City of Berkeley v. City of Berkeley Rent Stabilization Bd., A059403

• Decision Date: 12 August 1994
• Docket Number: No. A059403,A059403
• Citation: 27 Cal.App.4th 951,33 Cal.Rptr.2d 317
• Court: California Court of Appeals Court of Appeals
• Parties: CITY OF BERKELEY, Plaintiff/Appellant, v. CITY OF BERKELEY RENT STABILIZATION BOARD, Defendant/Appellant, Berkeley Property Owners' Association, Intervener/Appellant.

Page 317

33 Cal.Rptr.2d 317

27 Cal.App.4th 951

CITY OF BERKELEY, Plaintiff/Appellant, v. CITY OF BERKELEY RENT STABILIZATION BOARD, Defendant/Appellant Berkeley Property Owners' Association, Intervener/Appellant.

No. A059403.

Court of Appeal, First District, Division 5, California.

Aug. 12, 1994.

Review Denied Dec. 1, 1994.

Thomas A. Seaton, Susan Burnett Luten, Berkeley, for intervener and appellant.

Richard A. Judd, Goldfarb & Lipman, San Francisco, for defendant and appellant.

Dagmar Searle, John R. Searle, Berkeley, Christopher M. Harding, Kenneth L. Kutcher, Lawrence & Harding, California Housing Council, Apartment Ass'n of Greater Los Angeles, Santa Monica Housing Council, Carl J. Lambert, Michael N. Koenig, ACTION in Santa Monica, Santa Monica, amici curiae on behalf of defendant and appellant and intervener and appellant.

Myron Moskovitz, Berkeley, Michelle Marchetta Kenyon, McDonough, Holland & Allen, Oakland, for plaintiff and appellant.

Marcia Rosen, Lawyers' Committee for Civ. Rights of the San Francisco Bay Area, San Francisco, Anthony A. Trendacosta, Ralph H. Goldsen, Santa Monica Rent Control Bd., Santa Monica, for amici curiae for plaintiff and appellant.

PETERSON, Presiding Justice.

The ultimate legal question presented in this litigation is this: Did the City of Berkeley Rent Stabilization Board (Board) abuse its discretion, by exceeding the authority and powers imposed by its enabling ordinance when it adopted new regulations it contends were designed to avoid unconstitutional confiscatory effects on landlords and to ensure landlords fair and reasonable levels of rents producing a fair return on their investment, as our Supreme Court has ruled to be constitutionally required? We will hold, in partially affirming and partially reversing the lower court, that the Board did not abuse its discretion in adopting these regulations and acted wholly within its authority in promulgating them.

The regulatory actions challenged here are as follows:

First, after public hearings and the receipt of expert economic evidence, the Board provided for a one-time increase in rent levels. It did so because it concluded its previous regulatory provisions had not adequately allowed rents to be adjusted for inflation, in accordance with the decision of our Supreme Court in Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 169, 130 Cal.Rptr. 465, 550 P.2d 1001 (Birkenfeld ) and of this court in Searle v. City of Berkeley Rent Stabilization Board (July 18, 1990) A044761 [review denied and ordered not to be officially published Oct. 25, 1990] (Searle II ) ¹ hereinafter discussed. The Board also determined that rent levels should in the future receive annual general adjustments (AGA) for inflation in compliance with Birkenfeld to provide a just and reasonable return to landlords on their investments. The Board's AGA formula provided for a consumer price index (CPI) factor, multiplied by an estimated percentage of landlord rents. That percentage of landlord rents included the cost of debt service, the Board having heard evidence that debt service exclusion therefrom would erode landlords' net income over time.

Second, the Board determined (without timely objection by any party to this appeal) that it should use the 1980 rents, which it had previously certified as accurate for each City of Berkeley (City) rental unit, as the base rent on which rental adjustments would be annually calculated to compensate for inflation.

Third, the Board determined that in order to harmonize these actions with the Board's preexisting methods of regulating rents by indexing net operating income (NOI), these adjustments should be made for all rental units, without creating an exception for those purchased by landlords after the inception of rent control in City under the current ordinance in 1980.

Fourth, the Board determined that the rents of certain units could be adjusted upward if those rents had been far below the rents of comparable units, when frozen at the time of the inception of City rent control. The Board undertook this action in order to comply with Birkenfeld and its progeny, in providing landlords with a fair return on their investments.

Fifth, the Board determined certain below-market rent levels should be raised for units with historically low rents. The Board defined these historically low rents, in its regulation 1280, as those which were less than "seventy-five percent (75%) of the Department of Housing and Urban Development [hereafter HUD] fair market rents established for existing housing in Alameda County in 1979 under Section 8 of the United States Housing Act of 1937...." This rent adjustment was also designed to implement the requirement of Birkenfeld that rents not be perpetually frozen at unreasonably low levels.

The Board acted properly. There was no prejudicial abuse of discretion, and the Board's actions were consistent with its statutory authority and the mandates contained in the case law. We will remand this matter to the trial court with instructions to deny wholly the writ of mandate which sought to overturn these validly enacted regulations.

I. LEGAL, FACTUAL, AND PROCEDURAL HISTORY

In order to provide necessary factual background for the legal issues presented by this appeal, we must review four preliminary matters. First, we briefly summarize the prior legal history of rent control litigation in City and elsewhere in California, as treated in ordinances and prior court decisions, in order to explain the problems which led to the enactment of the rent control regulations challenged here. Second, we analyze the explicit and implicit authority of the Board as here pertinent, both as derived from legal precedents and from its enabling ordinance. Third, we summarize the evidence presented to the Board, and the other relevant proceedings at the administrative level. Fourth, we explain the somewhat unusual procedural history of this particular litigation, in order to clarify the issues in dispute on appeal.

A. Legal Precedents

City first enacted rent control in 1972, by an initiative measure which amended the City Charter (Charter) to prohibit any rent increases over 1971 levels, except after individual hearings for each property. The Supreme Court in 1976 declared this first measure unconstitutional in Birkenfeld, supra, 17 Cal.3d at page 169, 130 Cal.Rptr. 465, 550 P.2d 1001, because the individual rental adjustment procedure prevented the Board from making constitutionally necessary adjustments to rent levels without undue delay, which would render such rent levels confiscatory. ²

Post Birkenfeld, City again enacted a rent control ordinance by initiative in 1980, which as amended in 1982 is the version we consider in the case at bench (ordinance). ³ The ordinance attempted to respond to the constitutional deficiencies noted in Birkenfeld, supra, inter alia, by providing an additional, more generalized method of adjusting rent levels upward. Section 11 of the ordinance allows the Board to annually adjust all rent levels for changes in certain expenses, by the process of AGA enactments of general application. The ordinance also retained in section 12 a hearing procedure for consideration of individual landlord petitions for rental increases, for lack of which the ordinance had been found constitutionally insufficient in Birkenfeld. As we shall see, post enactment of the ordinance, the focus of City's rent control litigation has shifted to the rent control regulations adopted thereafter by the Board. We shall discuss the provisions of the ordinance in greater detail in section II, post.

Subsequently, rent control regulations were adopted by the Board, implementing the ordinance. They established a system for individual rent adjustments (IRA), pursuant to a standard of maintenance of net operating income (MNOI).

The rationale of the MNOI system is generally that confiscation of landlords' property may be avoided, and a fair return on investment guaranteed, if the net operating income from each property is kept constant, through annual increases from the base year, thus compensating for inflation.

In 1983, this court (Division Five) decided Cotati Alliance for Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 195 Cal.Rptr. 825 (Cotati ). The Cotati decision upheld a rent control ordinance similar to the one in issue here against an attack for facial unconstitutionality, since "the [rent control] Board has the ability to consider what level of rent will return a reasonable profit to the landlord considering all relevant factors." (P. 294, 195 Cal.Rptr. 825.) We held that local government rent control boards which were constitutionally required to set a fair rate of return for landlords were not limited to consideration of those specific factors listed in the local ordinance, but may also consider such relevant factors as the need to set rent levels high enough to maintain the housing stock, the need for an appropriate return on investment in order to attract capital investment, the impact of tax laws and depreciation, the special problems created for landlords by specific types of troublesome tenants, the particular hardship circumstances of the owner, and the effects of inflation on the dollar. (Id. at pp. 294-295, 195 Cal.Rptr. 825.)

We also emphasized that, in the absence of an unconstitutional and confiscatory taking, the courts were not authorized to interfere with the actions of the local rent boards, which had been delegated the power to perform this function of setting fair and reasonable levels for rent and rates of return: "While all of the above are factors that may be considered, the extent to which they are considered in setting a fair rent is within the province of local government, not the courts." (Cotati, supra, 148 Cal.App.3d at p. 296, 195 Cal.Rptr. 825, emphasis added, fn. omitted.) Our Supreme Court denied review.

The Board heard...