Santa Monica Beach, Ltd. v. Superior Court, S052824

• Court: United States State Supreme Court (California)
• Citation: 81 Cal.Rptr.2d 93,19 Cal.4th 952,968 P.2d 993
• Decision Date: 04 January 1999
• Docket Number: No. S052824,S052824
• Parties: , 968 P.2d 993, 99 Cal. Daily Op. Serv. 95, 98 Daily Journal D.A.R. 131 SANTA MONICA BEACH, LTD., Petitioner, v. The SUPERIOR COURT of Los Angeles County, Respondent; Santa Monica Rent Control Board, Real Party in Interest

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81 Cal.Rptr.2d 93 19 Cal.4th 952, 968 P.2d 993, 99 Cal. Daily Op. Serv. 95, 98 Daily Journal D.A.R. 131 SANTA MONICA BEACH, LTD., Petitioner,
v.
The SUPERIOR COURT of Los Angeles County, Respondent;
Santa Monica Rent Control Board, Real Party in Interest. No. S052824. Supreme Court of California Jan. 4, 1999.

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[968 P.2d 995] [19 Cal.4th 956] James S. Burling, R.S. Radford, Victor J. Wolski and Eric Grant, Sacramento, for Petitioner.

No appearance for Respondent.

Anthony A. Trendacosta, Los Angeles, Ralph H. Goldsen, Santa Barbara, Doris M. Ganga, Los Angeles, Joel M. Levy, Santa Monica; and Karl M. Manheim, Los Angeles, for Real Party In Interest.

Goldfarb & Lipman and Richard A. Judd, San Francisco, for California State Association of Counties and 65 California Cities as Amicus Curiae on behalf of Real Party in Interest.

MOSK, J.

In this case we consider whether a trial court properly sustained a demurrer to a complaint alleging that a city's rent control law violates the [19 Cal.4th 957] takings clause of the Fifth Amendment to the United States Constitution and the equivalent provision under the California Constitution because of that law's alleged failure to fulfill its stated objectives. We conclude that the trial court was correct to sustain the Santa Monica Rent Control Board's demurrer to petitioner's cause of action for inverse condemnation, and we accordingly reverse the Court of Appeal's judgment.

I. STATEMENT OF FACTS

Petitioner Santa Monica Beach, Ltd. (SMB), alleged the following in its complaint for inverse condemnation and petition for writ of mandate, which we accept as true for purposes of assessing the complaint's sufficiency to withstand a demurrer. (Quelimane Co. v. Stewart Title Guaranty Co. (1998) 19 Cal.4th 26, 34, fn. 3, 77 Cal.Rptr.2d 709, 960 P.2d 513.)

In April 1979, the City of Santa Monica (the City) adopted a rent control charter amendment (hereinafter sometimes the Rent Control Law) and created an elected rent control board (Board) to regulate rentals. Among other things, the Rent Control Law requires that owners register each rental unit and pay annual registration fees to the Board, establishes maximum allowable rents, provides for annual general adjustments and individual adjustments of allowable rents, prohibits evictions except for specified reasons, and prescribes remedies for violations of its provisions.

The stated purpose of the Rent Control Law, as expressed in the preamble to the charter amendment, was as follows: "A growing shortage of housing units resulting in a low vacancy rate and rapidly rising rents exploiting this shortage constitute a serious housing problem affecting the lives of a substantial portion of those Santa Monica residents who reside in residential housing. In addition, speculation in the purchase and sale of existing residential housing units results in further rent increases. These conditions endanger

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[968 P.2d 996] the public health and welfare of Santa Monica tenants, especially the poor, minorities, students, young families, and senior citizens. The purpose of this Article, therefore, is to alleviate the hardship caused by this serious housing shortage by establishing a Rent Control Board empowered to regulate rentals in the City of Santa Monica so that rents will not be increased unreasonably and so that landlords will receive no more than a fair return."

SMB alleges that in practice, however, rent control has been an agent of "gentrification" in Santa Monica. During the rent-controlled decade of the 1980's, Santa Monica experienced a loss of 775 low-income-renter households, a decrease of nearly 12 percent. The number of low-income-renter households increased over this period in every comparable city in Southern California without rent control. Santa Monica also lost 285 very-low-income-renter [19 Cal.4th 958] households. This was the largest decrease in the number of very-low-income renters of any comparable Southern California city.

Concurrent with this exodus of economically disadvantaged renters under rent control, Santa Monica experienced a 37 percent increase in the proportion of households with very high incomes between 1980 and 1990. This population shift toward upper-income households occurred during a decade when the proportion of very-high-income households dropped by more than 8 percent in Los Angeles County as a whole.

Under rent control, housing in Santa Monica has become increasingly unavailable to young families. Between 1980 and 1990, the number of family households with children in Santa Monica fell by 1,299, a decline of more than 6 percent. No comparable city in Southern California without rent control lost family households over the decade of the 1980's.

The impact of rent control has been especially harsh on young families headed by a mother with no spouse. The number of female-headed households with children under 18 in Santa Monica fell by 593 between 1980 and 1990, a decrease of more than 27 percent, despite an increase in such households in Los Angeles County as a whole.

Under rent control, Santa Monica's elderly population (age 65 or over) declined by 1.7 percent between 1980 and 1990, whereas the elderly population of Los Angeles County rose by more than 15 percent over the same decade. The elderly population increased over this period in every comparable city without rent control in Southern California.

In March 1992 SMB, the owner of a 12-unit residential rental property in the City of Santa Monica filed a petition asking the Board for permission to increase its rents. To obtain permission, SMB had to prove that its property was producing less than a "fair return" under "a comparative Net Operating Income (NOI) analysis that compares the NOI of calendar year 1978 to that of calendar year 1991, the most recent year prior to the filing of" SMB's 1992 petition. In May, after an administrative hearing, the Board's hearing examiner found that SMB's operating expenses for the base year of 1978 were $14,879, but that SMB was not entitled to a rent increase. SMB appealed to the Board, without success.

After various modifications to the Rent Control Law not relevant here, SMB filed on March 30, 1993, a second petition with the Board, this time [19 Cal.4th 959] asking for permission to increase its rents based upon its income and expenses for 1992. A hearing examiner found that SMB was entitled "to a permanent rent increase of $3 per unit per month and temporary rent increases averaging $58 per unit per month." SMB appealed to the Board, contending, inter alia, that the hearing examiner improperly applied the law and regulations to reduce SMB's rent increase entitlement based on SMB's 1992 NOI and to permanently deny SMB three-fourths of the general rent adjustment to be implemented in 1993 and 1994. The Board affirmed the hearing examiner's determinations.

SMB filed a combined complaint for inverse condemnation and petition for a writ of administrative mandate, naming the Board as defendant and respondent and contending that, as applied to SMB, the Rent Control Law constitutes a compensable regulatory taking of its property. In its inverse condemnation claim, SMB claims the Board has,

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[968 P.2d 997] by application of the Rent Control Law, violated SMB's rights under the Fifth Amendment rights to the United States Constitution and its rights under article I, section 19 of the California Constitution.

Specifically, SMB claims the Rent Control Law does not meet the "substantial advancement" test articulated by the United States Supreme Court in takings cases, as discussed below, because the Rent Control Law fails "to substantially mitigate some social harm that would otherwise result from the [property] owner's unregulated use of [its] property" and by "fail[ing] in practice to advance the specific purpose stated in the regulation.... Because [the Board's] application of the [Rent Control Law] has reduced the availability of private rental housing in Santa Monica and has made it more difficult for low-income renters, young families, and the elderly to find affordable rental housing, the [Rent Control Law] is not substantially advancing its stated purpose of implementing the housing policies of the [C]ity with regard to these population groups. [p] The ... Board's final determination regarding [SMB's 1993 petition] does not substantially advance a legitimate governmental interest, nor is there any close nexus between the denial of [SMB's] application for a fair rate of return on capital investments and any public harm that might result from [SMB's] unregulated operation of [its] property, because unregulated use of [its] property by [SMB] would not have resulted in the problems allegedly addressed by the [Rent Control Law], i.e., a shortage of available housing for low-income renters, young families, and the elderly."

Additional allegations within the inverse condemnation complaint charge the Board generally with depriving SMB of "essential attributes of ownership of its property, including the right to exclude others and the right to [19 Cal.4th 960] determine the terms upon which leasehold interests in [SMB's] property will be alienated." SMB "has received no compensation for the damages inflicted by [the City's] application of the [Rent Control Law] to [SMB's] property, and the [Rent Control Law] contains no provision for seeking or obtaining compensation."

For each and all of these reasons, SMB alleges, the Board's application of the Rent Control Law to SMB's property "comprises a regulatory taking of [SMB's] property for public use without just compensation.... [p] A trial de novo is necessary to examine the constitutional issues in this case. The administrative record compiled by the Rent Board is inadequate for this purpose because the Rent Board does not conduct the kind of judicial proceedings needed to safeguard [SMB's] fundamental right to due...