Pennell v. City of San Jose

• Decision Date: 25 April 1984
• Citation: 154 Cal.App.3d 1019,201 Cal.Rptr. 728
• Court: California Court of Appeals Court of Appeals
• Parties: Richard PENNELL, Tri-County Apt. House Owners Association, Plaintiff, Respondent & Appellant, v. CITY OF SAN JOSE, City Council of the City of San Jose, Defendants, Appellants, Respondents. A011914.

Page 728

201 Cal.Rptr. 728

154 Cal.App.3d 1019

Richard PENNELL, Tri-County Apt. House Owners Association, Plaintiff, Respondent & Appellant, v. CITY OF SAN JOSE, City Council of the City of San Jose, Defendants, Appellants, Respondents.

A011914.

Court of Appeal, First District, Division 4, California.

April 25, 1984.

Burch Fitzpatrick, Miller, Starr & Regalia, Oakland, for plaintiff, respondent & appellant.

Robert J. Logan, City Atty., Robert R. Cimino, Senior Deputy City Atty., Anthony C. Bennetti, Deputy City Atty., San Jose, for defendants, appellants, respondents.

Myron Moskovitz, James R. Grow, Asst. Atty., Berkeley, for amicus curiae City of Berkeley.

CALDECOTT, Presiding Justice.

On August 7, 1979, the City Council of San Jose adopted Ordinance No. 19696 entitled "The San Jose Rental Dispute Mediation and Arbitration Ordinance" ¹ (hereafter Rent Control Ordinance or Ordinance) which imposed certain limitations upon the rents to be paid by the tenants in the City of San Jose. A few weeks later, on September 28, 1979, plaintiffs Richard Pennell, an individual homeowner, and the Tri-County Apartment House Owners Association representing the landlords in the area affected by the Ordinance (hereafter Pennell or respondents) brought an action for declaratory and injunctive relief against defendants City of San Jose and the City Council of the City of San Jose (hereafter City or appellants). The complaint launched a two-pronged constitutional attack against the Ordinance. First, it alleged that sections 5703.28, subdivision (c)(7) and 5703.29, which allowed the consideration of the tenant's financial and economic situation in determining a just and fair rent were unconstitutional because they deprived the landlords of their property without just compensation and thereby violated their due process right under the Fifth and Fourteenth Amendments to the United States Constitution. The complaint further alleged that sections 5704.1 and 5704.2 were likewise unconstitutional because they permitted the imposition of special taxes upon each rental unit without the requisite two-third votes of the qualified electors in circumvention of section 4 of article XIIIA of the California Constitution.

The City challenged the complaint by demurrer filed on November 28, 1979. Subsequent to the ruling on the demurrer Pennell moved for judgment on the pleadings on February 11, 1980. After hearing the arguments of the parties the trial court ruled that sections 5703.28, subdivision (c)(7) and 5703.29 were unconstitutional because they obligated private individuals (landlords) to assume public burdens without just compensation thereby violating their rights to substantive due process. With respect to the second part of the respondents' contention the trial court declared that the annual $3.75 fee levied upon each rental unit pursuant to sections 5704.1 and 5704.2 constituted a regulatory fee rather than a special tax and that the imposition of such fees was valid without the approval of the two-third majority of the voters.

From the ruling of the trial court both parties appealed. The City filed a notice of appeal from that portion of the judgment which declared the consideration of the tenant hardship factor unconstitutional on its face. Pennell cross-appealed from the adverse determination that the imposition of rental unit fee was not prohibitive of section 4 of article XIIIA of the California Constitution.

On appeal, the parties basically reiterate their legal arguments made in the trial court. Appellants contend that the trial court erred in holding that the consideration of the tenant's economic hardship (§§ 5703.28, subd. (c)(7) and 5703.29) rendered the Ordinance facially unconstitutional and confiscatory. Respondents, in turn, complain that the trial court committed error in concluding that rental unit charges imposed under sections 5704.1 and 5704.2 were, in essence, regulatory fees not special taxes and thus not subject to the limitation set out in section 4 of article XIIIA of the California Constitution. We analyze and discuss the issues raised in the appeal and cross-appeal in separate sections.

The Appeal

Constitutionality of Rent Control Provisions of the Ordinance.

Before addressing appellants' contention on the merits, preliminarily we set out the legal principles governing the constitutionality of a rent control ordinance.

In Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 130 Cal.Rptr. 465, 55 P.2d 1001, our Supreme Court held that rent control is a proper exercise of the local government's police power if it is reasonably calculated to eliminate excessive rents and at the same time provide the landlords with a just and reasonable return on their property. However, if it is apparent from the face of the provisions of the ordinance that their effect will necessarily be to lower rents more than could reasonably be considered to be required for the measure's stated purpose, they are unconstitutionally confiscatory (Id., at p. 165, 130 Cal.Rptr. 465, 55 P.2d 1001; see also Cotati Alliance For Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280, 285, 195 Cal.Rptr. 825; City of Miami Beach v. Forte Towers, Inc. (Fla.1974) 305 So.2d 764, 768). While the determination of whether a rent control regulation is reasonable or confiscatory depends on the individual circumstances of each case, it has been said that where the methods used in the regulation are wholly arbitrary or based upon invalid criteria and where the application of said criteria would lead to a forced rent subsidy on the part of the landlord, the regulation is violative of due process, unconstitutional on its face and must be stricken (FPC v. Texaco Inc. (1974) 417 U.S. 380, 391-392, 94 S.Ct. 2315, 2323-2324, 41 L.Ed.2d 141; Prop. Owners Ass'n, etc. v. Tp. of No. Bergen (1977) 74 N.J. 327, 378 A.2d 25, 29-30; Hutton Park Gardens v. Town Council (1975) 68 N.J. 543, 350 A.2d 1, 13-15).

The Ordinance at bench exhibits a constitutional infirmity upon its face. While the Ordinance allows both automatic and cost-related increases (§§ 5703.2, 5703.4, 5703.5, 5703.28, subds. (a) and (b)), section 5703.28, subdivision (c)(6) makes the additional rent increase dependent on the tenant's financial hardship. (§ 5703.29. ² ) Needless to say this criterion is totally arbitrary and unjustifiable inasmuch as it runs counter to a legitimate purpose of the rent control regulation (i.e., an assurance of a fair and reasonable return on the investment of the owner). Furthermore, it amounts to a forced subsidy on the part of the landlord in violation of the due process clauses of the United States and California Constitutions which prohibit taking of property without just compensation. Moreover, the tenant's financial situation as a factor in arriving at the proper amount of rent also violates the equal protection provisions of the Constitution, inasmuch as it comprises an invalid classification based upon wealth or lack thereof (Dept. of Mental Hygiene v. Kirchner (1964) 60 Cal.2d 716, 721, 36 Cal.Rptr. 488, 388 P.2d 720).

In reaching the above conclusion, we are greatly aided by Prop. Owners Ass'n, etc. v. Tp. of No. Bergen, supra, 378 A.2d 25, a case right on point. In Bergen, the amended ordinance allowed rental increases to the maximum of 15 percent per year for all causes, but banned any rental increase for senior citizens (i.e., persons aged 65 years or older whose income did not exceed $5,000 annually). In holding that the amended ordinance was confiscatory on its face and violative of both the due process and equal protection clauses of the Constitution, the reviewing court cited with approval the trial judge who in his reasoning set out as follows: "Now, more importantly, however, the Ordinance is unconstitutional as a deprivation of property without due process of law. By this Ordinance the Municipality seeks to establish a special subsidy for those who the fathers, the Legislative fathers of the Municipality think should get a break in connection with rent increases. This is a fine reason and something to be applauded. However, this can be constitutionally done only on the basis of an overall use of public funds which then is distributed among all the taxpayers by virtue of taxation. And so we have that in [m]any types of legislation which counsel has cited where the burden rests upon the entire community, in which event special treatment of people in need is fully justified and constitutional. We have it from welfare up. We have senior citizen housing. We have other types of legislation which are properly protective of the rights where need appears [f]or special categories of persons. However, in every one of these instances the burden of supporting these people partially, of granting them a subsidy, is a public burden and should be borne by the entire community. Here, however, the Municipality undertakes to attempt to shift its burden, that is the burden of all the citizens and taxpayers of the Municipality, to a particular class of individuals, namely, persons who own property, and demand that those persons take care of the needs of the community as a whole. That to my mind constitutes a clear-cut taking of property without due process. Selecting a particular class of people in the community to subsidize another class of people in the community is hardly constitutional in its approach.

"Now, in this area of discrimination I didn't mention during our colloquy one facet, namely, not only discrimination against the landlord, but I can see a potential of discrimination against other tenants in a building under the pattern of the Rent Control Ordinance of the Municipality. And it arises in this way: If a landlord is burdened with a reduction in his income by virtue of the failure and inability to increase the rents of senior tenants in his building because of this amendment and he is thereby compelled to apply for an overall hardship...