March 15, 2011

The Follies of Rent Control

Our federal courts have made a pig's ear of property rights.

In my previous column for Defining Ideas, I wrote about a decision that caught the imagination of just about everyone from all sides of the political spectrum. What legal protections should be afforded to the family of Lance Corporal Matthew Snyder for the gratuitous abuse that it suffered at the hands of the Westboro Baptist Church?

This week I am moving on to something different—a case seeking, at this late date, to upset the rent stabilization law (RSL) of that notable housing mecca, New York City. Harmon v. Markus is so utterly insignificant in the grand scheme of things that the Court of Appeals for the Second Circuit dispatched it by a summary order on March 8, 2011, without precedential effect, less than two weeks after the oral argument. I only learned about the case because I met for the first and only time with the losing party, the property "owner" Jim Harmon, at lunch about a week before his oral argument. None of my sage words of advice made the slightest bit of difference, of course, to his untimely judicial annihilation. The court’s short and uninspired opinion was undeniably correct as a matter of current constitutional law. But for that very reason, it was also hopelessly defective as a matter of constitutional theory. Some account of how the Second Circuit decided the case, and how it should have decided it, gives ample testimony to the moribund state of modern federal constitutional law, particularly in the area of property rights.

Epstein
Illustration by Barbara Kelley

At issue in the case was the ability of Harmon to recover from his current tenant the possession of an apartment in a building that he had inherited from his parents. Under New York’s RSL, once a tenant is let into the premises on a short term lease, he is entitled to remain in possession so long as he pays the rent set under the RSL. That rent is calculated in ways that, in principle, allow the landlord to recover the costs of providing the unit to the tenant. But there are no upward adjustments in the rents paid to reflect any appreciation in property values due to the operation of market forces. Yet should the value of the property fall below the designated rate (which does not happen in New York City), the tenant is free to leave. Under the RSL the tenant enjoys the upside, leaving the landlord to absorb all the downside.

Rent controls take a person who should be the full owner of the property and turns him into a puppet dangling on the end of the tenant’s string.

The RSL does not allow the tenant to stay in possession of the apartment come hell or high water. First, the landlord can evict the tenant, after a tortuous process, for nonpayment of rent, which of course rarely ever happens given that the statutory rent is far below market values. Second, the landlord can also evict a tenant for "unsatisfactory behavior," but few tenants want to wreck the premises where they can live more or less forever. Third, the landlord can recover the premises for "an immediate and compelling necessity for [their] own personal use and occupancy," which would not apply here given that Harmon was already living in another unit within the building. Fourth, the landlord could recover the premises for the purpose of demolishing the building, so long as the new construction was not for housing accommodations. But what sane person would blow up his own home to evict a tenant that has overstayed his welcome? In practice, these tiny escape holes are of no significance. The tenant in effect has a perpetual hold on the premises. It takes no legal genius to conclude that the landlord’s motley bundle of statutory rights offers no fair substitute for his loss of the right to immediately repossess the premises at the expiration of the lease.

At the outset, it is critical to understand how the RSL transforms the common law of leases. A lease is a conveyance that allows the tenant to remain in exclusive possession of the premises for the duration of the lease. But afterwards, that "holdover" tenant receives a chilly reception from the common law. The landlord can evict that tenant at any time, or hold him responsible for the market rental value of the premises. That is exactly how it should be. The person who overstays his welcome is no better than a stranger who trespasses on the property.

The RSL, however, turns a common law trespasser into the favorite of the law. New York City has more tenants than landlords, and so in a burst of liberal generosity, the city gave tenants a new set of protections that allowed them to stay in possession of their units long after the duration of their leases. Indeed, in many cases, the units in question are inherited interests that can be handed down between family members.

The RSL takes a person who should be the full owner of the property and turns him into a puppet dangling on the end of the tenant’s string. The question is why that rent control statute does not run foursquare into the Takings Clause of the Constitution, which states, simply enough, "nor shall private property be taken for public use, without just compensation"?

For starters, letting a sitting tenant remain in possession doesn’t look like a taking for a public use to me. It is just a taking by one private party from another, so that the entire scheme of rent control should be stopped in its tracks. Even before the Supreme Court handed down its unfortunate 2005 decision in Kelo v. City of New London, it engaged in newspeak by saying that leaving tenants in possession has some indirect public benefit that justifies the process. Naturally, no mention is made of the enormous dislocations from the forced occupation of these premises. It is only the magic of "judicial deference" that allows a court to tote up the few positives and ignore the enormous negatives of the RSL.

Involuntary relationships, such as those arising from rent controls, generate a class war between tenants and landlords.

The second point is no less astonishing. The Second Circuit did not believe that there was any taking at all. After giving lip service to the rule that the permanent physical occupation counts as a "per se" (in itself) taking for which compensation is required, the Second Circuit restates the conventional wisdom in a fashion that should blow the mind of anyone with the slimmest faith in the English language: when "a property owner offers property for rental housing, the Supreme Court has held that governmental regulation of the rental relationship does not constitute a physical taking." Note the equivocation. The word "regulation" conjures forth the image that the Supreme Court believes, as do I, that the state has the power to make sure that tenants on the fourth floor have access to a fire escape. But the word "regulation" can’t possibly imply that the tenant who lives in the upstairs unit is not in physical occupation of those premises after the expiration of the lease. Of course, he is.

Nonetheless in an unsound Supreme Court decision, former Justice Sandra Day O’Connor took the position that so long as an owner allowed a tenant voluntarily onto the premises for a week or a year, that tenant was entitled to use of the property forever, all without occupation. Sound a bit off kilter? Well here is the sentence quoted by the Second Circuit to support this bizarre proposition: "That a rent-regulated tenancy might itself be of indefinite duration—as has long been the case under rent control and rent stabilization—does not, without more, render it a permanent physical occupation of property." Huh? Don’t ask what "without more" means. It means absolutely nothing at all. The barricaded tenant (and his progeny) get to stay as long as they want.

The courts also introduce other verbal gymnastics to explain why it is perfectly all right to allow a tenant in possession for one year to reap a lifetime of below-market rents. It would be one thing to be upset at the federal courts if what we asked of them was to disregard the plain meaning of a constitutional text in order to achieve a controversial social goal. But that is not what is going on here. "Private property" does not only refer to outright ownership of land. It clearly comprehends all the lesser interests in property created by voluntary arrangements. These arrangements are absolutely critical for the operation of any legal system. Can one imagine how to think about the law of private property while ignoring the role of leases, mortgages, and easements in the overall operation of the system? Yet that is just what the Supreme Court does time after time in order to wreak havoc on our long-established scheme of private rights.

One might excuse this verbal abuse of the English language if it served some larger social goal. But there is no evidence of that here. These forced frozen property arrangements encourage landlords to skimp on the maintenance of their property. In turn, those arrangements induce legislatures to bestow all sorts of foolish public subsidies—strings attached—to induce landlords to make the needed infrastructure expenditures. They also require an elaborate public administrative apparatus to set these below-market rents and to police against any violation. Involuntary relationships generate a class war between tenants and landlords that erupts into mutual vituperation at any and all public hearings designed to set rent increases.

Bad judicial reasoning often has horrific social consequences. Faced with this crushing defeat, Jim Harmon has two choices. He can lick his wounds and disappear quietly into the woodwork. Or he can seek a hearing before the Supreme Court, guns blazing, and ask it to overrule all of its numerous ill-considered and incoherent prior decisions that have made the RSL a grim fixture of the New York landscape. As his lawyer, I would surely advise him to save his time and breath. As a one-time friend, I would urge him to go for broke. The worst the Supreme Court can do is say "cert denied." If the Court took the case, it is hard to imagine how it could make a bigger mess of this branch of the law.


Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).


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