152 Valparaiso Associates v. City of Cotati

Opinion

Appellants 152 Valparaiso Associates, 402 Grand Avenue Associates, and 378 Belmont Associates contend the trial court wrongly sustained a demurrer and dismissed this lawsuit, which alleges that the rent control system of respondents the City of Cotati and the Cotati Rent Appeals Board has accomplished a taking of appellants’ property without just compensation, in violation of the Fifth and Fourteenth Amendments to the United States Constitution and article I, section 19 of the California Constitution. We agree and, therefore, vacate the judgment of dismissal.

I. Facts and Procedural History

Appellants are the owners of residential rental property in Cotati. Their property is subject to respondents’ rent control ordinance and regulations.

The stated purpose of respondents’ rent control laws includes the preservation of an affordable stock of residential rental units in the city for low-income renters, renters who are aged or on fixed incomes, and students.

However, according to the allegations of the first amended complaint and the United States Census Bureau figures referred to therein, respondents’ rent control laws have not advanced those goals. The complaint supported by

Appellants, who are subject to those rent control laws, made certain capital improvements to their rental property. They sought a rent increase sufficient to give them a fair return on their investment in those capital improvements. The rent board refused to grant any such increase. As a result, appellants allege the rate of return on their investments will be zero, resulting in an unconstitutional taking of their investment property.

In sum, appellants allege that respondents’ rent control ordinances effected an unconstitutional taking of appellants’ property, because respondent’s failed to substantially advance their stated public goals and denied appellants a fair return on their investment.

The trial court sustained without leave to amend a demurrer to appellants’ first amended complaint encompassing such allegations. Appellants filed a timely appeal from a resulting judgment dismissing that complaint.

The trial court erred in sustaining the demurrer to the first amended complaint. Appellants have alleged facts which, if true, would tend to establish that respondents’ rent control laws have effected a taking of appellants’ property, in violation of the federal and California Constitutions. We vacate the dismissal and remand with instructions to overrule the demurrer.

A. Background of Rent Control Decisions

This court (Division Five of the First Appellate District) has had many occasions to review the tortured history of rent control in California, most recently in City of Berkeley v. City of Berkeley Rent Stabilization Bd. (1994)

Our Supreme Court first overturned a rent control law as unconstitutional in Birkenfeld v. City of Berkeley (1976) 17 Cal.3d 129 , 169 [ 130 Cal.Rptr. 465 , 550 P.2d 1001 ] (Birkenfeld). The Birkenfeld court held that the Berkeley rent control law before it “drastically and unnecessarily restricts the rent control board’s power to adjust rents, thereby making inevitable the arbitrary imposition of unreasonably low rent ceilings. It is clear that if the base rent for all controlled units were to remain as the maximum rent for an indefinite period many or most rent ceilings would be or become confiscatory.” (Ibid.)

In light of Birkenfeld, the Berkeley rent laws were amended to provide for periodic upward adjustments of rent levels, in order to prevent the gradual confiscation of property. Our Supreme Court subsequently upheld those amended laws against a facial challenge in Fisher v. City of Berkeley (1984) 37 Cal.3d 644 , 679-684 [ 209 Cal.Rptr. 682 , 693 P.2d 261 ] (Fisher). The Fisher court specifically noted that under the revised ordinance, the rent board had the power to adjust rents upward in order to allow landlords a reasonable return on their investment. (P. 683, fn. 39.) The Fisher court also cautioned, however: “We must stress ... the limited scope of our inquiry in facial challenges .... As we made clear in Birkenfeld, whether rental regulations are fair or confiscatory depends ultimately on the result reached.” (P. 679.)

Berkeley was not the only city to enact rent control laws, and our Supreme Court was not the only court which was required to deal with these issues. This court (Division Five) first dealt with the Cotati rent control laws in Cotati Alliance for'Better Housing v. City of Cotati (1983) 148 Cal.App.3d 280 [ 195 Cal.Rptr. 825 ] (Cotati I). In Cotati I, we held such a rent control ordinance is not facially unconstitutional if it provides landlords “ ‘a fair and reasonable return on their investment.’ ” (P. 286.) Of course, the corollary to that holding is that a rent control ordinance which fails to actually provide a fair and reasonable rate of return in practice is unconstitutional, because it has taken private property without proper compensation. As we noted in Cotati I, the failure of a rent control law to provide a fair return on investment “might well violate prohibitions against the taking of private property for public use without just compensation contained in the . . . United States Constitution and article I, section 19, of the California Constitution.” (P. 293.)

We were later required to elaborate on these principles, in the context of the revised Berkeley rent control laws, in two more published cases. In

After the issue did ripen, we addressed it on the merits in Berkeley Rent, supra, 27 Cal.App.4th at page 984, where we concluded: “The judicial response to over two decades of . . . rent control controversies has consistently established these principles: Rent control schemes are unconstitutional if they deprive a landlord of a fair return on his investment; that condition [requiring a fair rate of return] if not present in an ordinance will be implied therein; and whether rental regulations are fair or (unconstitutionally) confiscatory is determined by the result they produce.” Under Berkeley Rent, therefore, it is the result produced, not merely the result intended, which must be examined in determining whether a rent control ordinance has unconstitutionally taken private property without just compensation. (Accord, Fisher, supra, 37 Cal.3d at p. 679.)

B. Application of Precedent and Constitutional Principles to the Case at Bench

The constitutional focus on the results produced by rent control laws is critical in this case. Appellants’ first amended complaint alleged certain results were produced by respondents’ rent control laws; and for purposes of ruling on this appeal from a judgment of dismissal following the sustaining of a demurrer without leave to amend, we are required to treat those results as legally established. (See Blank v. Kirwan (1985) 39 Cal.3d 311 , 318 [ 216 Cal.Rptr. 718 , 703 P.2d 58 ].) “[Appellants’ ability to prove their allegations is not a factor for our consideration . . . .” (Klein v. Children’s Hospital Medical Center (1996) 46 Cal.App.4th 889 , 892 [ 54 Cal.Rptr.2d 34 ] (Klein).)

We are, therefore, required to assume, for purposes of ruling on this appeal, that the results produced by rent control in Cotati were as follows. Contrary to the stated purposes of respondents’ rent control program, the results it produced were that poor people, the aged, students, and those on fixed incomes were gradually driven out of Cotati; and the stock of affordable rental apartments was not preserved, but instead was significantly depleted. In addition, appellants allege and we are required to assume that the rent board, contrary to the requirements of providing a fair rate of return, has decided appellants’ rate of return on their capital improvements to their property should be zero. Under those posited factual circumstances, we are

As the federal and California Supreme Courts have repeatedly observed, “The application of a general . . . law to particular property effects a taking if the ordinance does not substantially advance legitimate state interests, [citation], or denies an owner economically viable use of his land, [citation].” (Agins v. Tiburon (1980) 447 U.S. 255 , 260 [ 100 S.Ct. 2138 , 2141, 65 L.Ed.2d 106 ] (Agins), italics added; accord, Ehrlich v. City of Culver City (1996) 12 Cal.4th 854 , 870 [ 50 Cal.Rptr.2d 242 , 911 P.2d 429 ].) In the present case, appellants have alleged a state of facts which satisfies both prongs of this Agins test, by contending and offering to prove that respondents’ rent control laws have not substantially advanced legitimate state interests and have denied appellants any rate of return on their investments in capital improvements to their property. Under the more recent federal Supreme Court cases, general land use regulations will be held to have effected a regulatory taking if the results produced by the regulatory scheme do not advance a legitimate state interest. (See Nollan v. California Coastal Comm’n (1987) 483 U.S. 825 , 834 [ 107 S.Ct. 3141 , 3147, 97 L.Ed.2d 677 ] (Nollan); Dolan v. City of Tigard (1994) 512 U.S. 374 , 385, fn. 6 [ 114 S.Ct. 2309 , 2316, 129 L.Ed.2d 304 ] (Dolan).) Under the so-called Nollan/Dolan test, which also stems from the language of Agins, a property owner may challenge a regulatory taking if it does not advance a legitimate state interest, even if the taking does not deprive the property owner of all economically viable use of the property.

Respondents, however, argue that this Nollan/Dolan test does not apply, and that appellants were required to also allege their rental property has lost all economic value as a result of rent control. We reject this argument. It is inconsistent with the precise wording of Agins, supra, 447 U.S. at page 260 [100 S.Ct. at page 2141], which held that a taking may be established from either lack of advancement of a legitimate state interest “or” loss of economic value. Respondents’ argument is also inconsistent with the actual holdings in Nollan and Dolan, where the federal Supreme Court found there could be unconstitutional takings from the application of general land use regulations to a property, even though the property was not deprived of all of its economic value. (See Nollan, supra, 483 U.S. at pp. 834-842 [107 S.Ct. at pp. 3147-3151]; Dolan, supra, 512 U.S. at pp. 383-385 & fn. 6 [114 S.Ct. at pp. 2315-2316].) Respondents’ argument is also inconsistent with Lucas v. South Carolina Coastal Council (1992) 505 U.S.

Respondents rely for their argument solely upon certain dicta drawn out of context from a decision by the Fourth Appellate District, Division One, in Del Oro Hills v. City of Oceanside (1995) 31 Cal.App.4th 1060 , 1076 [ 37 Cal.Rptr.2d 677 ] (Del Oro Hills). In Del Oro Hills, the court held a developer could not mount a facial constitutional challenge alleging that a local land use ordinance restricting growth (subsequently found to be invalid) had been an unconstitutional taking, because the ordinance had served a legitimate state interest. (Pp. 1078-1081.) The court also held the developer could not mount a constitutional challenge to the ordinance as applied, because the issue was not ripe for review in light of the fact that the developer had not yet exhausted its administrative remedies. (Id. at p. 1077.) In dicta, the court also relied upon pre-Lucas, pre-Dolan authority dealing with the need to exhaust administrative remedies (Gilbert v. City of Cambridge (1st Cir. 1991) 932 F.2d 51 , 57) to suggest that “an ordinance is safe from a facial challenge if it preserves, through a permit procedure or otherwise, some economically viable use of the property.” (Del Oro Hills, supra, 31 Cal.App.4th at p. 1076, italics added.) The Del Oro Hills court later elaborated on this dicta concerning administrative remedies by opining, “we cannot accept Del Oro’s theory that satisfaction of one element of the Agins test (i.e., that there was an invalid regulation) is enough to establish a taking as a matter of law. In Nollan, Lucas, and Dolan, the United States Supreme Court’s analysis of the taking issue inextricably interlinked both the regulation’s validity and the question of whether any economically beneficial use of the property remained in light of the regulation. In light of later authority, Agins did not establish an ‘either/or’ type of test.” (P. 1079.)

No published decision of a California appellate court has extended the Del Oro Hills dicta, dealing with the need to exhaust administrative remedies before mounting a facial challenge to the constitutionality of a land use law, to apply instead to an ordinance which, as applied following exhaustion of administrative remedies, as here, allegedly deprives property of its value for no legitimate state interest. Similarly, no published decision of a California

In the context of the present case, there are also compelling constitutional reasons underlying our analysis. As the federal Supreme Court reemphasized most recently in Dolan'. “One of the principal purposes of the Takings Clause is ‘to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.’ ” (512 U.S. at p. 384 [114 S.Ct. at p. 2316], quoting from Armstrong v. United States (1960) 364 U.S. 40 , 49 [ 80 S.Ct. 1563 , 1569, 4 L.Ed.2d 1554 ].) If housing the poor and other vulnerable groups is a legitimate public burden—and we do not doubt that it is—then “ ‘in all fairness and justice’ ” and under the federal and California Constitutions, appellants contend this burden must be borne by the public as a whole, not just owners of rental property. It is not only unconstitutional, it is also— appellants suggest—futile and self-defeating to attempt to finance relief for the poor by regulatory exactions on local owners of private rental property. Such exactions might be justified as attempts to support a legitimate state interest, but they could still constitute takings. In addition, if the true purpose of rent control is indeed providing housing to the poor, then an examination of the actual results produced by such policies might be relevant to show they do not in fact substantially advance this interest. If that were shown, then this might suggest such rent control policies actually serve other purposes, at the expense of property owners, who are not so numerous as tenants. The danger that private property will be taken for an alleged public use by a local electoral majority is ever present in a rent control scheme; and we must examine the results produced, not simply the noble intentions, of such programs to determine their true constitutional effect. (See Fisher, supra, 37 Cal.3d at p. 679; Berkeley Rent, supra, 27 Cal.App.4th at p. 984.)

We must for these reasons also reject respondents’ argument that their demurrer was properly sustained because appellants’ allegations—that rent

California courts also routinely rely on the data from the most recent federal decennial census, even though it may necessarily be somewhat out of date, because it is still the best available source of such information. (See, e.g., Wilson v. Eu (1992) 1 Cal.4th 707 , 743 [ 4 Cal.Rptr.2d 379 , 823 P.2d 545 ]; Assembly v. Deukmejian (1982) 30 Cal.3d 638 , 677 [ 180 Cal.Rptr. 297 , 639 P.2d 939 ].)

We further observe that respondents are free if they wish, in later trial court proceedings, to attempt to introduce contrary evidence of subsequent census data, if it exists, allegedly showing, inter alia, that despite the documented exodus from Cotati by the poor and other groups reflected in the most recent federal decennial census, poor people have in fact more recently flocked to Cotati to live in an increasing inventory of rental apartments; that respondents’ rent control laws are applied so as to lure private investors and builders; or that the latter will receive a reasonable rate of return on their investment.

We need only hold here that respondents were proscribed from barring appellants’ allegations and proof by filing a demurrer, based on allegations such contrary evidence was or would be supported by more recent population data. (See Klein, supra, 46 Cal.App.4th at pp. 892-893.)

Finally, respondents contend appellants’ challenge to the actions of the rent board, in not granting them any return on their investment, was somehow barred by the applicable statute of limitations because the federal

The time has arrived to litigate the truth or falsity of appellants’ contentions that Cotati’s application of its rent control program has unconstitutionally confiscated landlords’ property. Confiscation may or may not have occurred in this case; and respondents’ rent control ordinance may or may not have substantially advanced some legitimate state interest, while avoiding the unlawful taking of landlords’ property. Those issues remain to be determined under the allegations of appellants’ pleading, combining a first amended complaint for inverse condemnation and a petition for writ of administrative mandate; and we remand this matter to the trial court for that purpose.

The judgment of dismissal is vacated. The matter is remanded to the trial court with instructions to overrule the demurrer.

Haning, J., and Jones, J., concurred.

A petition for a rehearing was denied August 18, 1997, and respondents’ petition for review by the Supreme Court was denied October 29, 1997. Kennard, J., was of the opinion that the petition should be granted.