Rue-Ell Enterprises, Inc. v. City of Berkeley

• Decision Date: 16 September 1983
• Docket Number: RUE-ELL
• Citation: 194 Cal.Rptr. 919,147 Cal.App.3d 81
• Parties: ENTERPRISES, INC., etc., Plaintiff and Appellant, v. CITY OF BERKELEY, et al., Defendants and Respondents. A010363. Civ. 51415.
• Court: California Court of Appeals Court of Appeals

Page 919

194 Cal.Rptr. 919

147 Cal.App.3d 81

RUE-ELL ENTERPRISES, INC., etc., Plaintiff and Appellant, v. CITY OF BERKELEY, et al., Defendants and Respondents.

A010363.

Civ. 51415.

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

Sept. 16, 1983.

Hearing Denied Nov. 10, 1983.

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

Myron Moskovitz, Berkeley, Ann Juergens, Oakland, Natalie E. West, City Atty., Berkeley, for defendants and respondents.

KING, Associate Justice.

In this case we hold that a municipality, by virtue of its authority in the exercise of its police power to regulate rents, may require a one-year reduction in rents provided in existing leases on commercial property, measured by a percentage of the landlord's property tax savings resulting from the passage of Proposition 13, without violating constitutional prohibitions against impairment of the obligation of contracts. We further hold that such legislation is not preempted by state law.

Rue-Ell Enterprises, Inc. (Rue-Ell), an owner of commercial property in the City of Berkeley, filed a complaint for declaratory and injunctive relief against the City of Berkeley, its city attorney, and one of Rue-Ell's tenants alleging that the City of Berkeley "Renter Property Tax Relief Ordinance" of 1978 was unconstitutional as applied to two commercial leases between Rue-Ell and the tenant. After a nonjury trial, the trial court rendered judgment for defendants. We affirm the judgment.

Prior to 1978, Rue-Ell and its tenant entered into leases providing for periodic cost of living increases in rents and for additional payments should taxes on the leased premises be increased. On June 6, 1978, the initiative commonly known as Proposition 13 was passed, adding Article XIIIA to the California Constitution. Property taxes on the properties in issue were reduced from $23,148 to $8,195 as a result of Proposition 13. ¹

On November 7, 1978, the electorate of the City of Berkeley enacted the Renter Property Tax Relief Ordinance (hereafter "Measure I"), to remain in effect until December 31, 1979. Measure I contained a preamble stating, in essence, that a shortage of rental property and resulting rent increases had caused a "severe problem" for Berkeley renters and had "endangered the health, safety, and welfare of all Berkeley residents," therefore it was "necessary as well as fair" to provide renters with a portion of the benefits of Proposition 13. The measure required all Berkeley landlords, residential and commercial, to reduce their 1979 rents by an amount equal to 80 percent of their Proposition 13 savings. ² As a result of Measure I, the rent due Rue-Ell under the leases in issue here, totalling $2,158 per month, was reduced by $199 per month. In January 1979 the tenant asserted its right to the reduction. Rue-Ell then commenced this action.

Rue-Ell's principal contention on appeal is that Measure I is invalid because it violates the contract clauses of the state and federal constitutions. (U.S. Const., art. I, § 10 ["No State shall ... pass any ... Law impairing the Obligation of Contracts...."]; Cal. Const., art. 1, § 9 ["A ... law impairing the obligation of contracts may not be passed."].) Respondents contend it does not.

Rue-Ell argues that Measure I violates the contract clause because an impairment can only be justified by an "emergency," relying on a depression-era decision, Home Bldg. & Loan Assn. v. Blaisdell (1934) 290 U.S. 398, 444, 54 S.Ct. 231, 242, 78 L.Ed. 413, which approved a Minnesota moratorium on mortgage foreclosure sales, stating that one of five significant factors was that the state legislature had perceived an emergency need to protect homeowners. Rue-Ell also relies on two California Supreme Court cases, both of which cited the Blaisdell "emergency" factor in invalidating laws for unjustified impairments. The court in Olson v. Cory (1980) 27 Cal.3d 532, 539, 178 Cal.Rptr. 568, 636 P.2d 532, striking down a limit on cost-of-living increases for judges, said "[d]efendants, offering no reason or justification for the state action, fail even to approach their burden of demonstrating the impairment of plaintiff's rights is warranted by an 'emergency' serving to protect a 'basic interest of society.' " The court in Sonoma County, Organization of Public Employees v. County of Sonoma (1979) 23 Cal.3d 296, 312, 152 Cal.Rptr. 903, invalidating legislation precluding cost-of-living increases for local government employees in excess of increases received by state employees, said "the government has failed to meet its threshold burden of establishing that an emergency existed."

Respondents reply that an impairment may be justified by a "broad, generalized economic or social problem." They rely on Allied Structural Steel Co. v. Spannaus (1978) 438 U.S. 234, 250, 98 S.Ct. 2716, 2725, 57 L.Ed.2d 727, which invalidated a state private pension law, stating that the law "was not even purportedly enacted to deal with a broad, generalized economic or social problem." The court also said that the law "was not enacted to deal with a situation remotely approaching the broad and desperate emergency economic conditions of the early 1930's ..." (id., at p. 249, 98 S.Ct. at p. 2725), but added in a footnote that "[t]his is not to suggest that only an emergency of great magnitude can constitutionally justify a state law impairing the obligations of contracts." (Id., at p. 249 fn. 24, 98 S.Ct. at p. 2725 fn. 24; accord, United States Trust Co. v. New Jersey (1977) 431 U.S. 1, 22-23 fn. 19, 97 S.Ct. 1505, 1517-1518 fn. 19, 52 L.Ed.2d 92.)

The Supreme Courts of the United States and of California have each recently had occasion to analyze further the constitutional prohibition against impairment of the obligation of contracts. After the completion of briefs by the parties herein but before oral argument, the United States Supreme Court decided Energy Reserves Group, Inc. v. Kansas Power & Light Co. (1983) 459 U.S. 400, 103 S.Ct. 697, 74 L.Ed.2d 569. The defendant in Energy Reserves had entered into contracts with the predecessor of plaintiff Energy Reserves Group, Inc. (ERG) to purchase natural gas at a specified price. Thereafter Congress deregulated the natural gas industry. This change in regulation would have permitted unexpectedly high price increases under price "escalator" and "redetermination" clauses contained in the contracts.

In direct response to deregulation, the State of Kansas enacted a law applicable to natural gas contracts executed before congressional deregulation of natural gas. The effect of the Kansas law was to preclude ERG from obtaining windfall gains which would otherwise have occurred under contracts which did not anticipate congressional deregulation.

The Supreme Court held that the Kansas law did not substantially impair obligations under the contracts, for two reasons. First, at the time the contracts were executed, ERG "did not expect to receive deregulated prices." (Id., 103 S.Ct. at p. 707.) Second, state regulation of the natural gas industry, although not specific as to price, "existed and was foreseeable as the type of law that would alter contract obligations." (Id., 103 S.Ct. at p. 708.) The court concluded, "In short, ERG's reasonable expectations have not been impaired by the Kansas Act." (Id., 103 S.Ct. at p. 708, citing City of El Paso v. Simmons (1965) 379 U.S. 497, 515, 85 S.Ct. 577, 587, 13 L.Ed.2d 446.)

After oral argument in this case, the California Supreme Court decided Allen v. Board of Administration (1983) 34 Cal.3d 114, 192 Cal.Rptr. 762, 665 P.2d 534. In rejecting a constitutional and statutory interpretation which would have provided windfall pension benefits for certain retired legislators, the court held that constitutional and statutory revisions confining retirement benefits to those gains reasonably to be anticipated from their employment contracts did not constitute an unconstitutional impairment of contracts. (Id., at p. 124, 192 Cal.Rptr. 762, 665 P.2d 534, quoting City of El Paso v. Simmons, supra, 379 U.S. at p. 515, 85 S.Ct. at p. 587.)

It is significant that the courts in Energy Reserves and Allen both found no violation of the constitutional prohibition against impairment of the obligation of contracts where the reasonable expectations of the parties to the contracts at the time of their execution had not been impaired by the subsequent change in the law. On this point the similarities between Energy Reserves and the present case are particularly striking. In both cases laws unanticipated at the time contracts were executed rendered those contracts significantly more lucrative. In both cases local laws were then passed restricting the windfall profits available under the contracts: in Energy Reserves the seller was prohibited from receiving the full price permitted by the escalator and redetermination clauses, and in the present case Rue-Ell was prohibited from receiving the full amount of rent permitted under the leases. In both cases there had previously been local regulation in the field: residential rent control was adopted in Berkeley in 1972, though later invalidated in Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129, 130 Cal.Rptr. 465, 550 P.2d 1001. ³ The decision in Energy Reserves demonstrates that a local law reducing the amount of money due under a contract can be considered together with a prior law otherwise resulting in windfall profits under the contract, in determining whether reasonable expectations under the contract have been impaired.

Any doubts as to whether an emergency is required to justify a state law impairing the obligation of contracts have been resolved by Energy Reserves and Allen. In the former, citing Spannaus and United States Trust, the court said that an impairment to be justified "must have a significant and legitimate public purpose ... such as the remedying of a broad and general social...