Opinion
Opinion on pages 996-1031 omitted.
[201 Cal.Rptr. 729]Burch Fitzpatrick, Miller, Starr & Regalia, Oakland, for plaintiff, respondent & appellant.
Robert J. Logan, City Atty., Robert R. Cimino, Senior Deputy City Atty., Anthony C. Bennetti, Deputy City Atty., San Jose, for defendants, appellants, respondents.
Myron Moskovitz, James R. Grow, Asst. Atty., Berkeley, for amicus curiae City of Berkeley.
CALDECOTT, Presiding Justice.
On August 7, 1979, the City Council of San Jose adopted Ordinance No. 19696 entitled "The San Jose Rental Dispute Mediation and Arbitration Ordinance" (hereafter Rent Control Ordinance or Ordinance) which imposed certain limitations upon the rents to be paid by the tenants in the City of San Jose. A few weeks later, on September 28, 1979, plaintiffs Richard Pennell, an individual homeowner, and the Tri-County Apartment House Owners Association representing the landlords in the area affected by the Ordinance (hereafter Pennell or respondents) brought an action for declaratory and injunctive relief against defendants City of San Jose and the City Council of the City of San Jose (hereafter City or appellants). The complaint launched a two-pronged constitutional attack against the Ordinance. First, it alleged that sections 5703.28, subdivision (c)(7) and 5703.29, which allowed the consideration of the tenant's financial and economic situation in determining a just and fair rent were unconstitutional because they deprived the landlords of their property without just compensation and thereby violated their due process right under the Fifth and Fourteenth Amendments to the United States Constitution. The complaint further alleged that sections 5704.1 and 5704.2 were likewise unconstitutional because they permitted the imposition of special taxes upon each rental unit without the requisite two-third votes of the qualified electors in circumvention of section 4 of article XIIIA of the California Constitution.
Unless otherwise indicated, all regulatory references will be to the provisions of the Rent Control Ordinance.
Unless otherwise indicated, all further references are to the Rent Control Ordinance.
The City challenged the complaint by demurrer filed on November 28, 1979. Subsequent to the ruling on the demurrer Pennell moved for judgment on the pleadings on February 11, 1980. After hearing the arguments of the parties the trial court ruled that sections 5703.28, subdivision (c)(7) and 5703.29 were unconstitutional because they obligated private individuals (landlords) to assume public burdens without just compensation thereby violating their rights to substantive due process. With respect to the second part of the respondents' contention the trial court declared [201 Cal.Rptr. 730] that the annual $3.75 fee levied upon each rental unit pursuant to sections 5704.1 and 5704.2 constituted a regulatory fee rather than a special tax and that the imposition of such fees was valid without the approval of the two-third majority of the voters.
From the ruling of the trial court both parties appealed. The City filed a notice of appeal from that portion of the judgment which declared the consideration of the tenant hardship factor unconstitutional on its face. Pennell cross-appealed from the adverse determination that the imposition of rental unit fee was not prohibitive of section 4 of article XIIIA of the California Constitution.
On appeal, the parties basically reiterate their legal arguments made in the trial court. Appellants contend that the trial court erred in holding that the consideration of the tenant's economic hardship (§§ 5703.28, subd. (c)(7) and 5703.29) rendered the Ordinance facially unconstitutional and confiscatory. Respondents, in turn, complain that the trial court committed error in concluding that rental unit charges imposed under sections 5704.1 and 5704.2 were, in essence, regulatory fees not special taxes and thus not subject to the limitation set out in section 4 of article XIIIA of the California Constitution. We analyze and discuss the issues raised in the appeal and cross-appeal in separate sections.
The Appeal
Constitutionality of Rent Control Provisions of the Ordinance.
Before addressing appellants' contention on the merits, preliminarily we set out the legal principles governing the constitutionality of a rent control ordinance.
In Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 130 Cal.Rptr. 465, 55 P.2d 1001, our Supreme Court held that rent control is a proper exercise of the local government's police power if it is reasonably calculated to eliminate excessive rents and at the same time provide the landlords with a just and reasonable return on their property. However, if it is apparent from the face of the provisions of the ordinance that their effect will necessarily be to lower rents more than could reasonably be considered to be required for the measure's stated purpose, they are unconstitutionally confiscatory (Id., at p. 165, 130 Cal.Rptr. 465, 55 P.2d 1001; see also Cotati Alliance For Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 285, 195 Cal.Rptr. 825; City of Miami Beach v. Forte Towers, Inc. (Fla.1974) 305 So.2d 764, 768). While the determination of whether a rent control regulation is reasonable or confiscatory depends on the individual circumstances of each case, it has been said that where the methods used in the regulation are wholly arbitrary or based upon invalid criteria and where the application of said criteria would lead to a forced rent subsidy on the part of the landlord, the regulation is violative of due process, unconstitutional on its face and must be stricken (FPC v. Texaco Inc. (1974) 417 U.S. 380, 391-392, 94 S.Ct. 2315, 2323-2324, 41 L.Ed.2d 141; Prop. Owners Ass'n, etc. v. Tp. of No. Bergen (1977) 74 N.J. 327, 378 A.2d 25, 29-30; Hutton Park Gardens v. Town Council (1975) 68 N.J. 543, 350 A.2d 1, 13-15).
The Ordinance at bench exhibits a constitutional infirmity upon its face. While the Ordinance allows both automatic and cost-related increases (§§ 5703.2, 5703.4, 5703.5, 5703.28, subds. (a) and (b)), section 5703.28, subdivision (c)(6) makes the additional rent increase dependent on the tenant's financial hardship. (§ 5703.29. ) [201 Cal.Rptr. 731] Needless to say this criterion is totally arbitrary and unjustifiable inasmuch as it runs counter to a legitimate purpose of the rent control regulation (i.e., an assurance of a fair and reasonable return on the investment of the owner). Furthermore, it amounts to a forced subsidy on the part of the landlord in violation of the due process clauses of the United States and California Constitutions which prohibit taking of property without just compensation. Moreover, the tenant's financial situation as a factor in arriving at the proper amount of rent also violates the equal protection provisions of the Constitution, inasmuch as it comprises an invalid classification based upon wealth or lack thereof (Dept. of Mental Hygiene v. Kirchner (1964) 60 Cal.2d 716, 721, 36 Cal.Rptr. 488, 388 P.2d 720).
Section 5703.29 provides that "In the case of a rent increase or any portion thereof which exceeds the standards set in Section 5703.28(a) or (b), then with respect to such excess and whether or not to allow same to be part of the increase allowed under this Chapter, the Hearing Officer shall consider the economic and financial hardship imposed on the present tenant or tenants of the unit or units to which such increases apply. If, on balance, the Hearing Officer determines that the proposed increase constitutes an unreasonably severe financial or economic hardship on a particular tenant, he may order that the excess of the increase which is subject to consideration under subparagraph (c) of Section 5703.28, or any portion thereof, be disallowed. Any tenant whose household income and monthly housing expense meets the criteria established by the Housing Assistance Payments Program under Section 8, existing housing provisions of the Housing and Community Development Act of 1974 (P.L. 93-383) and the regulations pertaining thereto, shall be deemed to be suffering under financial and economic hardship which must be weighed in the Hearing Officer's determination. The burden of proof in establishing any other economic hardship shall be on the tenant." (Emphasis added.)
In reaching the above conclusion, we are greatly aided by Prop. Owners Ass'n, etc. v. Tp. of No. Bergen, supra, 378 A.2d 25, a case right on point. In Bergen, the amended ordinance allowed rental increases to the maximum of 15 percent per year for all causes, but banned any rental increase for senior citizens (i.e., persons aged 65 years or older whose income did not exceed $5,000 annually). In holding that the amended ordinance was confiscatory on its face and violative of both the due process and equal protection clauses of the Constitution, the reviewing court cited with approval the trial judge who in his reasoning set out as follows: "Now, more importantly, however, the Ordinance is unconstitutional as a deprivation of property without due process of law. By this Ordinance the Municipality seeks to establish a special subsidy for those who the fathers, the Legislative fathers of the Municipality think should get a break in connection with rent increases. This is a fine reason and something to be applauded. However, this can be constitutionally done only on the basis of an overall use of public funds which then is distributed among all the taxpayers by virtue of taxation. And so we have that in [m]any types of legislation which counsel has cited where the burden rests upon the entire community, in which event special treatment of people in need is fully justified and constitutional. We have it from welfare up. We have senior citizen housing. We have other types of legislation which are properly protective of the rights where need appears [f]or special categories of persons. However, in every one of these instances the burden of supporting these people partially, of granting them a subsidy, is a public burden and should be borne by the entire community. Here, however, the Municipality undertakes to attempt to shift its burden, that is the burden of all the citizens and taxpayers of the Municipality, to a particular class of individuals, namely, persons who own property, and demand that those persons take care of the needs of the community as a whole. That to my mind constitutes a clear-cut taking of property without due process. Selecting a particular class of people in the community to subsidize another class of people in the community is hardly constitutional in its approach.
"Now, in this area of discrimination I didn't mention during our colloquy one facet, namely, not only discrimination against the landlord, but I can see a potential of discrimination against other tenants in a building under the pattern of the Rent Control Ordinance of the Municipality. And it arises in this way: If a landlord is burdened with a reduction in his income by virtue of the failure and inability to increase the rents of senior tenants in his building because of this amendment and he is thereby compelled to apply for an overall hardship increase within the additional ten percent permitted in the legislation, and such increase is granted, then, in effect, the other tenants in the building who are [201 Cal.Rptr. 732] not sixty-five and who have an income over $5,000 will ultimately be paying more rent because of the lack of contribution by these other tenants towards the overall income of the landlord. This is another form of discrimination which is a practical result of this kind of legislation by the Municipality." (Id., 378 A.2d at pp. 27-28.)
The above stated rationale applies with equal force to the Ordinance at bench. As a consequence, the ruling of the trial court that section 5703.28, subdivision (c)(7) and section 5703.29 of the Ordinance are unconstitutional must be held correct and sustained on appeal.
The Cross-Appeal
Constitutionality of Rental Unit Fee
California Constitution article XIIIA section 4 (which was enacted on June 6, 1978, as a part of Proposition 13) provides that "Cities, Counties and special districts, by a two-thirds vote of the qualified electors of such district, may impose special taxes on such district, except ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County or special district." (Emphasis added.)
In their cross-appeal respondents argue that the rental unit fee imposed under sections 5704.1 and 5704.2 constitutes a special tax within the meaning of the cited provisions of the California Constitution and that as a consequence the imposition of such fees is constitutionally invalid in the absence of the requisite two-third majority votes.
Section 5704.1 provides that "The costs of providing and administering the San Jose Rental Dispute Mediation and Arbitration Hearing Process shall be reimbursed to the General Fund by imposition of a fee chargeable against each rental unit in the City of San Jose subject to the provisions of this Chapter." (Emphasis added.)
Respondents' position is unacceptable for the reason that the rental unit fee exacted on the property owners pursuant to the Ordinance constitutes a regulatory fee rather than a special tax and therefore does not fall within the quoted section of the California Constitution.
In defining "special tax" within the meaning of article XIIIA of the California Constitution, Government Code section 50076 explicitly provides that "As used in this article, "special tax" shall not include any fee which does not exceed the reasonable cost of providing the service or regulatory activity for which the fee is charged and which is not levied for general revenue purposes."
The rental unit charge imposed upon the landlords under the Ordinance clearly qualifies as a regulatory fee within the aforestated definition of the statute. As pointed out earlier, section 5704.1 provides that the charge is to be paid on each rental unit; that it is to defray the costs of providing and administering the hearing process prescribed in the Ordinance; and that such costs shall be reimbursed to the general fund. Section 5704.2 likewise emphasizes that the rental unit fees are necessary to recover the cost of the hearing process mandated by the Ordinance. In short, the cited provisions of the Ordinance demonstrate that the levy of rental unit fees is for the purpose to recover the cost of the hearing process and not to pay general revenue to the local government. Under the prevailing law, this kind of payment is distinguishable from a tax which is levied to provide general revenue for the government and has no relation to the value of services furnished by the government (County of Fresno v. Malmstrom (1979) 94 Cal.App.3d 974, 983-984, 156 Cal.Rptr. 777). Here, the tax amounts clearly to a regulatory fee inasmuch as it does not [201 Cal.Rptr. 733] " 'exceed the sum reasonably necessary to cover the costs of the regulatory purpose sought' " or "the reasonable expense of the regulatory activities" (Mills v. County of Trinity (1980) 108 Cal.App.3d 656, 660-661, 166 Cal.Rptr. 674; see also County of Plumas v. Wheeler (1906) 149 Cal. 758, 763, 87 P. 909; United Business Com. v. City of San Diego (1979) 91 Cal.App.3d 156, 165, 154 Cal.Rptr. 263).
Respondents' claim that the rental unit charges constitute special taxes because the Rent Control Ordinance confer no benefit upon the owners of the property, may be disposed of for two reasons. First, Government Code section 50076 exempts all regulatory fees from the definition of special taxes whether the regulation benefits the property or not. Second, it is well settled that a municipality under the police power may impose a fee for the purpose of regulation where, as in the instant case, the fee constitutes an amount necessary to carry out the purpose and provisions of the regulation (United Business Com. v. City of San Diego, supra, 91 Cal.App.3d at p. 165, 154 Cal.Rptr. 263; accord, Mills v. County of Trinity, supra, 108 Cal.App.3d at pp. 659-660, 166 Cal.Rptr. 674; Redwood Theatres v. City of Modesto (1948) 86 Cal.App.2d 907, 919, 196 P.2d 119; 9 McQuillin, Municipal Corporations (3d ed. 1978) § 26.15, p. 29).
The judgment is affirmed.
PANELLI, J., concurs.
POCHE, Associate Justice, dissenting.
I respectfully dissent from the determination that section 5703.28, subdivision (c)(7) and section 5703.29 1 of the San Jose Rental Dispute Mediation and Arbitration Ordinance (Rent Control Ordinance) are each unconstitutional. In all other respects I concur in the majority opinion.
In order to pass any judgments with respect to the ordinance it is first necessary to understand its operation in overview:
As a matter of right the landlord of a rental unit regulated by the ordinance is entitled to increase its rent by eight percent (8%) in any twelve-month period.
If the landlord decides to increase the rent more than eight percent he has two options: (1) to invoke the hearing process by filing a petition with the San Jose Advisory Commission; or (2) to simply give the tenant written notice of the rent increase. In the latter case the landlord's full proposed increase becomes operative unless the tenant files a timely petition to have the reasonableness of the increase determined. Irrespective of the method chosen the tenant must pay the prior rental amount plus no less than the eight percent increase until a final determination is made by the hearing officer or arbitrator. The tenant must also pay whatever amount over eight percent is determined to be reasonable by the hearing officer during the pendency of any appeal to the arbitrator.
Initially, a mediation hearing officer conducts a preliminary evidentiary hearing and makes a written determination concerning whether the increase is reasonable under the standards set forth in section 5703.28. If the officer determines all or any portion of the excess over eight percent is not reasonable, a 30-day mediation process occurs in which the officer meets with both parties to obtain their respective best offers and a specific memorandum of agreement concerning any amount not determined to be reasonable. Absent agreement, the hearing officer grants the increase he determines complies with the standards, and each party has seven days to appeal the determination to an arbitrator. The arbitrator conducts an initial hearing, reviews the prior record and other matters provided by each party and makes a written determination with supporting findings of fact; this decision must also be based on the standards of section 5703.28, and is final for judicial review purposes. Any amount determined by the mediation hearing officer as reasonable--even in excess of eight percent--must be paid by the [201 Cal.Rptr. 734] tenant pending resolution of the dispute before the arbitrator. (§ 5703.21.)
The hearing officer and arbitrator are required to make the following determinations and allowances under section 5703.28, subdivision (a): as a matter of right the landlord is entitled to the entire rental increase, if it consists of five percent of the monthly rent plus: (1) costs of capital improvements averaged on a per unit basis and amortized over not less than 60 months; and (2) costs of rehabilitation averaged on a per unit basis amortized over not less than 36 months; and (3) increased costs of maintenance or operation, where the cost figures are established and bear a reasonable relationship to the purposes incurred and the property's value. Under section 5703.28, subdivision (b) the landlord is also entitled, as a matter of right (in addition to the eight percent or the 5% plus pass-through costs) to the prorated increased cost of debt service with certain limitations.
In addition to the rental increase prescribed as a matter of right for the landlord under section 5703.28, subdivisions (a) and (b), the hearing officer and arbitrator are required to "determine what is reasonable under the circumstances" taking into account information concerning each of the following seven factors: (1) increased debt service costs due to sale or refinancing the rental units or building within one year, including the landlord's rate of investment return, frequency of resale or refinance, and reflection of rental increases on appreciation of asset value; (2) prior rental history, including amount and frequency of past increases, response to Proposition 13 savings, comparable occupancy rates; (3) physical condition, quantity and quality of maintenance and repairs; (4) increase or decrease in housing services; (5) "other financial information which the landlord is willing to provide"; (6) existing market value of rents for comparable units; and (7) "hardship to a tenant, as provided in Section 5703.29." (§ 5703.28, subd. (c).)
Thus the hearing officer or arbitrator is permitted to "consider the economic and financial hardship imposed on the present tenant" only after the landlord has been awarded an increase of five percent plus capital improvements as provided in section 5073.28, subdivisions (a) and (b). Such tenant hardship is a relevant consideration only with respect to whether and to what extent the landlord will be allowed an increase in excess of the five percent plus capital improvements as previously determined under section 5073.28, subdivisions (a) and (b).
All that is required of the hearing officer or arbitrator in connection with the use of evidence concerning tenant hardship is that it be considered, weighed and balanced.
It is clear from the face of the ordinance that the section 5703.28 and section 5703.29 standards and provisions only permit the hearing officer and arbitrator to consider tenant hardship as one of many relevant factors in making a final determination on what excess, above the eight percent and/or amount required under section 5703.28, subdivisions (a) and (b), implements the two-fold purpose of the ordinance: to allow a fair and reasonable return to the landlord and to protect the tenant from arbitrary, capricious or unreasonable increases. No provision of the ordinance forecloses consideration of all the relevant factors in section 5703.28, subdivision (c), nor does proof of tenant hardship require a disallowance of all or any portion of the excess. Thus the majority opinion is simply inaccurate in its determination that a rental increase is made "dependent" on the tenant's financial hardship. (Majority opn., ante, at p. 731.)
The law is equally clear and well settled. A rent control ordinance is a proper exercise of a local government's police power if it is reasonably calculated to eliminate excessive rents and at the same time provides the landlord with a just and reasonable return on their property. (Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 165, 130 Cal.Rptr. 465, 550 P.2d 1001; Cotati Alliance for Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 285, 195 Cal.Rptr. 825.) While the determination of [201 Cal.Rptr. 735] what constitutes a fair and reasonable return is a complex question involving both factual and legal aspects, the court must take into account not only the interest of investors but also the interests of consumers and the general public. (See Cotati Alliance for Better Housing v. City of Cotati, supra, at p. 294, 195 Cal.Rptr. 825.)
Whether a rent control regulation is reasonable or confiscatory depends not on the formula used but on the result reached. (Carson Mobilehome Park Owners' Assn. v. City of Carson (1983) 35 Cal.3d 184, 191, 197 Cal.Rptr. 284, 672 P.2d 1297.) There are only two situations in which such a regulation may be held facially unconstitutional. The first involves the situation where the regulation is so restrictive as to preclude any possibility of a fair and reasonable return. (Cotati Alliance for Better Housing v. City of Cotati, supra, 148 Cal.App.3d at p. 291, 195 Cal.Rptr. 825.) The second involves an ordinance whose terms will not permit those who administer it to avoid confiscatory results in its application to the complaining party. (Carson Mobilehome Park Owners' Assn. v. City of Carson, supra, 35 Cal.3d at pp. 191-192, 197 Cal.Rptr. 284, 672 P.2d 1297; Birkenfeld v. City of Berkeley, supra, 17 Cal.3d at p. 165, 130 Cal.Rptr. 465, 55 P.2d 1001; Cotati Alliance for Better Housing v. City of Cotati, supra, 148 Cal.App.3d at p. 294, and fn. 14, 195 Cal.Rptr. 825.) Neither situation exists here nor does the majority opinion indicate that it does.
Instead, tenant hardship is simply one of many factors to be considered in assuring a fair and reasonable return for landlords. Nothing in the Rent Control Ordinance precludes the hearing officer or arbitrator from granting an increase necessary to assure a fair and reasonable return in spite of resulting tenant hardship. Thus the ordinance does not on its face deny due process.
This court also finds that the same provisions--on their face--violate equal protection. The best answer is contained in the recent case of Cotati Alliance for Better Housing v. City of Cotati, supra, 148 Cal.App.3d 280, 195 Cal.Rptr. 825: "... Equal protection is not denied simply because an ordinance treats one class of persons differently from another. Where there is no suspect classification, and purely economic interests are involved, a municipality may impose any distinction which bears some 'rational relationship' to a legitimate public purpose. [Citation.] Courts consistently defer to legislative determinations as to the desirability of such distinctions. [Citation.] The ordinance will be upheld so long as the issue is ' "at least debatable." ' [Citation.] [p] It is 'at least debatable' in the present case that the return on investment standard bears a rational relationship to a legitimate public purpose. The investment-based standard, unlike a value-based standard, ensures that inflationary factors will not be built into a rent control ordinance's rent ceiling adjustment mechanism, and thereby ensures the integrity of the entire rent control scheme. This court must defer to the local governmental determination as to the desirability of any consequential disparate treatment of landlords." (Id., at pp. 291-292, 195 Cal.Rptr. 825.)
Because we do not sit as a legislature or as a critic of the wisdom of legislative language I would affirm the judgment except that portion which finds section 5703.28, subdivision (c)(7) and section 5703.29 of the ordinance unconstitutional. Strict construction of the Constitution requires no less.
Section 5704.2, in turn, sets out that "There is hereby imposed on each rental unit, subject to the provisions of this Chapter, a fee of three dollars and seventy-five cents ($3.75) per year which shall be paid annually at the time at which the landlord's business license fee under Article VI or Article XII of this Code is due. Said fee is includable as a cost of maintenance and operation under the definition contained in Section 5702.4. The City Manager and the Commission shall report to the Council in time for budget hearings each year their recommendation as to the amount of such fee necessary to recover the costs of the Hearing Process." (Emphasis added.)