United States: Lawsuit Challenges New York's Rent Reform Bill

On Monday, July 15, 2019, a group of industry trade associations and building owners filed a federal lawsuit naming the City of New York, Rent Guidelines Board (RGB), and a number of state and local officials as defendants, alleging that the New York Rent Stabilization Laws (the RSL), including the reforms that were signed into law this past month, violate the 5th and 14th Amendments of the U.S. Constitution. The 125-page complaint, filed in the Eastern District of New York, sets forth three separate claims for relief:

(1) The RSL Violates Due Process: The RSL states that its purpose is to prevent unwarranted rent increases during a "housing crisis," a determination that can be made based on both the supply and condition of affordable housing. In New York City, a crisis has been declared every three years for the past 50 years, which, according to the complaint, has been determined without any meaningful support and analysis, making the decision arbitrary and irrational in violation of the Constitution. The complaint further alleges that the RSL is not rationally related to this goal, on the basis that the RLS does not target its relief to low-income populations, is not related to promoting socio-economic or racial diversity, and is not rationally related to increasing the supply of housing in New York.

(2) The RSL Constitutes a Physical Taking of Property: The complaint further alleges that the effects of the RSL are akin to a direct seizure of property by the government, on the basis that the regulations (and in particular, certain changes resulting from the 2019 amendments) deprive property owners of three fundamental property rights: (a) the right to exclude others, based on the fact that the RSL prohibits landlords from refusing the request of a tenant (or a tenant's successor) to renew its lease for an affordable unit, which, according to the complaint, is more akin to "a life estate with inheritance rights" than a true leasehold interest; (b) the right to possess and use their own property, based on the fact that the RSL limits a landlord's ability to recover an affordable unit for personal use to one unit per regulated building and for use as a primary residence only; and (c) the right to dispose of their own property, based on the fact that the RSL generally prevents or inhibits owners of regulated buildings from converting their use to something other than residential, taking the building off of the rental market, or demolishing the building.

(3) The RSL Constitutes a Regulatory Taking of Property: Finally, according to the complaint, the RSL also constitutes a regulatory taking, based on the following arguments: (a) the RSL has significant adverse economic effect on property values (citing a study that concluded that rent-stabilized buildings have 50% of the value of market-rate buildings), and the bill that was signed last month will further increase the economic burden on these buildings with the new limitations imposed on a landlord's ability to increase rents in order to recapture the costs of major capital improvements and individual apartment improvements; (b) the RSL interferes with investment-backed expectations, based on the argument that the de minimis rent increases permitted by the RGB are significantly outweighed by annual growth in operating expenses; and (c) the RSL does not provide any reciprocal benefits to property owners.

The plaintiffs are seeking declaratory and injunctive relief against future enforcement of the RSL. Under the Federal Rules of Civil Procedure, the defendants are required to respond to the complaint within 21 days of filing, which means that a response should be expected on or before Monday, August 5, 2019. Morrison & Foerster will continue to closely monitor the matter.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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