public hearing the board issued an order allowing the plaintiff a 6.8% rate of return on the total value of the units subject to rent control.² A judge of the Municipal Court of Brookline sitting in judicial review affirmed the board’s decision, whereupon the plaintiff appealed to the Superior Court. A Superior Court judge found that the rate of return allowed by the board was confiscatory and that a reasonable rate would be 10%. He remanded the case to the board to recompute the allowable rents based on a 10% rate of return on the total value of the twenty-six units as previously computed by the board. The board and the tenants, who had been made co-defendants, appealed to the Appeals Court.

The Appeals Court remanded the case to the Superior Court for further proceedings conforming to the scope of judicial review delineated in Sherman v. Rent Control Bd. of Brookline, 367 Mass. 1 (1975), on the basis that the Superior Court judge had substituted his judgment for that of the board in determining the fair rate of return, thus violating the standard laid down in the Sherman case, supra. The Appeals Court further opined that on remand the plaintiff had a constitutional right to judicial review of both fact and law with respect to his claim that the rate which the board had set resulted in a confiscation of his property, and the opinion contained an order that the Superior Court hold an evidentiary hearing on this question. Zussman v. Rent Control Bd. of Brookline, supra at 138-139.

Appearing again before the same judge in the Superior Court, the plaintiff waived the opportunity to present further evidence, and the parties stipulated that the judge should base his reconsideration on the record already before him. The Superior Court judge once more found that 10% was a reasonable rate of return and that the rate set by the board was confiscatory in that it had failed to consider financing costs in determining fair net operating income. The board again was ordered to recompute monthly rents for the affected apartments in the complex to produce a 10% rate of return on the value of those units retroactive to the date of the board’s decision.

The case was then returned to the Appeals Court on appeal by the board. The Appeals Court held that the Superior Court on remand had correctly followed the Sherman case standard of review, and also that the Superior Court judge was correct in holding a 6.8% rate of return to be confiscatory on the facts of this case. However, the judge also held that there was no evidence to support a finding of a constitutional entitlement to a 10% rate of return even though it was conceivable that that rate might be reasonable given adequate evidence to support it. The Appeals Court therefore for the second time remanded the case to the Superior Court to determine on the basis of evidence adduced before it “the minimum rate of return (somewhere in the range between 6.8% and 10%) which would reasonably have been expected by a hypothetical purchaser of the 26 rental units who would have been willing to purchase them on the date of the plaintiff’s petition to the board for a price equal to the value of those units as already determined by the board.” Zussman v. Rent Control Bd. of Brookline, supra at 143. Upon that determination by the Superior Court judge the case was to be returned to the board for the further determination “of a proper ‘fair net operating income’ at least equal to the minimum rate determined by the court,” with appropriate allocations in the increase of the maximum rents to the several units involved retroactive to the date of the board’s original decision. Id.

We refer to the language of Sherman v. Rent Control Bd. of Brookline, 367 Mass. 1, 10 (1975), where we reviewed the rent adjustment process and held that “the coincidence of an insistence on procedural protections in proceedings before the [rent control] board, and reliance on the board to exercise informed judgment and discretion in the award and admeasurement of rent adjustments, points to the conclusion that the [trial] court’s proper role is not to take evidence afresh and decide for itself what rent is to be fixed, but is rather to decide whether the board’s decision was supported by the facts before it and was legally justified.” We reaffirm that decision today and specifically hold that a landlord who asserts that confiscation of his property has resulted from a decision under St. 1970, c. 842, § 8 (a), is not entitled to a trial de novo. We do not agree with the language of the Appeals Court in Zussman v. Rent Control Bd. of Brookline, supra at 138.

The Appeals Court would extend to the field of rent control the doctrine of Ohio Valley Water Co. v. Ben Avon Borough, 253 U.S. 287 (1920). This we decline to do. The Ben Avon doctrine originated as a principle of public utility law, holding that if a utility claims that a rate decision will result in confiscation of property “the State must provide a fair opportunity for submitting that issue to a judicial tribunal for determination upon its own independent judgment as to both law and facts; otherwise the order is void because in conflict with the due process clause, Fourteenth Amendment.” Id. at 289.

We have adopted this principle of judicial review in cases involving public utilities, New England Tel. & Tel. Co. v. Department of Pub. Util., 327 Mass. 81 (1951); Lowell Gas Co. v. Department of Pub. Util., 324 Mass. 80 (1949), and in motor vehicle rate litigation, Opinion of the Justices, 251 Mass. 569, 610-611 (1925). Even in these cases, however, there is no constitutional requirement that the reviewing court itself hear evidence of an alleged confiscation. “ [T] here is no constitutional requirement, even in a case involving a claim of confiscation or of other violation of constitutional right, as to the precise method by which the court must review a commission’s findings of fact, provided the method is fully adequate to enable the reviewing court to make certain that it has before it all available pertinent evidence on the constitutional issue and provided that, as to that issue, the court is free to act upon its own independent judgment as to both law and fact. We think it would be constitutional to require that all evidence be first heard and passed upon by the commission and that the reviewing court hear the case on the transcript of that evidence, together with the findings of the commission. The determination of facts by a court upon a transcript of evidence not taken before it is a method of review by no means unknown to our law. But if this method should be adopted we think it would be necessary (1) to lodge in the reviewing court full authority to see to it that, by remanding to the commission or otherwise, the commission should hear and report all pertinent evidence, and (2) that this authority should extend to new evidence necessary to bring the proof as nearly as reasonably possible down to the date of final decision. The court should have control over the evidence applicable to constitutional issues substantially equivalent to that which it has over evidence heard by a master appointed by it. If these requirements are observed we think it would be the duty of the court, at least in the absence of some obstruction not to be anticipated, to conform to a statute providing that the reviewing court should not itself hear evidence” (emphasis supplied). Opinion of the Justices, 328 Mass. 679, 687 (1952).

We are not to be understood as downgrading or underestimating the importance of judicial review in the preservation of constitutional rights. There can be no doubt that judicial review should be available in this case. The effect of this opinion is to limit the power of the reviewing court in substituting its own evidentiary hearing for that already conducted by the rent control board. We hold that judicial review of facts in rent control cases does not extend to the taking of evidence de novo.³ In reaching this conclusion we have attached significant importance to the large number of rent control determinations made each year in this Commonwealth and to the significant difference between utilities rate setting and rent control. This latter point has been well stated recently by the Supreme Court of New Jersey in Troy Hills Village v. Township Council of Parsippany-Troy Hills, 68 N.J. 604, 622 (1975) : “The general procedure for determining just and reasonable return is familiar to the law of public utilities____To this extent utilities law may provide some guidance for our purposes. However, because of fundamental differences in the nature of the property involved and the purposes of the regulations, public utility precedents are of only limited value to the field of rent control. In particular, it should be noted that constitutional challenges to rent leveling ordinances are not rate-fixing cases. Courts should not be concerned with balancing competing interests and determining what is the ‘best’ rate level. Rather, their sole task is to determine the lowest constitutionally permissible rate.” It will be remembered that in Marshal House, Inc. v. Rent Control Bd. of Brookline, 358 Mass. 686, 702-703 (1971), we read the term “fair net operating income,” as it appears in St. 1970, cc. 842 and 843, “to require that rents be set so as to assure to landlords a reasonable return on their investment.” That remains the governing standard in this Commonwealth today.

In assessing whether the standard has been met, it was made clear in Sherman v. Rent Control Bd. of Brookline, 367 Mass. 1, 10 (1975), that a reviewing court was obliged “to decide whether the board’s decision was supported by the facts before it and was legally justified.” We reiterate, however, that in rent control cases the power of the reviewing court does not extend to the taking of evidence de novo.

On the assumption that this case were to be remanded, the judge would be limited to the record already made before the board. We do not find remand warranted, however, for we rule that despite the expanded hearings below the plaintiff has failed to prove confiscation. He has enjoyed three opportunities to present evidence in the trial courts, although he was not properly entitled to them in light of the Sherman case and today’s decision. Indeed, on the third occasion he declined to produce further evidence, and the parties stipulated that the judge should base his reconsideration on the record already before him. None of the parties has subsequently alleged the existence of new evidence which would affect the outcome of this litigation. Cf. Sherman v. Rent Control Bd. of Brookline, supra at 11 n.10; Opinion of the Justices, 328 Mass. 679, 687 (1952).

The board valued the property at $550,000,^{4 5}while there was evidence that the plaintiff had actually paid $700,000.® However, the trial judge found that the figure used by the board “falls within the range of what may be regarded as reasonable under the circumstances of this case,” and we are not inclined to dispute this finding. The plaintiff purchased the property with the intention of converting it to condominiums. This factor may have made him willing to pay a higher price for the building.⁶ In any case, the protection against confiscatory rates applies only to those who conduct their operations in a reasonably efficient manner. G & M Employment Serv. Inc. v. Commonwealth, 358 Mass. 430, 438 (1970). Aetna Cas. & Sur. Co. v. Commissioner of Ins., 358 Mass. 272, 281 (1970). Where the actual purchase price exceeds the fair market value of the units as apartments, the rent control board would be abdicating its duty if it granted an increase in rates to cover the excess cost.

The trial judge made his finding of confiscation “in light of the large interest factor with which [the plaintiff] is faced and which has in no degree been considered as a cost factor by the Board in determining fair net operating income in this case.” This approach was erroneous. Under c. 842 a rent control board is not bound to consider the landlord’s financing arrangements in setting rates, and there are sound practical reasons consistent with the intent of that chapter which support the board’s policy. The rationale is particularly evident on the facts of this case, where the landlord has chosen to finance 100% of the cost of the building.⁷

The plaintiff’s debt service charges clearly would be less if he had undertaken “conservative” financing, which the trial judge found to be 70% of fair market value. They would be even less had he chosen to give a more substantial down payment from his own funds. The plaintiff’s use of 100% financing, whatever the motivation, was fundamentally a business decision within his discretion. Given the express concern of St. 1970, c. 842, § 1, with the “substantial and increasing shortage of rental housing accommodations for families of low and moderate income and abnormally high rents,” a landlord’s decision to minimize or wholly eliminate his initial capital outlay cannot justify imposing higher rents on his tenants. Nor does it warrant permitting him to collect higher rents than other less heavily financed landlords.

The case is remanded to the Superior Court with instructions to enter a new judgment affirming the decision of the judge of the Municipal Court of Brookline which affirmed the board’s decision here challenged.

So ordered.

2 The board reduced this rate to 6.1% because it found a lack of ordinary maintenance and repair.

3 As we observed in the Sherman case at 11 n.10, “The limited judicial review does not exclude the court’s remanding a case to a board for further hearings and findings where the board record is inadequate.”

4 The board’s figure was 37%% higher than the assessed value of $400,000. Regulation § 1 (d) of the board allows the board to find a fair market value in excess of assessed value where “more appropriate to the circumstances of the case.”

5 $680,000 purchase price plus $20,000 broker’s fee.

6 The property had been previously purchased by Louis Glazer for $600,000 in July, 1971. The plaintiff bought the building from Glazer in September, 1972, at a total cost of $700,000. At the time of the plaintiff’s purchase, Glazer was being permitted a 6.8% rate of return on his $600,000 investment.

7 The $700,000 mortgage covered the purchase price plus broker’s fee.