Amicus Curiae Brief — Yee v. Escondido

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No. 90-194 i

IN THE

Supreme Court of the United States

OCTOBER TERM, 1991

JOHN K, YEE and IRENE S. YEE, et al.,

Petitioners,

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 AMERICAN FEDERATION OF LABOR

AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

AS AMICUS CURIAE IN SUPPORT OF RESPONDENT

ROBERT M. WEINBERG

VIRGINIA A. SEITZ

1000 Connecticut Avenue, N.W.

Washington, D.C. 20036

WALTER KAMIAT

LAURENCE GOLD

(Counsel of Record)

815 15th Street, N.W.

Washington, D.C. 20006

(202) 637-5390

WILSON - EPES PRINTING Co.. INC. - 789-0096 - WASHINGTON. D.C. 20001

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TABLE OF CONTENTS

INTRODUCTION AND SUMMARY OF ARGU-

I secsininnniAicereicinnscteniatniciniecinnnatnenninnsimaeteniaitinesene

1. THE EFFECTS OF THE REGULATIONS ON

THE INTERESTS OF THE LANDOWNER

AND THE HOMEOWNER .................................-.

A. The Relationship of the Landowner and the

Homeowner in the Absence of the Regula-

UN IEL SARTRE EEE CU eee Cn pe mE

B. The Effects of the California Mobilehome

Residency Law on the Interests of the Land-

owner and the Homeowner ...........................

C. The Effects of the City of Escondido Mobile-

home Rent Protection Ordinance On the In-

terests of the Landowner and the Home-

Il. THE ORDINANCE DOES NOT EFFECT A

“TAKING” UNDER THE CONSTITUTION.

ee sseuinsindnantintnunctameninen:

Page

TABLE OF AUTHORITIES

CASES Page

Block v. Hirsh, 256 U.S. 135 (1921)... naiiaeatieeaile 23, 24

Bowles v. Willingham, 321 U.S. 503 (1944)... 24

Connolly v. Pension Benefit Guaranty Corp., 475

U.S. 211 (1986) SONNE Resp er ess SL 28, 29

Danforth v. United States, 308 U.S. 271 (1939) . 21

Edgar A. Levy Leasing Co. v. Siegel, 258 U.S. 242

| —-_ eae SE 24

FCC v. Florida Power Corp., 480 U.S. 245 (1987) . 22, 23,

Federal Power Commission v. Hope Gas Co., 320

U.S. 591 (1944) .................. 5 |

Fisher v. City of Berkeley, 475 U Ss. 260 (1986) . mate 21

Heart of Atlanta Motel, Inc. v. United States, 379

3s 8 Renee ee muepiied 24, 26

Home Building & Loan Association v. Blaisdell,

Lt FF) | ne 24

Illinois Natural Gas Co. v. Public Service Co., 314

ie St | ne 27

Lochner v. New York, 198 USS. 45 (1905). enka 30

Loretto v. Teleprompter Manhattan CATV Corp.,

458 U.S. 419 (1982). eos 24, 25, 27

Nebbia v. New York, 291 U.S. 502 (1934). 30

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

SED CG DP ccecissscrccccossaremensesseicnnnee ae 29, 30

Penn Central Transportation Co. v. New York

City, 438 U.S. 104 (1978) idsieshtetesidaemanna an 28

Pennell v. San Jose, 485 U.S. 1 (1988) . cnieiesiaeaeee 22, 23

Permian Basin Aves Rate Cases, 390 U.S. 747

IIIT wiituestetuseuecsrcnnae soenihathongananiaeaeaeee 21

PruneYard Shopping Ce nter v. . Robins, 447 US.

74 (1980) sninssinais isles 27

Queenside Hills Realty Co. v. Sazl, 328 U.S. 80

(1946) aoe : a BS 24

Reitman v. Mulkey, 387 U.S. 369 (1967) 23

United States v. Terminal Railroad Association,

224 U.S. 383 (1912) snecomessanephsublenaiinaiianaaae 27

Usery v. Turner Elkhorn Mining Co., 428 U.S. 1

| END rer 29

iii

TABLE OF AUTHORITIES—Continued

STATUTES Page

Escondido Municipal Code,

EES ESC passim

a cninniiaunaceeumenen 6

California Fair Employment and Housing Act,

Cal. Government Code §§ 12900-12996 27

California Mobtlehome Residency Law, §§ 798, et

Neen saunvstueceaeeessccees passim

California Unruh Civil Rights Act, Cal. Civil Code

a usavesseeenenonseansees: 27

Fair Housing Act, 42 U. S.C. $8 3601-3631 ............... 27

MISCELLANEOUS

Baar, Mobilehome Ownership in Fremont (Aug.

City of Les ‘Angeles, ‘Community Development

Dept., Rent Stabilization Division, Rental Hous-

EE 6

Drury, Mobilehome (The U nrecognized Rev olution

in American Housing) (rev. ed. 1972)... 5

Goetz & Scott, Principles of Relational Contracts,

67 Va. L. Rev. 1089 (1981). ia 8, 16,18

Goldberg, Requlation and . Administered Contracts,

7 Bell J. Econ. 426 (1976) . 8,18

Haddock, Macey & McChesney, Prope ty Rights in

Assets and Resistance to Tender Offers, 73 Va.

ee x

Hearings on S. 2740 Before the Subcomm. on

Housing and Urban Affairs of the Senate Comm.

on Banking and Currency, 91st Cong., Ist Sess.,

vol. 91 (1969)... 6

Hirsch & Hirsch, Legal-Economic Analysis of Rent

Controls in a Mobile Home Context: Placement

Values and Vacancy Decontrols, 35 UCLA L.

Rev. 399 (1988) 5,8

Klein, Crawford & Alchian, Vertical Integration,

Appropriable Rents, and the Competitive Con-

tracting Process, 21 J.1.. & Econ. 297 (1978) 8,18

TABLE OF AUTHORITIES—Continued

Mandel, Does Rent Control Hurt Tenants, 54

Brooklyn L Rev. 1267 (1989). eh ee

Manufactured Housing Institute, Quick Facts

Contracts, 65 Minn. L. Rev. 521 (1981)

Note, The Community and the Park Owner Versus

the Mobile Home Park Resident, 52 B.U. L. Rev.

811 (1972) PERE LIE LEIS Re

Nutt-Powell, Manufactured Homes (Making Sense

of a Housing Opportunity) (1982) :

Report of the President’s Commission on Housing

(19G2)........ spes:aktcptdiinies keane iia cea taasasns ceases

Sanchez Talarico Associates, Alternative Location

and Replacement Housing Opportunities for

Oxnard Mobile Home Lodge (Sept. 1988)...

Williamson, Transaction-Cost Economics: The

Governance of Contractual Relations, 22 J.L. &

Econ, 233 (1979)

Page

8,18

BRIEF OF THE AMERICAN FEDERATION OF LABOR

AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

AS AMICUS CURIAE IN SUPPORT OF RESPONDENT

This brief amicus curiae of the American Federation

of Labor and Congress of Industrial Organizations

(“AFL-CIO”) is filed with the consent of the parties and

in support of the respondent, as provided for in the Rules

of this Court.

INTEREST OF THE AMICUS CURIAE

The AFL-CIO is a federation of 89 national and inter-

national unions with a total membership of approximately

14,000,000 working men and women. The AFL-CIO, its

affiliates, and their members have a strong interest in the

constitutional standards applicable to loeal, state, and

federal government regulation of housing in order to pro-

tect tenants, as a particular matter, and government eco-

nomic regulation, as a general matter.

INTRODUCTION AND SUMMARY OF ARGUMENT

Petitioners’ brief discusses interchangeably the effects

of two distinct pieces of 'egislation: the City of Escon-

dido’s Mobilehome Rent Protection Ordinance, Escondido

Municipal Code, § 29-101, ef seq., and the State of Cal-

ifornia’s Mobilehome Residency Law, Cal. Civil Code

$ 798, et seq. But the State is not a party to this action;

the only defendant here is the City of Escondido; and

there is no challenge to the state statute stated in the

complaint. Joint Appendix (“J.A.") 2-18. In these cir-

cumstances, the only issues before the Court concern the

constitutionality of the challenged provisions of the city

ordinance. The constitutionality of the state statute is

not before the Court in this case.

As a challenge only to the city rent control ordinance,

this case is plainly within the run of rent and price con-

trol cases, and a decision for the respondent is dictated

by this Court’s precedents. Sce pp. 20-23, infra. In this

amicus curiae brief, rather than simply rest on this suffi-

cient ground, we meet petitioners on their own terms and

show that, taken together or separately, neither the city

nor the state enactment constitutes a physical or a regu-

latory taking under the Takings Clause.’

To the contrary, these enactments combine to comprise

a reasonable and balanced regulatory scheme designed to

protect and preserve the legitimate interests of two dis-

tinct groups of property owners, in circumstances where

the two groups’ ownership interests are interdependent.

Specifically, these regulations address a unique form of

residential housing—the ‘“mobilehome” or “prefabricated

home”’—in which ownership of a single family home is

separate from ownership of the land on which the home

sits, and the home, once placed on the land, cannot be

removed except at great cost to the homeowner.

Because of these separate ownership interests, the regu-

lations go beyond the problem of excessive rents arising

from housing scarcity, which is the common predicate for

rent control legislation. The additional problem of par-

ticular concern is the homeowner’s dependency—his vul-

nerability to exploitation by the landowner—once the

homeowner affixes his home to the landowner’s land. The

State statute and the city ordinance are designed to pro-

tect the homeowner from excessive increases in rent for

the land and from the destruction or diminution of the

value of his investment in his home that results from the

landowner’s exploitation of that vulnerability. At the

same time, both enactments are careful to preserve the

landowner’s ability to make a fair and reasonable return

on his investments in the land and its development. And

both enactments apply to any particular landowner only

1We do not address in this amicus curiae brief the various

threshold arguments made by respondent-—-that petitioners’ taking

claims are premature, and that petitioners’ regulatory taking claim,

which was neither litigated below nor raised in their petition for

certiorari, is not properly before the Court. We will also not sepa-

rately address petitioners’ claim that the regulations here violate

the substantive requirements of the Due Process Clause.

so long as he chooses to remain in the business of leasing

his land for occupation by mobilehome owners.

The state and city enactments are well within the range

of legitimate regulatory responses to the problems posed

by the combination of ownership interests of mobilehome

owners and landowners. All that these regulations may

“take” from the landowner is his ability to charge exces-

sive rents—excessive in the sense that the charge in-

cludes amounts derived from the landowner’s exploitation

of both the searcity of the resource being leased (mobile-

home park space) and the denendent pesition of a home-

owner who must affix the product of his investments this

mobilehome and all improvements to that home) to the

landowner’s land. All that the State and the City “give”

to the homeowner is the right to be free of such exploita-

tion on an ongoing basis and the attendant ability to pro-

tect the value of his investments against the adverse ef-

fects of such exploitation. Neither the common law nor

constitutional law has ever treated a property owner's

ability to take advantage of scarcities or market leverage

in order to secure a monetary premium—viz., a return

above a fair and reasonable return on his investment—as

an inherent property right protected from the effects of

government regulation.

In part I, infra, we show that in the absence of the

city and state enactments here the landowner may ex-

tract premiums based not only on che scarcity of mobile-

home sites but also on the appropriable quasi-rents that

are created by the dependent nature of the homcowner’s

investments in his home and surroundings once the home

is affixed to the landowner’s site. The value of the

quasi-rents that the landowner may appropriate is not

the result of any additional investment by the landowner,

but is a function of the investments of the homeowner

and the value the homeowner stands to lose if he were

compelled to take an action that would benefit neither

partv—removing the hame from the site.

The enactments here are designed to achieve the fol-

lowing results: (1) to limit periodic rent increases to

amounts that provide a fair and reasonable return based

on the investments of the landowner and not on his mar-

ket leverage; (2) to protect against the landowner’s

ability to extract quasi-rents from the homeowner at the

time of sale of the home by, inter alia, raising the rent

to the purchaser and thereby depressing the sale price of

the home; and (3) to give economic incentives to mobile-

home owners to invest in improving their homes. their

sites, and their communities, by assuring homeowners

that they—and not the landowners—will receive the re-

turns on their own investments. The benefits of the enact-

ments thus go to all present and future mobilehome

owners and to the greater community.

In part Il, infra, we show that this Court has repeat-

edly held that price or rent control regulations—which

deprive sellers or landowners of the ability, based on

scarcity or on market leverege, to extract premiums in

excess of a fair return on investment—do not constitute

“takings” under the Takings Clause. This line of deci-

sions governs this case.

As we go on to show, petitioners’ efforts to avoid the

force of these authorities by recasting the case do not bear

analysis. First, we show that all provisions that are even

arguably relevant to a physical taking claim are found

in the state statute, which is not challenged in this case

and thus is not properly before the Court. Second, we

show that those state statutory provisions, even if they

were properly before the Court, would not effect a “tak-

ing.”” Petitioners’ land is occupied by mobilehomes not be-

cause of state compulsion, but because of petitioners’ com-

mercial choices. Provisions limiting petitioners’ control

over the identity of their lessees are not different from

common regulatory provisions that have, quite correctly,

never been considered takings. Third, none of petition-

ers’ arguments approach the requirements this Court has

stated for a regulatory taking. —

ARGUMENT

I. THE EFFECTS OF THE REGULATIONS ON THE

INTERESTS OF THE LANDOWNER AND THE

HOMEOWNER

A. The Relationship of the Landowner and the Home-

owner in the Absence of the Regulations

It facilitates analysis here to begin with a detailed con-

sideration of the economic relationship of the mobilehome

park owner and the mobilehome owner in the absence of

the city and state regulations.

1. At the outset of the relationship between a mobile-

home owner and a park owner, the mobilehome owner has

made two significant investments: the cost of buying the

home itself* and the cost of transporting and affixing

the home to the landowner’s site: * the landowner, in his

turn, has invested in the mobilehome site, utility outlets,

and sometimes such amenities as landscaping of common

areas, playgrounds, swimming pools and clubhouses.*

Although this form of home ownership has been cele-

brated as “a significant source of affordable housing for

American families,’°® there ,is a severe and well-

2 The average sales price of a new mobilehome is between $19,200

and $34,800. Manufactured Housing Institute, Quick Facts 199091.

’ The average new mobilehome sold in today’s market is 1050

square feet. Drury, Mobilehome (The Unrecognized Revolution in

American Housing) (rev. ed. 1972) at 102 (1955 and 1966 data) ;

Nutt-Powell, Manufactured Homes (Meking Sense of a Housing

Opportunity) (1982) at 53 (1973 and 1980 data). Transportation of

a dwelling of this size requires specialized trucks and loading equip

ment. Hirsch & Hirsch, Legal-Economic Analysis of Rent Controls

in a Mobile Home Contert: Placement Values and Vacancy Decon-

trols, 35 U.C.L.A. L. Rev. 399, 404 (1988). The cost of such trans-

portation is substantial, id. at 404-05. See also Cal. Civil Code

$ 798.55(a) (West 1982) (citing “the high cost of moving mobile-

homes’’).

‘See Hirsch & Hirsch, supra, 35 U.C.L.A. L. Rev. at 405-06 &

nn. 22 & 23.

5 The Report of the President's Commission on Housing 85-86

(1982) (noting that prefabricated housing is a major housing source

documented shortage of available mobilehome sites, par-

ticularly in California.” Among the causes of this scar-

city is the prevalence of zoning regulations, which limit

the areas where mobilehome parks may be )laced, require

such parks to meet size specifications, and limit the num-

ber of sites within each park.’ This government-

exacerbated scarcity enables the landowner—in the ab-

sence of rent regulation—to extract a premium from the

mobilehome owner in the rent charged for the mobilehome

site.

Once an initial lease agreement is entered into, and the

home is affixed to the site, the mobilehome owner must

make additional] site-specific investments in order to adapt

the home to the site, and he typically undertakes as well

the kinds of site-specific investments that homeowners

generaily make to turn a new house into a home. Thus,

mobilehome owners often install steps, skirting, walk-

for “first-time home buyers, the elderly, and low- and moderate-

income families,” and that such housing accounted for almost 26

percent of all single-family homes sold in the United States in 1981.

and for the vast majority of those which sold for under $50,000).

* See, e.g., City of Los Angeles, Community Development Depart-

ment, Rent Stabilization Division, Rental Housing Study (Mobdile-

home Parks Under Rent Stabilization) 57 (1985) (“[vjacant pads

were found to be virtually non-existent—only two out of 1,226 ap-

peared in the sample”); Sanchez Talarico Associates, Alternativ:

Location and Replacement Housing Opportunities for Oxnard Mobile

“Home Lodge (Sept. 1988) (only 12 out of roughly 11,000 spaces

vacant); Baar, Mobilehome Ownership in Fremont 13-14 (Aug.

1991) (total absence of spaces in Alameda and Santa Clara counties).

i In the City of Escondido, fg example, the zoning laws restrict

mobilehome parks to certain areas of the City, restrict the density

“of homes within the parks, and place minimum size requirements on

the development of new parks. See Escondido Municipal Code,

£ 33-190, ef seq.

For more general discussions of the impact of zoning laws on

mebilehome park scarcity, se« Note, The Community and the Park

Owner Versus the Mobile Home Park Resident. 52 BU... Rev. x11

(1972); Hearings on S. 2740 Before the Subcomm. on Housing and

Urban Affairs of the Senate Comm. on Banking and Currency, 91st

Cong. Ist Sess. vol. 91, at 9 (1969).

‘

ways, and driveways, and may also invest in, e.g., land-

seaping, carports, porches, and decks.

- 2. When the term of the initial lease runs out, the

homeowner is in a considerably weakened position with re-

spect to the negotiation of a successor lease. Were he to be

unable to obtain a successor lease, a homeowner wishing

to retain his home would have to bear all of the following

transaction costs of removing his home from the site:

‘a’ He would lose the investments he made in

adapting the home to the site and improving the site.

‘b! He would have to pay the considerable costs

of transporting the home to a new park.

‘c) He would have to pay the costs of repairing |

the damage to the home that often occurs when a

home is removed from the site to which it has been

affixed. See Cal. Civil Code § 798.55/a).

(d) He would have to bear the financial and psy-

chological costs of searching for a new location in

a scarcity market where a convenient and vacant spot

might not easily be found. See note 6, supra.

‘e) As with anyone else having to move, he would

suffer the subjective, non-economic costs of detaching

himself and his family from the community in which

they have been living. Having to move might mean

that children have to change schools, the family has

to go to a different church, and other relationships

are lost or diminished.

In negotiating a successor lease, the landowner is, ac-

cordingly, in a position to extract additional rent from the

homeowner up to the value of the substantial costs that

would be involved in such a move. Thus, absent govern-

ment regulation, the landowner can extract a substantial

premium unrelated to the level of the landowner’s invest-

ments or costs on ton of the rent premium due to scarcity

that could be obtained in any event. See pp. 5-6, supra.

Indeed, it is the homeorrner’s investments and potential

costs thai determine the amount of the premium. The

more substantial the homeowner's site-specific investments

and additional costs of moving, the greater the home-

owner’s exposure to the landowner’s ability to extract a

rent premium. This additional premium constitutes what

is often called a “quasi-rent.” *

3. Similarly, in the absence of the state and city regu-

lations here, the landowner is in a position to exploit the

homeowner’s dependent status at the point the homeowner

wishes to sell his home. If the homeowner is unable to sell

the home as affixed to the landowner’s property, but is

forced to sell the home off the site, the homeowner would

lose the value of al! site-specific investments already

made and would be required to make additional, other-

wise unnecessary, investments:

*The term “quasi-rent” or “appropriable quasi-rent” is often

used by economists to refer to the amount of advantage that

can be gained by a party acting “opportunistically” after another

party makes specialized investments that are specific to the former

party’s assets. Because the value of the investments in other uses is

much less than in the specialized use, the investor is effectively

“locked into” the transaction to a significant degree, and the differ-

ence in the value of the investments (as between the specialized use

and the next best use) may, therefore, be subject to possible appro-

priation by the other party. a

For these reasons, the dominant party in a situation involving

quasi-rents may gain a return far in excess of the fair return on

his own investments; that party’s return will be based instead on

his appropriation of the returns that result from the sunk invest-

ments of the other party. See generally, Klein, Crawford & Alchian.

Vertical Integration, Appropriable Rents, and the Competitive Con-

tracting Process, 21 J.L. & Econ. 297, 298-302 (1978); Williamson,

Transaction-Cost Economics: The Governance of Contractual Rela-

tions, 22 J.L. & Econ. 233, 234, 240 & n.30 (1979) ; Muris, Oppor-

tunistic Behavior and the Law of Contracts, 65 Minn. L. Rev. 521,

521-26 (1981); Goetz & Scott, Principles of Relational Contracts,

67 Va. L. Rev. 1089, 1100-1102 & n.25 (1981): Haddock, Macey &

McChesney, Property Rights in Assets and Resistance to Tender

Offers, 73 Va. L. Rev. 701, 712-18 (1987); see also Goldberg, Requla-

tion and Administered Contracts, 7 Bell J. Econ. 426, 439-41 (1976);

Hirsch & Hirsch, supra, at 419-20.

Professor Timothy J. Muris cites the situation of a home located

on land owned by another as a particularly vivid illustration of the

“quasi-rent” problem. See Muris, supra, at 527 (homeowners with

homes located on the property of another risk “landlords ... Increas-

ing the rent up to the cost of moving their homes elsewhere” ),

(a) The homeowner would lose the value of his

investment in transporting the home to the site.

(b) He would lose the value of all adaptations of

the home to the site and improvements to the site.

detaching, and, depending on the timing and circum-

stances of the sale, of transporting the home from

the site.

‘d) And he would have to pay the costs of repair-

ing any damage to the home from its detachment and

transportation from the site.

Absent the enactments here, when the homeowner at-

tempts to sell the mobilehome, the landowner can capture

from the homeowner an amount just short of the sum

of these losses and costs—the appropriable amount that

constitutes the “quasi-rent” in these circumstances, see

note 8, supra—in one or more of the following three

ways: ad

First, the landowner—by refusing to accept al! prospec-

tive homebuyers as leaseholders-—can effectively force the

homeowner to sell the home to the landowner et a price

just above the amount that results from subt racting the

costs and losses incident to an off-site sale from the on-

site value of the home, At such a price, the homeowner

would be better off selling to the landowner than selling

the home off the site. The landowner could then turn

around and sell the home to a new buyer at the on-site

price and pocket the difference, which would constitute the

appropriated “quasi-rent.”

Second, the landowner could simply charge the home-

owner a sales or transfer fee for any on-site sale. As long

as the amount of the fee is less than the sum of the costs

and losses listed above—the “quasi-rent’’—-the homeowner

would be better off paying the fee and selling the home

on-site than selling the home off-site.

Third, the landowner could agree to accept the prospec-

tive buyer, but only at a licher rental rate. The pros-

pective buyer would only be willing to pay the higher rate

if there were a reduction in the sale price of the home

sufficient to finance the rental premium. Again, as long as

the decrease in the price of the home that is caused by

the rent increase is less than the amount of the quasi-rent,

the homeowner would be better off accepting the price

reduction and selling on-site than selling the home off-site.

Thus, in each of these three ways, the landowner could

extract a considerable quasi-rent from the homeowner at

the point of sale. And, in each case, the value that the

landowner can appropriate does not result from any addi-

tional investments by the landowner or any additional

good or servicg that the landowner has provided. To the

contrary, the amount extracted is a function of the value

the homeowner stands to lose by taking an action that

would benefit neither party—removing the home from the

site. The more the homeowner has invested in improve-

ments to the home and the site, the more the landowner

can extract at the point of sale.

B. The Effects of the California Mobilehome Residency

Law on Interests of the Landowner and the Home-

owner

In 1978, the State enacted a regulatory scheme di-

rectly addressed to, inter alia, the potential for exploita-

tion by the landowner of the mobilehome owner’s depend-

ent position. .

At the outset, the statute clearly recites the state legis-

lature’s understanding of the homeowner’s vulnerability

to such exploitation:

The Legislature finds and declares that, because of

the high cost of moving mobilehomes, the potential

for damage resulti.g therefrom, the requirements

relating to the installation of mobilehomes, and the

cost of landscaping or lot preparation, it is necessary

that the owners of mobilehomes occupied within

mobilehome parks be provided with the unique pro-

tection from actual or constructive eviction afforded

by the provisions of this chapter. [Cal. Civil Code

S$ 798.55(a).]

Based on these considerations, the statute limits the

permissible grounds on which a landowner may terminate

a mobilehome owner’s tenancy, but does so in a manner

which fully protects the landowner’s legitimate interests

in preserving the economic value of his investments and

his ultimate control over the use to which his land will

be put. Permissible grounds for terminating tenancies

thus include: “|flailure of the homeowner or resident to

comply with a local ordinance or state law or regulation

relating to mobilehomes”; “{c]onduct by the homeowner

or resident . . . which constitutes a substantial annoy-

ance”; “|flailure of the homeowner or resident to com-

ply with a reasonable rule or regulation of the park”;

“|njonpayment of rent, utility charges, or reasonable

incidental service charges”; “{e]ondemnation of the

park”; and “{c|hange of use of the park or any portion

thereof [by the park owner] ... .” Cal. Civil Code

S$ 798.56 (West Supp. 1991).

Based on the same considerations, the statute limits

the landowner’s ability to exploit the homeowner’s depend-

ent position at the time of the mobilehome’s sale. In par-

ticular, the statute prohibits two of the three means

(discussed at pp. 9-10, supra) by which the landowner

may extract the appropriable quasi-rent at the time of

sale.

First, the statute provides that the landowner “shall

not charge a homeowner ... or the agent of any such

person a transfer or selling fee as a condition of a sale

of his mobilehome within a park unless the [landowner]

performs a service in the sale.” Cal. Civil Code § 798.72

(West Supp. 1991).

Second, the statute limits the grounds on which the

landowner can refuse to lease the site to a buyer of a

home sold on the site by the homeowner. Cal. Civil Code

S 798.73. But, once again, the statute does so in a manner

that fully protects the landowner’s legitimate economic

interests in his investments. Thus, the statute permits the

landowner, “in order to upgrade the quality of the park,”

to require removal of a mobilehome upon its sale to a

third party where the home “is in rundown condition or

in disrepair,” or where it is older or smaller than certain

specifications set forth in the statute. Cal. Civil Code

$ 798.73. And, the statute, while permitting the land-

owner to “require the right of prior approval of a pur-

chaser of a mobilehome that will remain in the park,”

provides that:

Approval cannot be withheld if the purchaser has the

financial ability to pay the rent and charges of the

park unless the [landowner] reasonably determines

that, based on the purchaser’s prior tenancies, he

or she will not comply with the rules and regulations

of the park. |Cal. Civil Code § 798.74(a) (West

Supp. 1991). }

All of these statutory provisions directly further the

Same policy. By preventing the landowner from unrea-

sonably evicting a homeowner or refusing to approve an

appropriate purchase of a home sold in place, and by

similarly preventing the landowner from charging an

unearned fee upon the sale of a home that will remain

on site, these provisions prevent the landowner from

using his property to take advantage of the homeowners’

vulnerability to the appropriation of their investments.

The state statute does not, however, address two re-

maining means by which a landowner can exploit the

homeowner's vulnerable position. First, the statute does

not restrict the landowner’s ability on an ongoing basis to

extract rental premiums based on the scarcity of mobile-

home sites in a given area and on the appropriable quasi-

rents that result from the homeowner's site-specific in-

vestments and the costs of removing the home from the

site. See pp. 7-8, supra. Second, the statute does not

restrict the landowntr’s ability to extract the appropria-

ble quasi-rent at the time of sale of the home by means

of a rent increase to the prospective purchaser. See

pp. 8-10. supra. The statute contemplates that these rent

control issues are to be subject to local regulatory judg-

ments. See Cal. Civil Code §§ 798.17, 798.45 (West Supp.

1991).

C. The Effects of the City of Escondido Mobilehome

Rent Protection Ordinance On the Interests of the

Landowner and the Homeowner

In 1988, Escondido adopted a rent control ordinance

that addresses the two gaps just discussed in the state-

regulatory scheme. The ordinance controls increases in

rent, whether imposed on on-going homeowners or on

purchasers of homes sold in place.

On the face of the ordinance, careful provision is made

to ensure that iandowners will be permitted rent increases

that provide a fair and reasonable return on the land-

owners’ investments. Thus, the municipal board that is

responsible for passing on all rent increase applications

is given the following directives:

The Board shall approve such rent increases as

it determines to be just, fair and reasonable. The

Board shall consider the following factors, in addi-

tion to any other factors it considers relevant, in

making such determination:

(1) Changes in the Consumer Price Index for

All Urban Consumers in the San Diego Metro-

politan Area published by the Bureau of Labor

Statistics.

(2) The rent lawfully charged for comparable

mobilehome spaces in the City of Escondido.

(3) The length of time since the last hearing

and final determination by the Board on a rent

“The statute does place certain limits on the authority of local

governments to control mobilehome rents: First, park owners are

exempt from local rent control laws if they and their tenants enter

long-term leases containing certain statutorily prescribed provisions.

Cal. Civil Code § 798.17. Second, in order to promote the develop-

ment of new mobilehome parks, California mandates that local rent

control ordinances exempt all new construction from rent regulation.

Cal. Civil Code § 798.45. In the latter regard, California rent control

ordinances conform to the pattern of rent control laws in this

country. See Mandel, Does Rent Control Hurt Tenants, 54 Brooklyn

L. Rev. 1267, 1268 (1989).

increase application or the last rent increase

if no previous rent increase application has been

made.

(4) The completion of any capital improve-

ments or rehabilitation work related to the

mobilehome space or spaces specified in the rent

increase application, and the cost thereof, includ-

ing such items of cost, including materials, labor,

construction interest, permit fees, and other

items as the Board deems appropriate.

(Oo! Changes in property taxes or other taxes

related to the subject mobilehome park.

- (6) Changes in the rent paid by the applicant

for the lease of the land on which the subject

mvbilehome park is located.

(7) Changes in the utility charges for the sub-

ject mobilehome park paid by the applicant and

the extent, if any, of reimbursement from the

tenants.

(8) Changes in reasonable operating and

maintenance expenses.

(9) The need for repairs caused by circum-

stances other than ordinary wear and tear.

(10) The amount and quality of services pro-

vided by the applicant to the affected tenant.

(11) Any existing written lease lawfully en-

tered into between the applicant and the affected

tenant. [J.A. 11-12.]

Given the multiplicity of factors that are to be taken

into account, it is impossible, based solely on the words of

the ordinance, to ascertain with any kind of accuracy the

amounts of rent increases that may be permitted to land-

owners in the future. The factors listed in the ordinance

allow the board to monitor and regulate the landowners’

efforts to charge rent premiums based on the scarcity of

sites or on the extraction of appropriable quasi-rents.

But, on its face, the ordinance only “takes” from the

landowner the ability to increase rents unilaterally.

Assuming arquendo that the ordinance does in fact

work to prohibit entirely the extraction of such premiums

by the landowner, the homeowner would receive the fol-

lowing benefits: the homeowner would not have to pay

rents on an ongoing basis that include premiums for

scarcity or quasi-rents; and, at the point of sale of the

home, the homeowner would not be subject to extraction

of the appropriable quasi-rents by the landowner. Thus,

the homeowner would be in a position to realize a return

on the full value of all the investments he has made in

connection with his home: viz., his investments in the

home itself and improvements to the home, in transport-

ing the home and attaching and adapting it to the site,

and in improving the site.

These benefits go not only to persons who were home-

owners at the time of the ordinance’s enactment, but to

all successor homeowners. As long as the state and city

regulations remain in force, each successor homeowner

will be free from rent premiums based on scarcity or the

extraction of quasi-rents, and each successive homeowner

will be able to invest in his home and his site without

fear of being subject to the extraction of quasi-rents if

and when he decides to sell his home.

To be sure, petitioners contend that while all successor

homeowners may in fact receive such benefits, only the

initial homeowners—viz., those who owned mobilehomes

at the time the ordinance was enacted—can properly be

considered beneficiaries of the ordinance. Petitioners ar-

gue that the full value of all future benefits of the ordi-

nance will be reflected in the prices paid to the initial

homeowners by the first generation of subsequent pur-

chasers, and will continue to be reflected in the purchase

prices paid by all successive purchasers. On the basis of

this theory, petitioners urge that no successor homeown-

ers derive any net benefits from the ordinance. Pet. Br.

at 23, 26-27. This theory simply cannot survive analysis.

First, the notion that the initial homeowner would,

upom sale of his home, realize the present value of all

future benefits of the ordinance—such that all future

homeowners would gain no meaningful advantages from

the ordinance—rests upon assumptions that have no

grounding in reality. Neither the initial homeowner nor

the purchaser of the home would have any realistic ability

to calculate the monetary value of the benefits of the ordi-

nance with any degree of accuracy. No one knows what

rent increases will be permitted by the board in the short

term, much less the long term; no one knows what rent

increases would have occurred in the absence of the or-

dinance; and, certainly, no one is in a position to compute

the difference between these two unknown and unknowable

amounts.

These uncertainties make it wholly unrealistic to as-

sume that the initial homeowner somehow can deny sub-

sequent purchasers all benefits of the regulations here at

issue by charging a premium in the price of the home

that will capture the ful! value of all benefits—just as it

would be unrealistic to assume that, in the sale of a pri-

vate home in the metropolitan Washington, D.C. area, a

homeowner can deny all future homeowners any benefit of

future increases in that home’s value by charging a price

that may contain within it some element of expected

future appreciation. Benefits that are this speculative and

contingent in nature are not susceptible to the kind of

neat capture that petitioners hypothesize."

Second, the notion that a subsequent purchaser gains no

net benefits from a regulatory scheme because his enjoy-

ment of those benefits may entail paying an increased

purchase price is contrary to the most basic premises of

our economic system. Presumably, those who make volun-

tary purchase decisions at market prices believe they are

gaining benefits from their purchases. If, as a_ result

of the ordinance, purchasers of a mobilehome are willing

to pay more for the home, that is precisely because the

purchasers perceive that the benefit they obtain in ex-

change for the increased price is worth the additional cost.

’ As Professors Charles Goetz and Robert Scott noted in their

study of long-term contracting, “where the future contingencies are

peculiarly intricate or uncertain, practical difficulties arise that im-

pede the contracting parties’ efforts to allocate optimally all risks at

the time of contracting.”” Goetz & Scott, supra, at 1090. See also id.

at 1090 n.4. See also note 11, infra.

Here, it is likely that the benefits of the rent-control

ordinance will make a mobilehome more attractive to a

prospective purchaser, not because he knows that he will

achieve a readily identifiable amount of savings, but be-

cause the ordinance (together with the state statute) pro-

vides him some insurance against certain forms of prof-

teering or exploitation by the landowner. That “insur-

ance benefit” will give the purchaser a measure of security

in his investment in the home itself, as well as the knowl-

edge that he can invest what he wishes in improving the

home and its site—and, indeed, that he can invest in the

broader community as well—free of the fear that such

investments will subject him to the opportunistic behavior

of a landowner who might treat the homeowner’s invest-

ments as a means to extract greater profits.

The beneficial effects of the regulations in this re-

gard are particularly significant in that this “insurance

benefit”—viz., the protection of homeowners from land-

owner opportunism and the resulting loss of investments—

is not a product that the market produces without these

regulations, despite its value to home purchasers. Thus,

the regulations must be understood as creating a desired

benefit to be used by purchasers as a class."

'' The failure of the private market to produce this “insurance

benefit” is not surprising in light of the practical impediments to

any contractual arrangement that would parallel the protections pro-

vided by the city and state regulations. The landowner would not

rationally bargain away his power to exploit the homeowner's vul-

nerable position without obtaining the equivalent value in exchange.

To make the transaction worthwhile from the homeowner's point of

view, the protections would have to extend not only for the duration

of his tenancy in the park, but also to at least certain terms of the

lease for any purchaser of the home. But, as we have already shown

at pp. 15-16 & n.10, supra, the uncertainties and contingencies in-

herent in such a transaction would make it impossible to obtain

a reliable valuation of fhe exchange. In addition to other factors.

there are variables within the knowledge and control of the home-

owner—for example, the duration of the tenancy and level of future

investment—-that can significantly affect the value of the transaction

from the landowner's perspective. These variables may also creat:

a potential for adverse selection—viz. that those seeking contractual

Third, petitioners fail ‘to recognize the broader public

purposes that may be achieved by the regulations here.

protections will be those to whom it will be most costly to grant

those protections. Other variables are solely in the knowledge and

control of the landowner. Such problems of asymetrical knowledge

militate against a mutually agreeable valuation.

Moreover, the transaction would have to take account of a number

of costs that the regulations remove from the calculus. For ex-

ample, both the city and state regulations provide for public mech-

anisms of enforcement and administration, with built in economies

of scale. The costs to an individual homeowner of obtaining compara-

ble mechanisms would be prohibitive. And the price would also have

to account for the transaction costs of reaching the agreement itself

in the first instance, which in light of the problems already dis-

cussed would be considerable.

Scholars who have examined the ability of parties to protect them-

selves contractually from opportunistic appropriation of quasi-rents

in long-term and complex relationships have found that effective con-

tractual protection is rarely—if ever—obtained. See, e.g., Goetz &

Scott, supra, at 1090 n.4 (“when transactions are conducted under

conditions of uncertainty and complexity, it becomes extremely costly

-—if not literally impossible—for parties . . . to describe the complete

decision tree at the time of bargaining’); Klein, Crawford &

Alchian, supra, at 303 (“[e)xplicit long-term contracts can, in prin-

ciple, solve opportunistic problems, but . . . they are often very costly

solutions”); Muris, supra, at 527-28 (“[flully explicit contracts

.. are not feasible when the cost of discovering and planning for

all possible contingencies is prohibitive’).

Moreover, even if complex contractual solutions to the problems of

quasi-rents and opportunistic behavior were obtainable, many

scholars view the efforts to obtain them as socially wasteful. Even

if all issues of distributive justice were put aside, the fact remains

that expenditures to capture quasi-rents generate no new product

or service; nor do expenditures to gain contractual protection from

the party who might capture quasi-rents. See Muris, supra, 524

(“Resources spent to implement or prevent opportunistic behavior

do not help produce a commodity or service that the contracting par-

ties mutually value. Accordingly, the elimination or reduction of

these expenditures will improve the wealth of society by freeing the

resources for productive use.”’). Thus, a number of commentators

have argued that social welfare is often promoted by systems of

regulation that prevent opportunism. See id. at 576-77 (noting bene-

fits of various regulations which deter appropriation of quasi-rents) :

Williamson, supra, at 257-58 (same); see also Goldberg, supra, at

439-41.

The combined effect of the state and city enactments may

well be to create an economic environment for mobile-

home housing that encourages homeowners freely to in-

vest in improving their homes, their lots, and their com-

munities. By assuring homeowners that they will retain

the value of their investments, the regulations give home-

owners the incentive to make such investments, and gen-

erally to commit themselves to community improvements.

Without these regulations homeowners might well refrain

from such investments, or, alternatively, those placing a

high value on such investments might well refrain from

purchasing mobilehomes. Either way, mobilehome com-

munities would be less stable and less attractive, and

would thus make less of a contribution to the greater

community’s well being. The beneficiaries of these reg-

ulations thus clearly include all mobilehome residents, as

well as the broader community, which has every interest

in promoting socially productive investments by assur-

ing that those who make such investments reap appropri-

ate rewards."

'* To the extent that an initial homeowner may obtain a unique

benefit, it is important to be clear about what that benefit would be.

Prior to the adoption of the regulations here, the ability of the land-

owner to extract quasi-rents at the time of sale would likely have

resulted in a depression of the price of mobilehomes. In so far as

that result occurred, it should follow that government restrictions on

the landowner’s ability to extract quasi-rents would tend to remove

that depression in price. Accordingly, it may be that the initial

howeowner was able to purchase the home at a depressed price and

will be able to sell the home at a price that is not depressed.

But it may also be true that the class of initial homeowners has

suffered a unique detriment. Of all present and future homeowners

ut the time the ordinance was enacted, by definition only the initial

homeowne.s had leased sites under a regime where the landowners

were free to extract rent premiums based on scarcity or quasi-rents.

For the reasons stated in text, pp. 15-19, supra, all successor home-

owners will have the protections that the ordinance provides against

such premiums. If the initial homeowners receive an increase in the

price of homes that somehow refiects the difference between leasing

with the protections of the regulations as opposed to leasing without

the protections of the regulations, that increase would be going to

II. THE ORDINANCE DOES NOT EFFECT A “TAK-

ING” UNDER THE CONSTITUTION

As we have just demonstrated, all that the city rent

control ordinance may be said to “take” from petition-

ers is the ability to obtain rent premiums in excess

of a fair and reasonable rent. Indeed, the essence of peti-

tioners’ complaint is that the ordinance denies them the

rent increases that would obtain in a market in which

they could gain full advantage from scarcity and their

market leverage. As we now demonstrate, this Court’s

decisions have repeatedly upheld as constitutional regula-

tory schemes that deny to property owners precisely such

advantages,

It is well established that the Constitution does not

protect the right of property owners to set prices or reap

profits at the levels that could be achieved in some hypo-

thetical market that is free of government regulation. To

the contrary, we live in a society in which government is

intimately involved in myriad aspects of our economic

life, and thus where no market is entirely free of gov-

ernment regulation. Virtually all government regula-

tion, in any form, has some direct or indirect effect on

the value of private property or on the income to be

derived from private property. Such government actions

as the establishment of Federal Reserve Board policies,

changes in trade policy, adoption of environmental or

occupational safety and health restrictions, placement of

roads and highway, or enforcement of the anti-trust laws

all may have drastic effects on the value of any given

parcel of private property.

Diminutions in the value of private property caused by

government actions of this kind are simply part of the

fluctuations in the value of property that occur in an

economy in which market conditions are subject to

myriad influences beyond the control of individual

property owners. In a nation where “the function of

the only class of howeowners that has had to pay the price of leasing

without the regulations’ protections.

government may often be to tamper with free markets,

correcting their failures and aiding their victims,” Fisher

v. City of Berkeley, 475 U.S. 260, 264 (1986), no owner

of property can be unaware that some regulatory action

by government may affect the value of the owner’s prop-

erty. “Such changes in value are incidents of ownership.

They cannot be considered as a ‘taking’ in the constitu-

tional sense.” Danforth v. United States, 308 U.S. 271,

285 (1939).

Thus. a seller or a landowner has no vested property

interest in a level of profit based upon the price or the

rent that would emerge in some hypothetical market free

of regulation. The government has the constitutional

authority, in pursuit of legitimate purposes, to reject the

results produced by a “free market” and substitute a reg-

ulated result that balances the interests of the affected

private parties in a different fashion. Whether the

change in the value f property is caused by such govern-

ment regulation of price or by the actions of private

parties that affect the property’s market value, one risk

of property ownership in our society is, and always has

been, that the property’s value may change.

This Court has on a number of occasions applied these

principles in the context of holding constitutional gov-

ernment price-control or rent-control regulations. Indeed,

the Court has emphasized that such price and rent reg-

ulations have been with us for centuries:

It is plain that the Constitution does not forbid the

imposition, in appropriate circumstances, of maxi-

mum prices upon commercial and other activities.

A legislative power to create price ceilings has, in

“countries where the common law prevails,” been

“customary from time immemorial ... .” Munn

v. [llinois, 94 U.S. 113, 133. [Permian Basin Area

Rate Cases, 390 U.S. 747, 769 (1968) oa

And, as Justice Jackson explained in his separate opinion

in Federal Power Comm'n v. Hope Gas Co., 320 US.

991 (1944), the power to legislate price ceilings is neces-

sarily the power to deprive the seller of the value he

could obtain in a market in which he enjoyed advantages

based on scarcity or market power:

[T]here is nothing in the law which compels a

commission to fix a price at that “value” which a

company might give to its product by taking advan-

tage of scarcity, or monopoly of supply. The very

purpose of fixing maximum prices is to take away

from the seller his opportunity to get all that other-

wise the market would award him for his goods.

This is a constitutional use of the power to fix max-

imum prices[.] [320 U.S. at 655 (emphasis added) .]

This Court, in Pennell v. San Jose, 485 U.S. 1 (1988),

recently made precisely the same point with specific ap-

plication to residential rent control:

|Wle have recognized that the government may

intervene in the marketplace to regulate rates or

prices that are artificially inflated as a result of the

existence of a monopoly or near monopoly, or a dis-

crepancy between supply and demand in the market

for a certain product. Accordingly, appellants do not

dispute that the [rent control] Ordinance’s asserted

purpose of “prevent[ing] excessive and unreasonable

rent increases” caused by the “growing shortage of

and increasing demand for housing in the City of San

Jose...” is a legitimate exercise of appellees’ police

powers. Cf. Block v. Hirsh, 256 U.S. 135, 156 (1921)

(approving rent control in Washington, D.C., on the

basis of Congress’ finding that housing in the city

was “monopolized’”’). [485 U.S. at 11 (internal cita-

tions omitted) . |

This Court has also stated the standard for determin-

ing when a price or rent control is so severe that the

control constitutes an unconstitutional taking, and this

standard is not geared to a property owner’s ability to

benefit from whatever scarcity or market power may

have existed prior to the controls. In FCC v. Florida

Power Corp., 480 U.S. 245 (1987), for example, the FCC

reduced the property owner’s negotiated rental rates by

75%, and this Court ruled that even that drastic re-

duction did not constitute a taking:

It is of course settled beyond dispute that regula-

tion of rates chargeable from the employment of

private property devoted to public uses is constitu-

tionally permissible. Such regulation of maximum

rates or prices may, consistently with the Constitu-

tion, limit stringently the return recovered on in-

vestment, for investors’ interests provide only one

of the variables in the constitutional calculus of

reasonableness. So long as the rates set are not con-

fiseatory, the Fifth Amendment does not bar their

imposition. * * * * Appellees have not contended,

nor could it seriously be argued, that a rate provid-

ing for the recovery of fully allocated cost, includ-

ing the actual cost of capital, is confiscatory. Accord-

ingly, we hold that the FCC regulatory order chal-

lenged below does not effect a taking of property

under the Fifth Amendment. [Jd. at 253, 254 (in-

ternal citations and quotation marks omitted) ]."

The ordinance here on its face provides for the ap-

proval of rent increases that are “just, fair and rea-

sonable,” and its terms focus specific attention on the

landowner’s costs and investments. J.A. 11, 12. There

is simply no basis for a conclusion that the rate increases

allowed by the ordinance are or will be “confiscatory.”

While the foregoing authorities are, we submit. suffi-

cient to dispose of the issue fairly raised by the ordi-

nance challenged here, petitioners have sought to avoid

the force of those authorities by recasting the issue in

various ways. As we now show, each of the petitioners’

efforts to recast the case fails at the threshold, because

each is based on an inaccurate characterization of the

ordinance or its effects.

'S This Court held many years ago that rental housing is within

the category of “property devoted to public uses” as that phrase is

used in the passage quoted in text. “Housing is a necessary of life.

All the elements of a public interest justifying some degree of

public control are present.” Block v. Hirsh, 256 U-S. 135, 156

(1921). That conclusion has been recently reaffirmed. See Pennell,

supra, 485 U.S. at 12; see also Reitman v. Mulkey, 387 U.S. 369,

385-86 (1967) (Douglas, J., concurring).

1. Petitioners contend that the challenged ordinance

“takes from [the] landowner the right of possession and

confers that right upon another,” thereby effecting a “per-

manent physical occupation” of the landowner’s property.

Pet. Br. at 9. By so characterizing the effect of the

ordinance, petitioners seek to fit within the holding of

Loretto v. Teleprompter Manhattan CATV Corp., 458

U.S. 419 (1982), in which the Court found a taking

where a statute compelled a landlord to permit the cables

and equipment of a cable company to occupy perma-

nently a part of her apartment building.

The Loretto Court, however, was careful to circum-

scribe the scope of its holding. The Court emphasized

that the case did not involve the respective rights of land-

lords and tenants, id. at 439, and stressed that govern-

ments retain broad discretion in reordering the landlord-

tenant relationship:

This Court has consistently affirmed that States

have broad power to regulate housing conditions in

general and the landlord-tenant relationship in par-

ticular without paying compensation for all economic

injuries that such regulation entails. [Jd. at 440

(citing Heart of Atlanta Motel, Inc. v. United States,

3879 U.S. 241 (1964) (discrimination in places of

public accommodation) ; Queenside Hills Realty Co.

v. Sarl, 328 U.S. 80 (1946) (fire regulation) :

Bowles v. Willingham, 321 U.S. 508 (1944) (rent

control); Home Building & Loan Assn. v. Blaisdell,

250 U.S. 398 (1934) (mortgage moratorium) ; Edgar

A. Levy Leasing Co, v. Siegel, 258 U.S. 242 (1922)

‘emergency housing law); Block v. Hirsh, 256 U.S.

135 (1921) (rent control) ).|

The Court then concluded its opinion by declaring:

Our holding today is very narrow. We affirm the

traditional rule that a permanent physical occupa-

tion of property is a taking. In such a case, the prop-

erty owner entertains a historically rooted expecta-

tion of compensation, and the character of the in-

vasion is qualitatively more intrusive than perhaps

any other category of property regulation. We do

not, however, question the equally substantial au-

thority upholding a State’s broad power to impose

appropriate restrictions upon an owner’s use of his

property. [458 U.S. at 441 (emphasis in original) .]

For each of the following reasons, petitioners’ efforts

to transform this case into a case governed by Loretto

must fail.

First, as we stated at the outset of this brief, p. 2,

supra, the complaint here challenges only the city ordi-

nance, and not the state statute. The City is the only

defendant, and no claim can be asserted against the City

that the state statute is invalid. Yet petitioners’ asser-

tions that their rights of physical occupation have been

taken go only to those provisions of the state statute

relating to the landowner’s right to evict tenants or to

refuse to accept qualified prospective tenants. If peti-

tioners were completely successful in this case, these state

restrictions would remain in force.

The question here then is only whether the City’s rent

control provisions effect a “permanent physical oecupa-

tion” of the landowner’s property. Insofar as the ordi-

nance applies to petitioners, it governs only the amount

of allowable rents.’* The ordinance then, for all pur-

poses here, is simply a garden variety rent control regu-

lation. As we have noted, Loretto explicitly states that

such rent regulations are not physical takings, but rather

are enactments that “states have broad power to [ adopt]

without paying compensation for all economic injuries

that such regulation entails.” 458 U.S. at 440.

Second, the state statute, even if it were properly

before the Court, does not effect any physical taking.

Petitioners are voluntarily in the business of running a

mobilehome park. The very essence of that business is

'4 Section 6 of the ordinance adopts provisions parallel to the state

law provisions but is applicable only to “[a] tenancy which is not

subject to the provisions of the Mobilehome Residency Law.” J.A.

13. Petitioners do not contend that their challenges involve any such

tenancies.

to invite mobilehome owners to place their homes on sites

in the park. Indeed, no site in petitioner’s park can

become occupied except by petitioners’ invitation. Peti-

tioners’ land is thus occupied by homes not because of

state compulsion, but because of petitioners’ commercial!

choices.

Moreover, the statute does not prevent petitioners from

going out of the mobilehome park business, in whole or

in part, and, thus, having the homes removed from pe-

titioners’ land. Subject only to notice requirements and

local zoning requirements (neither of which are chal-

lenged), the statute expressly envisons that a landowner

may “|c|hange |the] use of the park or any portion

thereof... .” Cal. Civil Code § 798.56(g) (West Supp.

1991). What the state statute does regulate therefore

is not whether the land will be occupied by mobilehomes,

but whether the landowner will have the ability, while he

chooses to remain in the mobilehome park business, to

retain full control over the identity of his mobilehome

lessees."®

All that petitioners here are faced with is a requirement

that, while offering their property to the public for com-

mercial advantage, they must do so without excluding

tenants who give them no commercially valid reasons for

such exclusion. In this respect, the state statute is wholly

analogous to the regulation at issue in Heart of Atlanta

Motel, Inc. v. United States, 379 U.S. 241 (1964), where

this Court rejected, inter alia, a challenge under the

Takings Clause to Title II of the Civil Rights Act of

1964, which banned racial discrimination by those offering

For this reason, petitioners’ citation of FCC v. Florida Power

Co., 480 U.S. 245 (1987), does not assist their cause. In Florida

Power Co., the Court held that the government may regulate the

terms of the physical use of property once the landowner consents

to that use. The Court reserved the question whether a physical

taking would occur if the landowner were required to continue a use

of his property to which he no longer consented. Sve id. at 251-52

n.6. No such question is presented here, because petitioners continue

to voluntarily offer their property to the public for use as a mobile-

home park.

public accommodations. The Court declared that “Tthe

motel owner] has no ‘right’ to select its guests as it sees

fit, free from governmental] regulation.” Jd. at 259, 261.

See also, PruneYard Shopping Ctr. v. Robins, 447 U.S.

74, 82-84 (1980). The federal government, the States,

and a multitude of local governments have adopted a

variety of regulations of property owners who are in

the business of offering their property for public occupa-

tion, severely limiting the ability of those owners to select

who may accept their offers. See, e.g., Fair Housing

Act, 42 U.S.C. £§ 3601-3631, California Fair Employ-

ment and Housing Act, Cal. Gov’t Code §§ 12900-12996,

Cal. Unruh Civil Rights Act, Cal. Civ. Code $51. And,

the state regulations here are of the same character.

Regulations of this nature have roots as old as the

common law's “common carriage” requirements and are

integral to much of our established regime of regulated

industries. See, e.g., Illinois Natural Gas Co. v. Central

Illinois Pub. Serv. Co., 314 US. 498, 507-08 (1942) (or-

der that a natural gas pipeline company “establish physi-

cal connections of their transportation facilities with

[specific] distributors, and .. . sell gas to them”) ; United

States v. Terminal Railroad Ass’n, 224 U.S. 383, 411-12

(1912) ‘order to owners of railroad terminal facilities

to “provide definitely for the use of the terminal facili-

ties by any other railroad . . . upon such just and reason-

able terms and regulations as will, in respect of use,

character, and cost of service, place every such company

upon as nearly an equal plane as may be with respect to

expenses and charges as that oceupied by the proprietary

companies.”) The California statute’s restrictions on

landowner discrimination is no more a taking than are

the kinds of “common carriage” anti-discrimination rules

enforced in Illinois Natural Gas or Terminal Railroad

Association. Holding such rules to be takings would

throw into question a vast portion of our regulatory

regimes. Loretto gave no indication it intended such a

result.

2. Petitioners next argue, apparently as an alternative

to the physical taking argument, that the Escondido ordi-

nance effects such “an oppressive deprivation of property

rights” (Pet. Br. at 17) as to constitute a regulatory tak-

ing under the standards articulated in Penn Central

Transp, Co. v. New York City, 438 U.S. 104 (1978). In

support of that argument, petitioners ascribe consequences

to the ordinance that bear no relation to what the ordi-

nance in fact requires—e.g., that the ordinance’s limita-

tions on unilateral rent increases somehow “abridge” peti-

tioners’ “right to exclude others” from their property

id. at 18), and that the ordinance somehow freezes the

amounts that petitioners may charge as rent so that

“petitioners [will] receive controlled rents which de-

cline in constant dollars of inflation” (id. at 20). When

the effects of the ordinance are stated accurately, there

can be no serious contention that the ordinance consti-

tutes a regulatory taking under Penn Central.

As we have shown, the ordinance on its face simply

establishes an administrative process through which park

owners will receive rent increases that are “just, fair and

reasonable” in light, inter alia, of the park owners’ costs

and investments. See pp. 13-14, supra. And, as we have

also shown, this Court has repeatedly approved this form

of regulation against constitutional challenge. See pp.

20-23, supra. Penn Central in no way altered the law in

this regard. Indeed, Penn Central reiterated the vitality

of numerous prior decisions in which “this Court has up-

held . . . regulations that destroyed or adversely affected

recognized real property interests.” Jd. at 125.

Although petitioners claim that the ordinance here “in-

terferes with [their] reasonable investment-backed ex-

pectations” (Pet. Br. at 22), the ordinance’s impact pales

beside the economic injuries and diminished economic

expectations this Court has found in other cases not to

constitute regulatory takings." The most that petitioners

8 See, e.g., Connolly v. Pension Benefit Guarantee Corp., 475 U.S.

211, 225 (1986) (retroactive imposition on employers of liability for

may lose is the opportunity to extract premiums—in ex-

cess of a fair and reasonable return—based on searcity

or on exploitation of quasi-rents. See pp. 6-19, supra.

As we have shown, this Court’s price and rent control

cases reject the notion that the loss of the opportunity to

exercise such forms of market leverage is a compensable

loss under the Takings Clause. See pp. 20-23, supra.

3. Petitioners also contend that under Nollan v. Cali-

fornia Coastal Comm’n, 483 U.S. 825, 834 n.3 (1987), the

Escondido ordinance constitutes an unconstitutional tak-

ing, because the deprivation that park owners have suf-

fered “does not substantially advance legitimate state in-

terests.” Pet. Br. at 25 (emphasis deleted). The predicate

for this contention is the assertion that the ordinance has

no effect other than to transfer from the landowner to

those who were homeowners at the time the ordinance was

adopted the right to collect the value of the rent pre-

miums that are at issue here. Jd. at 26-29. But we have

demonstrated in great detail that the ordinance benefits

not only the homeowner at the time the ordinance was

adopted but all successor purchasers, as well as the

greater community. See pp. 15-19, supra.

The fit between the means and the ends here could not

be closer. The means are the control of the landowners’

ability to charge rent premiums based on scarcity and the

extraction of quasi-rents. The ends are the benefits that

accrue directly from mobilehome owners being given a

measure of protection against having to pay such pre

miums: (1) to limit periodic rent increases to amounts

that provide a fair and reasonable return based on the in-

substantial unfunded vested pension benefits is not a taking although

“there is no doubt that the Act completely deprives an employer of

whatever amount of money it is obligated to pay to fulfill its statu-

tory liability’) ; Usery v. Turner Elkhorn Mining Corp., 428 U.S. 1

(1976) (retroactive imposition on employers of liability for compen-

sation to employees for previously incurred disabilities is not a tak-

ing although emplovers had never coniracted for such liability) ;

Hadacheck v. Sebastian, 239 U.S. 394, 405 (1915) (reducing value

of property from $800,000 to $60,000 is not a taking).

vestments of the park owner and not on the latter’s mar-

ket leverage; (2) to protect against the park owner’s

ability to extract quasi-rents from the homeowner at the

time of sale by raising the rent to the purchaser and

thereby depressing the sale price of the home; and (3)

to give economic incentives to mobilehome owners to in-

vest in improving their homes, their sites, and their com-

munities. See pp. 6-19, supra.

Petitioners may disagree with the economic analysis or

the policy choices that underlie the City’s approach. But

the language in Nollan, 483 U.S. at 834 n.3, that “the

regulation [should] ‘substantially advance’ the ‘legiti-

mate state interest’ sought to be achieved” (citation

omitted) should not be understood as an invitation to

judicial second-guessing of the wisdom of choices made

by the democratic institutions of our society. Otherwise,

the Takings Clause would become the vehicle for a re-

vival of Lochner v. New York, 198 U.S. 45 (1905), and

federal courts would again sit in judgment on the wis-

dom of all economic regulation.

What this Court said in Nebhbia v. New York, 291 U.S.

502, 537-38 (1934), in the context of the Due Process

Clause, is equally applicable in the context of the Takings

Clause:

With the wisdom of the policy adopted, with the ade-

quacy or practicability of the law enacted to forward

it, the courts are both incompetent and unauthor-

ized to deal. The course of decision in this court

exhibits a firm adherence to these principles. Times

without number we have said that the legislature is

primarily the judge of the necessity of such an en-

actment, that every possible presumption is in favor

of its validity, and that though the court may hold

views inconsistent with the wisdom of the law, it

may not be annulled unless palpably in excess of

legislative power.

CONCLUSION

For the foregoing reasons, the judgment of the court

below should be affirmed.

Respectfully submitted,