Kavanau v. Santa Monica Rent Control Bd.

Decision Date26 August 1997
Docket NumberNo. S051847,S051847
Citation16 Cal.4th 761,941 P.2d 851,66 Cal.Rptr.2d 672
Parties, 941 P.2d 851, 97 Cal. Daily Op. Serv. 6858, 97 Daily Journal D.A.R. 11,069 Earl W. KAVANAU, Plaintiff and Appellant, v. SANTA MONICA RENT CONTROL BOARD, Defendant and Respondent.
CourtCalifornia Supreme Court

James S. Burling, R.S. Radford, Sacramento, Paul C. Mileck, Berkeley, Sherman L. Stacey, Santa Monica, Kimball & Weiner and George Kimball, Los Angeles, Amici Curiae on behalf of Plaintiff and Appellant.

Anthony A. Trendacosta, Ralph H. Goldsen, Doris Ganga, Karl M. Manheim, Hedges & Caldwell, David Pettit and Joan Mack, Los Angeles, for Defendant and Respondent.

Louise H. Renne, City Attorney, San Francisco, Andrew W. Schwartz, Deputy City Attorney, Richards, Watson & Gershon and Rochelle Browne, Los Angeles, Amici Curiae on behalf of Defendant and Respondent.

CHIN, Justice.

In this case, we consider the inverse condemnation claim of Earl W. Kavanau, a property owner who prevailed in a prior action against the Santa Monica Rent Control Board (Rent Board) on the ground that the rent control regulations of the City of Santa Monica (the City) violated his right to due process of law. The Court of Appeal affirmed the trial court's dismissal order, rejecting Kavanau's inverse condemnation claim because he had not lost "all use of his property." We disagree that a property owner must lose all use of his property in order to have a viable inverse condemnation claim. Nevertheless, we conclude Kavanau is not entitled to maintain an inverse condemnation action, because he may obtain a full and adequate remedy for any interim loss flowing from the due process violation through an adjustment of future rents under the rent regulation process. Accordingly, we affirm the judgment of the Court of Appeal.

FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND

Kavanau's complaint alleges as follows. In 1988, he purchased a 10-unit apartment building in the City. At that time, the building was already subject to the City's rent control law, which limited rent increases to 12 percent per year regardless of increases in landlord expenses. Between November 1, 1988, and October 31, 1989, Kavanau collected rents totaling $43,444 and spent $33,565 operating and maintaining the property, $82,934 improving the property, and $44,000 servicing debt on the property. On November 30, 1989, Kavanau applied to defendant Rent Board for rent increases on nine of the ten units in his building. The Rent Board's hearing examiner determined Kavanau was entitled to rent increases totaling approximately $35,000 per year, but required Kavanau to impose these increases over the course of eight years so as not to exceed the 12 percent limit in any one year. The hearing examiner approved rent increases for the first year totaling $5,184.

Kavanau appealed the hearing examiner's decision to the Rent Board, which upheld the decision. Kavanau then petitioned the superior court for a writ of administrative mandate, which the court denied. Kavanau appealed, and the Court of Appeal reversed. (Kavanau v. Santa Monica Rent Control Bd. (1993) 19 Cal.App.4th 730, 736, 23 Cal.Rptr.2d 724 (Kavanau I ).)

In Kavanau I, the Court of Appeal concluded that the 12 percent limit on rent increases deprived Kavanau of "a just and reasonable return" and therefore was unconstitutional. (Kavanau I, supra, 19 Cal.App.4th at p. 736 & fn. 7, 23 Cal.Rptr.2d 724.) The Court of Appeal directed the superior court to issue a writ of mandate prohibiting application of the 12 percent limit to his rent increase petition. (Id. at pp. 736-737, 23 Cal.Rptr.2d 724.) We denied the Rent Board's petition for review. The Rent Board complied with the superior court's mandate.

Kavanau then filed the complaint in this case, seeking damages for temporary application of the 12 percent limit. In his first cause of action, he alleges he "has suffered a 'taking' and 'damaging' of his property rights" within the meaning of article I, section 19 of the California Constitution and the Fifth Amendment of the United States Constitution. He seeks "just compensation" in the form of lost rental income and interest. In his second cause of action, Kavanau alleges a violation of his right to due process of law and seeks damages, including emotional distress damages, under 42 United States Code section 1983 (section 1983).

The Rent Board demurred to Kavanau's complaint, and the superior court sustained the demurrer without leave to amend. Kavanau appealed, and the Court of Appeal affirmed. The Court of Appeal noted that Kavanau had abandoned his cause of action under section 1983. As for the cause of action alleging a taking of his property requiring just compensation under the state and federal Constitutions, the Court of Appeal rejected Kavanau's claim because he never lost "all use of his property." For example, he continued to receive rents and enjoy tax benefits, and he could borrow against the property, hold it for investment, convert it to condominiums, or sell it. One justice dissented, stressing that Kavanau I had already decided the Rent Board had applied its regulations in an unconstitutional manner. Because Kavanau lost substantial rental income as a result of this constitutional breach, the dissenting justice argued Kavanau had suffered a taking of his property and should receive just compensation. We granted review in order to consider whether a taking occurred and what, if any, right to just compensation Kavanau might have.

THE CITY'S RENT CONTROL LAW

Rent control laws must be "reasonably calculated to ... provide landlords with a just and reasonable return on their property." (Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 165, 130 Cal.Rptr. 465, 550 P.2d 1001 (Birkenfeld ).) In order to satisfy this standard, rent control laws incorporate any of a variety of formulas for calculating rent ceilings. (See Baar, Guidelines for Drafting Rent Control Laws: Lessons of a Decade (1983) 35 Rutgers L.Rev. 723, 781-817 (Guidelines ) [discussing various rent control formulas].) "Rent control agencies are not obliged by either the state or federal Constitution to fix rents by application of any particular method or formula." (Carson Mobilehome Park Owners Assn. v. City of Carson (1983) 35 Cal.3d 184, 191, 197 Cal.Rptr. 284, 672 P.2d 1297 (Carson ).) Rather, "selection of an administrative standard by which to set rent ceilings is a task for local governments ... and not the courts." (Fisher v. City of Berkeley (1984) 37 Cal.3d 644, 681, 209 Cal.Rptr. 682, 693 P.2d 261 (Fisher ); cf. Power Comm'n v. Natural Gas Pipeline Co. of America (1942) 315 U.S. 575, 586, 62 S.Ct. 736, 743, 86 L.Ed. 1037 (Pipeline Co.) ["The Constitution does not bind rate-making bodies to the service of any single formula or combination of formulas."].)

The City uses a "maintenance of net operating income" formula for calculating rent ceilings. A typical maintenance of net operating income formula presumes the landlord's net operating income at the time rent control began provided a just and reasonable return. In order to maintain this net operating income at a constant level, the law permits rent increases that will enable the landlord to recoup increases in ongoing operating expenses. (See Guidelines, supra, 35 Rutgers L.Rev. at pp. 809-817.) The landlord may also amortize the costs of capital improvements over the useful life of those improvements and pass those costs through to tenants. (See id. at pp. 817-826.) Of course, if the law holds net operating income constant, inflation will erode the real value of that income. Thus, many maintenance of net operating income formulas permit a periodic inflation adjustment. (See Fisher, supra, 37 Cal.3d at p. 683, 209 Cal.Rptr. 682, 693 P.2d 261; cf. Cotati Alliance for Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 289, 195 Cal.Rptr. 825 (Cotati ).)

The City's rent control law conforms generally to this model. An April 10, 1979, amendment to the City Charter (Charter) created the Rent Board and empowered it "to regulate rentals ... so that rents will not be increased unreasonably and so that landlords will receive no more than a fair return." (Charter, § 1800.) Pursuant to this charter amendment (Charter, § 1803(g)), the Rent Board adopted comprehensive regulations (Rent Board Regulations).

The Charter amendment rolled back most residential rents in the City to their level on April 10, 1978. (Charter, § 1804(b); Rent Bd. Regs., regs. Nos. 7000-7001.) This rollback established the base rent for individual rental units in the City. (Charter, § 1804(b).) To accommodate subsequent changes in landlord expenses, the Rent Board has since authorized various general rent adjustments and surcharges. (Charter, § 1805(a), (b); Rent Bd. Regs., regs. Nos. 3000-3106.) In addition, a landlord can petition for an individual rent adjustment in lieu of applicable general adjustments (Charter, § 1805(c); Rent Bd. Regs., regs. Nos. 4100-4114), in which case a hearing examiner receives evidence and prepares a decision, including findings of fact and law (Charter, § 1805(d); Rent Bd. Regs., regs. Nos. 4007-4020). Either party may appeal the hearing examiner's decision to the Rent Board. (Charter, § 1805(d)(10); Rent Bd. Regs., reg. No. 4021.)

The Rent Board Regulations define net operating income as gross income less operating expenses. (Rent Bd. Regs., regs. Nos. 4101(a), 4104.) The Rent Board Regulations also establish a presumption that the net operating income during the 1978 calendar year provided a landlord with a fair return. (Rent Bd. Regs., reg. No. 4102.) A landlord can rebut this presumption by showing that operating expenses during 1978 were unusually high (Rent Bd. Regs., reg. No. 4103A) or that base rent was unusually low (Rent Bd. Regs., reg. No. 4103B...

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