Amicus Curiae Brief — Yee v. Escondido

Suprene Court, U.S

re FILED

No. 90-1947 | NOV29 iggy

| OFtice OF THE CicRK

IN THE

Supreme Court of the United States

October Term 1991

JOHN K. YEE, et al.,

Petitioners,

V.

THE CITY OF ESCONDIDO,

Respondent.

On Writ of Certiorari To The

Fourth Appellate District,

Division One, Court of Appeal

For the State of California

BRIEF OF THE WASHINGTON LEGAL

FOUNDATION AND ALLIED EDUCATIONAL

FOUNDATION AS AMICI CURIAE IN SUPPORT

OF PETITIONERS

Prof. Jonathan K. Van Patten Daniel J. Popeo

University of South Dakota Paul D. Kamenar

School of Law (Counsel of Record)

Vermillion, SD 57069 WASHINGTON LEGAL

(605) 677-5361 FOUNDATION

1705 N Street, N.W.

Washington, D.C. 20036

(202) 857-0240

November 29, 1991

CASILLAS PRESS, INC., 1717 K STREET, N.W., WASHINGTON, D.C. 20036

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ...............0e8- iii

INTEREST OF THE AMICI CURIAE ............. |

STATEMENT OF THE CASE ...............4.-. 2

SUMMARY OF ARGUMENT .................:. 5

DT tcivecneaveverseneeeeaereeeees 8

I. | The Escondido Ordinance Constitutes a

Permanent Physical Taking of Petitioners’

PN cso eeredeUsereereeKhieoenecces 8

A. The Escondido Ordinance Combines

With the State Mobilehome Residency

Law to Permanently Transfer an Interest

in Property from the Owner to a Person

Occupying the Property in Perpetuity.......... 9

B. The Circuit Courts of Appeal Have

Found a Taking Under the Same

Circumstances as Exist in This Case........ 13

C. The Rejection of the Hall and Barnegat

Analysis by the Court of Appeal in this

Case Was Erroneous as a Matter of Law... .. 17

Il. The Escondido Ordinance Does Not

"Substantially Advance Legitimate State

Interests” and it "Denies an Owner

Economically Viable Use of His Land.” ........ 21

CONCLUSION

eeaeeueeweeeeaeCcpe eae eg 2 82 2 2 ee ee

TABLE OF AUTHORITIES

Cases

Agins v. City of Tiburon,

CI ccc cet ccces 5, 7, 8, 21

Armstrong v. United States,

EEE 8

Azul Pacifico, Inc. v. City of Los Angeles,

740 F.Supp. 772 (C.D. Cal. 1990) .......... 15, 16

Azul Pacifico, Inc. v. City of Los Angeles,

___ F.2d ___, 1991 WL 224528 (9th Cir. 1991)

ee eee e ea wees cecces 6, 13, 16

Chicago, B. & Q. R. Co. v. Chicago,

Ne kt ee cca e cece: 8

Conley v. Gibson,

cc ccc cc ce ccc cece 10

Eaton v. B.C. & M.RR.,

EEE 13

F.C.C. v. Florida Power Corp.,

Ee 18, 19

Hall v. City of Santa Barbara,

833 F.2d 1270 (9th Cir. 1986),

cert. denied, 485 U.S. 940 (1988)... 6, 10, 14, 15, 18

Kaiser Aetna v. United States,

SI ITED. wo coc cece 13

Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419 (1982) ......... 5, 6, 7, 9, 11, 13, 20

Mississippi University for Women v. Hogan,

I oo ccc ccc cece es ceees 23

Moore v. City of East Cleveland,

EEE eee 23

Nollan v. California Coastal Commission,

483 U.S. 825 (1987) ............. 5, 7, 8, 21, 23

Penn Central Transportation Co. v. City of New York,

EEE 8

iV

Pennell v. City of San Jose,

IR Mn 6 ara kg Va reg ar 19, 20, 22

Pinewood Estates of Michigan v. Barnegat Township

Leveling Board,

898 F.2d 347 (3d Cir. 1990)

eect ead chee 6, 13, 16, 17, 18, 21, 23

Seawall Associates v. City of New York,

74 N.Y.2d 92, 542 N.E.2d 1059 (1989),

cert. denied, 493 U.S. 976 (1989) ............. 24

Supreme Court of New Hampshire v. Piper,

Ne oe ae ee ere 23

United States v. Sperry, )

Rn cream eeeaees asian 20

Yee v. City of Escondido,

224 Cal.App.3d 1349, 274 Cal.Rptr. 551 (1990)... 18

Statutes

California Mobilehome Residency Law

Cals. Civ. Camis $8 70 G8 O00... cece 3

oe Re Be ff errr rrr ee 3, 5,9

pe ae Me |}, 8 eee 3, 5, 10

Ss Ses UE URE oss ce ccwc ev ccccuses 3

Ss es I EE 6 956 sce a caencens 5

6 ae Re Lk | ee 5, 1]

Escondido Municipal Code, Article V, § 29-103... 3, 12

Secondary Authorities

Epstein, Takings: Descent and Resurrection,

¢ 3 & 6 RAR Ree ere ree 21

Hirsch & Hirsch, Legal-Economic Analysis of

Rent Controls in a Mobile Home Context:

Placement Values and Vacancy Decontrol,

35 U.C.L.A. L. Rev. 399, 412, 448-49 (1988) . . .3, 12

Karlen, Back to the Future: From Nollan to Lochner,

17 Southwestern L. Rev. 627 (1988)........... 21

Michelman, Property, Utility, and Fairness:

Comments on the Ethical Foundations of "

Just Compensation” Law,

80 Harv. L. Rev. 1165, 1184 (1967)...........

Recent Developments, Making Room at the Inn:

Rent Control as a Regulatory Taking,

38 Wash. U. J. of Urb. and Contemp. Law

a ti oe Sa a

SA C. Wright & A. Miller, Federal Practice &

Procedure § 1357 (2d Ed. 1990)..............

In the Supreme Court of the United States

October Term, 1991

No. 90-1947

JOHN K. YEE, et al., Petitioners,

Vv

THE CITY OF ESCONDIDO, Respondent.

ON WRIT OF CERTIORARI TO THE

FOURTH APPELLATE DISTRICT,

DIVISION ONE, COURT OF APPEAL

FOR THE STATE OF CALIFORNIA

BRIEF FOR THE

WASHINGTON LEGAL FOUNDATION AND

ALLIED EDUCATIONAL FOUNDATION

AS AMICI CURIAE IN SUPPORT OF THE

PETITIONERS

INTEREST OF THE

WASHINGTON LEGAL FOUNDATION AND

ALLIED EDUCATIONAL FOUNDATION

The Washington Legal Foundation (WLF) is a

national non-profit public interest law and policy center with

over 120,000 members and supporters nationwide. While

WLF engages in litigation and administrative process in a

variety of substantive areas of the law, WLF devotes

considerable resources to cases dealing with property nghts

in general and the Takings Clause of the Fifth Amendment in

particular. WLF has filed briefs on these issues in this Court

and lower courts, including cases on rent control. See, é.g.,

Pennell v. City of San Jose, 485 U.S. 1 (1988); Fisher v.

City of Berkeley, 475 U.S. 260 (1986).

The Allied Educational Foundation (AEF) is a non-

profit charitable and education foundation based in

Englewood, New Jersey. Founded in 1964, AEF is

dedicated to promoting education in diverse areas of study,

including and law and economics, and has appeared before

this Court as amicus on a number of occasions.

Both WLF and AEF believe that they can provide a

broader perspective to this case and the issues presented

which will assist the Court in adjudicating the merits of this

case. By letters filed with the Clerk of the Court, Petitioners

and Respondent have consented to the filing of this Brief.

STATEMENT OF THE CASE

On July 7, 1988, a mobilehome rent control ordinance

became effective within the City of Escondido for all

mobilehome parks. The Ordinance provides, inter alia:

Except as hereinafter provided, an owner shall

not demand, accept, or retain rent for a mobilehome

space exceeding the rent in effect for said space on

January 1, 1986. ... No owner shall send a notice

containing the specific amount of a proposed rental

increase prior to receiving approval of a rent increase

from the Board [the Mobilehome Park Rental Review

Board of the City of Escondido].

Escondido Municipal Code, Article V, § 29-103. There is

no provision in the Ordinance fer adjustment of the rental to

fair market value when a tenant vacates the leased property.

(See Respondent's Brief in Opposition to Certiorari,

Appendix A-1 - A-3). The absence of "vacancy decontrol"

means that the existing rental obligation carries over to the

new tenant.!

The operation of the Escondido Ordinance must be

viewed in connection with the California Mobilehome

Residency Law (Calif. Civ. Code §§ 798 et seq.). The state

law severely limits the grounds upon which a mobilehome

tenancy may be terminated or not renewed. Calif. Civ.

Code §§ 798.55 & 798.56. As a consequence, tenancies on

a month to month basis or for a specified term are, in effect,

abolished for mobilehome parks. Of course, the tenancy

may be terminated by the voluntary decision of the tenant.

Calif. Civ. Code § 798.59.

The Escondido Ordinance operates in combination with

the California Mobilehome Residency Law to guarantee

tenants a continuing lease at a controlled rent for the duration

of the tenancy. Because there is no provision for any rental

adjustment when a tenancy is terminated, a selling tenant

may charge a premium on the sale of a mobilehome coach in

relation to the extent that the controlled rent is lower than the

fair market rental value of the mobilehome park space.

1 See Hirsch & Hirsch, Legal-Economic Analysis of Rent Controls

in a Mobile Home Context: Placement Values and Vacancy Decontrol,

35 U.C.LL.A. L. Rev. 399, 412, 448-49 (1988).

4

Petitioners John K. Yee and Irene S. Yee, owners of

two mobilehome parks in the City of Escondido, filed an

action under 42 U.S.C. §§ 1983 et seq., alleging that the

mobilehome rent control ordinance enacted by the

Respondent City of Escondido constituted a taking in

violation of the Fifth and Fourteenth Amendments to the

United States Constitution, as well as under the California

Constitution, Article 1, Section 19. They sought declaratory

and injunctive relief against further enforcement of the

ordinance, and attorneys’ fees under 42 U.S.C. § 1988 and

Cal. Civ. Proc. § 1036.

The Respondent filed a demurrer and a motion to strike.

The demurrer was sustained by the Superior Court for the

County of San Diego without leave to amend and action was

dismissed by the Court. The Yees appealed this decision to

the California Court of Appeal, Fourth Appellate District.

Pursuant to stipulation of the parties, the Yees' appeal was

consolidated on appeal with other cases challenging the

Escondido Ordinance. (See Respondent's Brief in

Opposition to Certiorari, pp. 7-8, n. 6). The Court of

Appeal affirmed the Superior Court decision. The California

Supreme Court denied a Petition for Review.

On October 15, 1991, this Court granted certiorari with

respect to Questions | and 2 raised in Petitioner's Petition

for Certiorari. __ U.S. __, 112 S.Ct. 294 (1991).

This Amici Curiae Brief will address the following two

questions:

1. Does the Escondido Ordinance constitute a taking

under the Fifth and Fourteenth Amendments by permanently

authorizing the occupation of property and thereby causing

the transfer of an interest in property from the owner to a

third party, without payment of just compensation?

2. Does the Escondido Ordinance “substantially

advance legitimate state interests" or does it “den[y] an

owner economically viable use of his land"??

SUMMARY OF ARGUMENT

When government authorizes the permanent physical

occupation of property, this Court has readily found a

taking, "without regard to whether the action achieves an

important public benefit or has only a minimal economic

impact on the owner." Loretto v. Teleprompter Manhattan

CATV Corp., 458 U.S. 419, 434-35 (1982). The

Escondido Ordinance, operating in combination with the

California Mobilehome Residency Law (Calif. Civ. Code §§

798 et seq.), authorizes the taking of economic benefits from

the park owner by a tenant who is entitled to occupy the

property in perpetuity.

Under the California Mobilehome Residency Law, the

park owner may not terminate a lease or refuse to renew

same so long as the tenant pays the rent and reasonable

expenses and avoids bad behavior. Calif. Civ. Code §§

798.55 & 798.56. When the tenant decides to sell the

mobilehome coach, the park owner may not require the

removal of the coach from the park except under very limited

circumstances. Calif. Civ. Code § 798.73. The park owner

may not ordinarily refuse approval of the new purchaser as a

ienant. Calif. Civ. Code § 798.74. The practical effect of

these provisions is to allow the present tenant to transfer the

possessory interest in the mobilehome space to a third party

without renegotiation of the terms and conditions of the

lease.

2 Nollan v. California Coastal Commission, 483 U.S. 825, 834

(1987); Agins v. Tiburon, 447 U.S. 255, 260 (1980). Amici have

made the assumption that this is the proper formulation of the second

question certified for consideration in this case.

6

Against this background of state law, the control of rents

by Respondent constitutes a permanent transfer of economic

interests from the park owner to the current tenant. Where

the benefit of renting the mobilehome space at a less than fair

market rate is coupled with the perpetual occupation of the

property by the tenant, there is a physical taking.

The lack of vacancy decontrol exacerbates the effect of

the Escondido Ordinance. Because the rent for the

mobilehome space is not decontrolled upon a termination of

the tenancy, a windfall inevitably accrues to the vacating

tenant. The sale price of the coach will reflect the benefit of

a rent controlled space. An unregulated sale of the coach

will undermine the reason for rent control because the new

tenant will pay a higher price for the mobilehome coach and

thereby capitalize a portion of the rent.

The actions of the Respondent are therefore well within

the holding of this Court in Loretto v. Teleprompter

Manhattan CATV Corp., 458 U.S. 419 (1982). This

conclusion is supported by the decisions of the Ninth Circuit

in Azul Pacifico, Inc. v. City of Los Angeles, __ F.2d ___,

1991 WL 224528 (9th Cir. 1991) and Hall v. City of Santa

Barbara, 833 F.2d 1270 (9th Cir. 1986), ce: ¢. denied, 485

U.S. 940 (1988) and the decision of the Third Circuit in

Pinewood Estates of Michigan v. Barnegat Township

Leveling Board, 898 F.2d 347 (3d Cir. 1990).

The rejection of the Hall and Barnegat analysis by the

California Court of Appeal in this case was erroneous

because the Court made factual assumptions not supported

by the evidence. This was particularly inappropriate for a

decision on the pleadings. The lower court also erred in

concluding that subsequent decisions of this Court had

undermined the rationale of Loretto, heavily relied upon by

both Hall and Barnegat. A careful reading of the subsequent

_— nd

decisions discloses, however, that this Court had not

repudiated Loretto. It has simply refused to extend the

Loretto holding to non-physical takings.

As a second ground for decision in this case, Amici

contend that the Escondido Ordinance does not "substantially

advance legitimate state interests" and it "denies an owner

economically viable use of his land." Nollan v. California

Coastal Commission, 483 U.S. 825, 834 (1987) (quoting

Agins v. Tiburon, 447 U.S. 255, 260 (1980)).

The principal justifications for rent control are to protect

mobilehome owners from unreasonable space rental

increases and to protect the owner's investment in the

mobilehome coach. Although the protection of consumer

welfare if a legitimate end, the means used in this case do not

"substantially advance" the governmental interest.

Regulation of rents without regulation of the resale of

mobilehome coaches allows the current tenant to reap the

economic benefit of future rent control. In fact, the means

used by Respondent are counterproductive to its own

asserted end.

The Ordinance is underinclusive because it does not

regulate the resale of mobilehome coaches in order to protect

consumers from "unreasonable" increases in the cost of

mobilehome housing. Protection of the tenant's investment

in the mobilehome coach cannot justify the lack of vacancy

decontrol because it gives the seller more than just protection

for investment. It gives the seller a windfall. If the

justification is articulated as protecting tenants in

mobilehome parks with limited incomes, the failure to

decontrol the rent when such tenants terminate their tenancy

indicates that the Ordinance is overinclusive as well. The

means used by the Ordinance therefore do not "substantially

advance” the interest asserted by Respondent.

ARGUMENT

I. The Escondido Ordinance Constitutes a

Permanent Physical Taking of Petitioners’

Property.

The Fifth Amendment guarantees that private property

shall not “be taken for public use, without just

compensation." This provision is applicable to the States

through the Fourteenth Amendment. Chicago, B. & Q. R.

Co. v. Chicago, 166 U.S. 226, 239 (1897). The purpose of

this guarantee is "to bar Government from forcing some

people alone to bear public burdens which, in all fairness

and justice, should be borne by the public as a whole."

Armstrong v. United States, 364 U.S. 40, 49 (1960). See

also Nollan v. California Coastal Commission, 483 U.S.

825, 835 n. 4 (1987); Agins v. City of Tiburon, 447 U.S.

255, 260 (1980).

Althoug® this Court has acknowledged that "[t]he

question of wat constitutes a ‘taking’ for purposes of the

Fifth Amendment has proved to be a problem of

considerable difficulty" (Penn Central Transportation Co. v.

City of New York, 438 U.S. 104, 123 (1978)), several

factors have been identified. These include the economic

impact of the regulation on the claimant, the extent to which

the regulation has interfered with distinct investment-backed

expectations, and the character of the governmental action.

Id. at 124.

When the character of the action involves a physical

intrusion by government, this Court has stated that a

“taking” may be more readily found. /d. Indeed, if the

intrusion amounts to a permanent physical occupation of

property, the "cases uniformly have found a taking to the

extent of the occupation, without regard to whether the

9

action achieves an important public benefit or has only

minimal economic impact on the owner." Loretto v.

Teleprompter Manhattan CATV Corp., 458 U.S. 419, 434-

35 (1982). Thus, a permanent physical intrusion by the

government is not simply one factor in resolving whether the

action constitutes a taking, it is determinative. /d. at 426.

A. The Escondido Ordinance Combines With

the State Mobilehome Residency Law to

Permanently Transfer an Interest in

Property from the Owner to a Person

Occupying the Property in Perpetuity.

The first question therefore is whether operation of the

Escondido Ordinance amounts to a permanent physical

occupation of the Petitioners’ property. It must be conceded

at the outset that the Ordinance does not, in and of itself,

authorize a »hysical taking. However, when viewed in

connection with state law regarding mobilehome tenancies,

its effect is to authorize the taking of economic benefits from

the owner by a tenant who is entitled to occupy the property

in perpetuity.

The California Mobilehome Residency Law severely

limits the grounds upon which a landlord may terminate or

refuse to renew a lease. Calif. Civ. Code § 798.55. The

park owner may terminate a tenancy only in the event of (1)

failure to comply with a local ordinance or state law or

regulation relating to mobilehomes within a reasonable time

after receiving a notice of noncompliance from the

appropriate governmental agency; (2) conduct by the

mobilehomeowner or resident, upon the park premises,

which constitutes a substantial annoyance to other

mobilehomeowners or residents; (3) conviction of the

homeowner or resident for prostitution or a felony controlled

substance offense on account of an act within the

10

mobilehome park, except that the tenancy may not be

terminated if the person convicted permanently vacates and

does not subsequently reoccupy the mobilehome; (4) failure

of the homeowner or resident to comply with a reasonable

rule or regulation which is part of the rental agreement; (5)

nonpayment of rent, utility charges, or reasonable service

charges, except that a tenant may cure nonpayment within

three days after receiving written notice; (6) condemnation of

the park; or (7) change in the use of the park. Calif. Civ.

Code § 798.56. The practical effect of these limitations is to

make the mobilehome tenancy perpetual so long as the rent is

paid and the tenant behaves.?

When the tenant decides to sell the mobilehome coach,

the park owner may not require the removal of the coach

from the park except under very limited circumstances.

Calif. Civ. Code § 798.73. The park owner may require

prior approval of the purchaser, but such approval cannot be

withheld if the prospective tenant has the financial ability to

pay the rent and charges of the park, unless there is reason to

believe, on the basis of the purchaser's prior tenancies, that

3 See Hall v. City of Santa Barbara, 833 F.2d 1270, 1277 (9th Cir.

1986), cert. denied, 485 U.S. 940 (1988).

Because the Superior Court below determined that Petitioners’

complaints failed to state a cause of action as a matter of law, the

complaints must be viewed in the light most favorable to the

Petitioners and their allegations are to be taken as true. 5A C. Wright

& A. Miller, Federal Practice & Procedure § 1357, at 304 (2d Ed.

1990). As this Court has stated in Conley v. Gibson, 355 U.S. 41,

45-46 (1957):

In appraising the sufficiency of the complaint, we follow, of

course, the accepted rule that a complaint should not be

dismissed for failure to state a claim unless it appears beyond

doubt that the plainuff can prove no set of facts in support of

his claim which would entitle him to relief.

11

"he or she will not comply with the rules and regulations of

the park." Calif. Civ. Code § 798.74(a). The practical

effect of these provisions is to allow the present tenant to

transfer the possessory interest in the mobilehome space to a

third party without renegotiation of the terms and conditions

~ of the lease.

With these provisions of state law serving as the legal

landscape against which the Escondido Ordinance operates,

the control of rents constitutes a permanent transfer of

economic interests from the park owner to the current tenant.

This occurs in two ways. The first is the benefit of renting

property at a rate less than the fair market rental rate. A

general power to convey this benefit to tenants is within the

recognized police power "to regulate housing conditions in

general and the landlord-tenant relationship in particular

without paying compensation for all economic injuries that

such regulation entails." Loretto v. Teleprompter Manhattan

CATV Corp., 458 U.S. 419, 440 (1982). But where this

benefit is coupled with the perpetual occupation of the

property by the tenant, it amounts to a physical taking. The

Loretto Court was careful to distinguish its holding from the

general rent control cases:

In none of these cases, however, did the government

authorize the permanent occupation of the landlord's

property by a third party... . So long as [the rent

control regulations} do not require the landlord to

suffer the physical occupation of a portion of his

building by a third party, they will be analyzed under

the multifactor inquiry generally applicable to

nonpossessory governmental activity.

Loretto, 458 U.S. at 440. The Escondido Ordinance acts in

concert with the state mobilehome residency law to achieve

precisely this prohibited result.

12

The second transfer of property resulting from

Escondido Ordinance is the ability of the current tenant to

realize the future value of the less than fair market rental rates

when such tenant vacates the leased premises. Although not

inherent in rent control generally, this second benefit is the

inevitable result of the Escondido Ordinance. Because the

rent is not decontrolled* upon the vacation of the premises on

account of a sale of the mobilehome coach, a windfall will

accrue to the first tenant. The sale price of the coach will

inevitably reflect an amount capitalizing the difference

between future fair market rent and future controlled rent.°

To regulate rents in mobilehome parks, but not the resale of

mobilehome coaches, inevitably allows the current tenant to

reap the economic benefit of future rent control. The

consequence of allowing the current tenant to realize the

benefit of reduced future rents is that the chief reason for rent

control (less than fair market rental rates) is thereafter lost to

subsequent tenants because they will have to pay the

difference in the form of a higher sales price for the

mobilehome coach.

The Escondido Ordinance, when operating against the

background of the state mobilehome residency law, therefore

constitutes a taking because there is a permanent transfer of

interests in property from the owner to another party who is

entitled to occupy the property in perpetuity.

4 There is no provision in the Escondido Ordinance for an adjustment

of rent on account of the termination of a mobilehome tenancy and

vacation of the leased premises. See Escondido Municipal Code,

Article V, § 29-103(g). (Respondent's Brief in Opposition to

Certiorari, Appendix A-1 - A-3).

5 See, e.g., Hirsch & Hirsch, Legal-Economic Analysis of Rent

Controls in a Mobile Home Context: Placement Values and Vacancy

Decontrol, 35 U.C.L.A. L. Rev. 399, 425, 430-32, 447-48 (1988).

13

The Ordinance is well within the prohibition articulated

by this Court in Loretto v. Teleprompter Manhattan CATV

Corp., 458 U.S. 419 (1982). If there is a permanent

physical occupation of property, authorized by the

government, then there has been a taking. /d. at 441. The

fact that the occupant is a third party and not the government

is of no significance. Jd. at 432 n. 9. The inability of the

landlord, however, to terminate, refuse to renew, or reject a

new tenant, when combined with the lack of vacancy

decontrol, are very significant. This underscores the fact

that the physical intrusion in this case is not temporary, but

effectively permanent.

The right to choose who might occupy the property has

been transferred to the current tenant. As underscored by

this Court in Kaiser Aetna v. United States, 444 U.S. 164,

176 (1979), the right to exclude others is "one of the most

essential sticks in the bundle of right that are commonly

characterized as property." ‘vhis is a fundamental attribute of

ownership of property, long recognized in the common law.

See, e.g., Eaton v. B.C. & M.R.R., 51 N.H. 504 (1872).

Recognition of a taking in this case would be well within

established precedent based upon a clear textual commitment

in the Fifth Amendment.

B. The Circuit Courts of Appeal Have

Found a Taking Under the Same

Circumstances as Exist in This Case.

The only two Circuits to address this precise issue have

both held that rent control without provision for adjustment

when a vacancy occurs constitutes a permanent physical

occupation by the tenant. See Azul Pacifico, Inc. v. City of

Los Angeles, __ F.2d ___, 1991 WL 224528 at 4 (9th Cir.

1991); Pinewood Estates of Michigan v. Barnegat Township

Leveling Board, 898 F.2d 347, 353 (3d Cir. 1990); Hall v.

14

City of Santa Barbara, 833 F.2d 1270, 1276 (9th Cir.

1986), cert. denied, 485 U.S. 940 (1988).

The leading case is Hall v. City of Santa Barbara, 833

F.2d 1270, 1276 (9th Cir. 1986), cert. denied, 485 U.S.

940 (1988). In Hall, the Ninth Circuit held that the plaintiff

had stated a cause of action for an uncompensated taking on

the basis of the combined operation of a local mobilehome

rent control ordinance and the California Mobilehome

Residency law:

Reduced to its essentials, appellants’ claim is that the

Santa Barbara ordinance has transferred a possessory

interest in their land to each of their 71 tenants; that

this interest consists of the right to occupy the

property in perpetuity while paying only a faction of

what it is worth in rent; and that this interest is

transferable, has an established market and market

value. If proven, appellants’ claims would amount

to the type of interference with the property owner's

rights the Court described so eloquently in Loretto.

Id. at 1276. The Hall Court observed that the effect of the

law is to give tenants a lease for an indefinite period. The

right to occupy property in perpetuity is a right normally

ownership with ownership. It is also the type of property

interest protected by the Takings Clause. See Michelman,

Property, Utility, and Fairness: Comments on the Ethical

Foundations of "Just Compensation” Law, 80 Harv. L.

Rev. 1165, 1184 (1967). Not only is the right to occupy

indefinitely transferred, but so is the right to decide who will

live on the property in the future. Hall, 833 F.2d at 1276.

Hall also recognized the second type of taking discussed

above. The absence of vacancy decontrol allows the current

tenant to realize the profit from future control of rent. This

15

type of taking is even more extreme because it is divorced

from any valid purpose that rent control could possibly

serve. The Hall Court concluded:

[B]ecause of the way the ordinance is alleged to

operate, the tenant is able to derive an economic

benefit from the statutory leasehold by capturing a

rent control premium when he sells his mobile home.

In effect, the tenant is given an economic interest in

the land that he can use, sell or give away at his

pleasure; this interest (or its monetary equivalent) is

the tenant's to keep or use, whether or not he

continues to be a tenant. If the Halls’ allegations are

proven true, it would be difficult to say that the

ordinance does not transfer an interest in their land to

others.

Id. at 1276-77. The Court rejected the argument that the

transfer was not permanent because the ordinance might

someday be repealed. "A government taking can always be

undone if the government so chooses. That has never

defeated a taking claim." /d. at 1277. It also discounted the

fact that a tenancy could be terminated for cause. The

tenant's continuing right to possession is essentially at the

will of the tenant, not the landlord. /d.

Hall's recognition, at the pleading stage, of a cause of

action for a compensable taking was supported by the

subsequent factual findings of the United States District

Court in Azul Pacifico, Inc. v. City of Los Angeles, 740

F.Supp. 772 (C.D. Cal. 1990). In Azul Pacifico, the

District Court found that mobilehome park owners

effectively cannot evict tenants, and they cannot charge

market rent. /d. at 775-76. It should be noted that the Los

Angeles ordinance was not as violative of the property

owner's rights because it at least allowed for a maximum

16

increase of ten percent upon the termination of a tenancy.

This still was not enough to avoid a taking. /d. at 776. The

District Court also found that the vacancy controls operated

to transfer a property right from the park owner to the

tenants. There was expert testimony which established that

coaches in rent-controlled parks sold for considerably more

than in parks where market rents prevailed, even after

accounting for other variables such as location and

amenities. The plaintiff's expert calculated the premium at

$20,880; the city's expert calculated it at $5,000. /d.

On appeal, these findings were affirmed by the Ninth

Circuit. Azul Pacifico, Inc. v. City of Los Angeles, ___

F.2d, __, 1991 WL 224528 at 5 (9th Cir. 1991). "The

premium itself, the existence of which the district court

found as a matter of fact, establishes that selling tenants can

monetize the property right assigned to them by the [rent

stabilization ordinance]." /d.

Similarly, the Third Circuit in Pinewood Estates of

Michigan v. Barnegat Township Leveling Board, 898 F.2d

347 (3d Cir. 1990) held that the combined impact of the state

law and the local ordinance permanently deprived the owners

of a possessory interest in their property. /d. at 353. The

Third Circuit found the physical invasion of the mobilehome

properties and the uncompensated creation of interests in

them to be more pronounced than that in Loretto. Id. The

Court emphasized that the payment to the vacating tenant

was in part a payment of future rent:

[T]he purchaser of a mobile home who pays a

premium for the right to keep the home in a mobile

home park pays for the cost of the tenancy rather

than for the mobile home. Thus, the premium is

nothing more than rent for the pad which, depending

upon whether the purchase is financed or paid for in

17

cash, the new tenant pays during his tenancy or in

advance. But this rent is paid not to the appellants

who own the parks but to the prior tenant who, by

virtue of the Barnegat Ordinance and state law has

been granted a valuable alienable possessory interest

in the park.

Id. In comparing the case with other rent control cases, the

Court noted the uniqueness of the mobilehome legislation

which has brought about the taking. With rent control of

apartment dwellings, the landlord selects and rents to the

new tenants.® The vacating tenant is not empowered to sell

the right to occupy the premises. Furthermore, the tenant

cannot occupy the premises in perpetuity. The tenant does

not acquire an inheritable right. /d. at 355. The Third

Circuit reversed the District Court's dismissal of the action

and remanded the case for further proceedings on the merits

of the plaintiffs’ claim.

C. The Rejection of the Hall and Barnegat

Analysis by the Court of Appeal in this

Case Was Erroneous as a Matter of Law.

The Court of Appeal in this case rejected the Petitioners’

contention that the combined effect of the state and local laws

constituted a taking of property. Remarkably, in light of the

procedural posture of the case, the Court opposed

Petitioners’ theory of taking with its own counter theory. It

stated that "[w]here a governmental regulation: purports to

reduce the excessive and unfair price to a reasonable level,

the mere fact that the price for complementary goods and

services rises as a result does not transmute an otherwise

6 Within the term of the lease, however, the tenant may be able to

capture the premium afforded by rent control through the mechanism of

a sublease, if permitted under applicable law.

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