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Another Landmark Opinion Upholding Local Rent Control

Aleshire & Wynder’s Rent Control and Mobilehome Park Law Team (including Partners Bill Wynder, Sunny Soltani, and Associate Jeff Malawy) participated in another “landmark” litigation defending the authority of local municipalities to adopt and enforce rent stabilization laws.  Acting as amicus on behalf of the League of California Cities and the California State Association of Counties, Attorneys Wynder, Soltani, and Malawy filed a brief defending the City of Goleta’s rent control ordinance and its largely-senior citizen mobilehome park residents.

Just prior to Christmas, an 11 judge en banc panel of the Ninth Circuit Court of Appeals, by a vote of 8 to 3, rejected a park owner's challenge that the Goleta rent control ordinance denied the owner of its "investment backed expectation." The court, in Guggenheim v. City of Goleta, Ninth Circuit Case No, 06-56306 (December 22, 2010), found that this park owner, and by extrapolation all other purchasers of existing rent controlled parks, knew exactly what it was purchasing -- a property subject to rent control -- and, as a result, could not bring an after-acquired challenge to Goleta’s rent control law as a “taking of property without just compensation.”

In language important to every jurisdiction in California with rent stabilization laws, the en banc panel held:

Lingle explains Penn Central as identifying several factors, not a set formula, to determine whether a regulatory action is “functionally equivalent to the classic taking.”  “Primary among those factors are the economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations.”   [¶¶] That “primary factor,” “the extent to which the regulation has interfered with distinct investment-backed expectations,” is fatal to the Guggenheims’ claim. We assume for purposes of discussion (since the Guggenheims’ summary judgment evidence would so establish) that the rent control ordinance, unchanged since 1987, did indeed transfer about $10,000 a year in rent for the average mobile home owner from the landlord to the tenant, and that this has had the effect of raising the price of the average mobile home from $14,000 to $120,000. That had happened before the Guggenheims bought the mobile home park. Since the ordinance was a matter of public record, the price they paid for the mobile home park doubtless reflected the burden of rent control they would have to suffer.”

The en banc panel added this important discussion to its opinion which will certainly be quoted by cities up and down the state in future challenges to rent control:

“The people who really do have investment-backed expectations that might be upset by changes in the rent control system are tenants who bought their mobile homes after rent control went into effect.Ending rent control would be a windfall to the Guggenheims, and a disaster for tenantswho bought their mobile homes after rent control was imposed in the 70’s and 80’s. Tenants come and go, and even though rent control transfers wealth to “the tenants,” after a while, it is likely to affect different tenants from those who benefitted from the transfer. The present tenants lost nothing on account of the City’s reinstitution of the County ordinance. But they would lose, on average, over $100,000 each if the rent control ordinance were repealed. The tenants who purchased during the rent control regime have invested an average of over $100,000 each in reliance on the stability of government policy. Leaving the ordinance in place impairs no investment backed expectations of the Guggenheims, but nullifying it would destroy the value these tenants thought they were buying.”   (Emphasis added.)

Investors, like the Guggenheims, have repeatedly purchased mobilehome parks at a reduced price because of rent control, and then challenged rent control laws claiming that these laws deny them their “investment backed expectations.”  The City of Carson, like the City of Goleta, is experiencing similar challenges to its rent control laws following the purchase of the Colony Cove Mobile Estates by a business entity controlled by a Mr. Jim Goldstein.  City Attorney, Bill Wynder, observed:  “The new Ninth Circuit opinion will make it far more difficult for speculators to use these disingenuous arguments in the future.”

The en banc panel decision represents a repudiation of the three-judge panel opinion authored by Judge Jay S. Bybee in 2009.  In that decision, Judge Bybee wrote that mobilehome park owners had a constitutional right to compensation from the City because the rent control ordinance constituted a "regulatory taking" under the Fifth Amendment.  Despite the fact that the park owner bought the park with full knowledge of the rent control law, Judge Bybee, joined at that time by Judge Alfred T. Goodwin, found that the law improperly interfered with the park owner's “investment backed expectation.”

As noted in the en banc opinion, which was authored by Judge Andrew J. Kleinfeld:  “The Guggenheims bought a trailer park burdened by rent control, and had no concrete reason to believe they would get something much more valuable, because of hoped for legal changes, than what they had.”  As the en bancpanel pointed out, Guggenheim bought the property for a price that took into account the ordinance's limits on the rent increases that a park owner can impose on the mobile home owners who lease space in this park.

Had Guggenheim succeeded in the case, he could have dramatically increased rents and gained windfall profits at the expense of a particularly vulnerable population.  Interestingly, the en banc majority decision was authored by Judge Kleinfeld, who had dissented from the Bybee panel decision.  Judge Kleinfeld was joined, along with six other judges, by Judge Alfred T. Goodwin, who had originally agreed with the Bybee 3-judge decision.

For more information about this important decision, or questions about your own community’s rent control laws, contact our Rent Control and Mobilehome Park Law Team :

Partners Bill Wynder (wwynder@awattorneys.com), Sunny Soltani (ssoltani@awattorneys.com), or Associate Jeff Malawy (jmalawy@awattorneys.com).