The Last Bite of the Big Apple: New York’s Rent Stabilization Law Tested in Federal Court

Background

Housing affordability continues to be a persistent issue faced by many New Yorkers.^[1] The New York City Housing and Vacancy Survey (NYCHVS) has shown that the rent burden has remained high for the past decade. ^[2]

The NYCHVS is conducted every three years to comply with New York State and New York City’s rent regulation laws, and it is sponsored by the Department of Housing Preservation and Development (HPD). The primary objective is to measure the net rental vacancy rate for New York City’s rental stock, as mandated by law. Additionally, NYCHVS describes the supply, condition, and continued need for rent control and rent stabilization. The initial findings of the 2021 NYCHVS were recently released in 2022. ^[3]

According to the 2021 NYCHVS report, the overall net rental vacancy rate in New York City is 4.54 percent.^[4] Upon closer examination, significant disparities in the availability of rental properties, particularly among lower-priced units, are present. Less than one percent (1%) of units with asking rents below the median of $1,500 are currently vacant.^[5] Over the past decade, New York City has seen a decline of 608,700 units renting for less than $1,500 and an increase of 431,200 units renting for $2,300 or more.^[6] Unfortunately, the 2021 NYCHVS report also reveals that over half of the households in New York City are rent-burdened, paying more than thirty percent of their income on housing expenses each month.^[7]

It can be argued that New York City is currently experiencing a significant shortage of affordable housing in lower-priced units. Various approaches, such as legislation, tax incentives, and zoning amendments, have been implemented to address this issue. Despite having the largest housing stock since the establishment of NYCHVS in 1965, rent regulation, which helps to maintain the affordability of NYC’s housing, is facing subtle opposition.

Rent regulations in New York City have remained a subject of litigation for decades. Property owners have challenged New York’s rent control and stabilization regulations on a host of constitutional violation grounds, contending that the regulations violate the Takings Clause, the Contracts Clause, the Equal Protection Clause, and the Due Process Clause. Every challenge has failed. ^[8]

Since 1969, New York City’s Rent Stabilization Law (RSL) addresses the problem of plummeting vacancy rates.^[9] To maintain this law, it is necessary to establish the existence of a housing emergency, which is defined as a citywide net rental vacancy rate of 5% or less.^[10] The RSL establishes The Rent Guidelines Board (RGB) to review various factors before determining the amount by which rents could be increased. These factors contain the economic condition of the residential real estate market industry in New York City, including real estate taxes, sewer, and water rates, gross operating maintenance costs, financing costs and availability, the overall supply of housing accommodations, and overall vacancy rates.^[11] Additionally, other relevant data, such as the current and projected cost of living indices for the affected area, is also considered by the RGB.^[12]

The Rent Stabilization Law (RSL) has undergone several amendments, including one in 1974. The State introduced the Emergency Tenant Protection Act (ETPA) to curb excessive rent hikes in the decontrolled segment of the rental housing market caused by low vacancy rates and insufficient standard rental housing.^[13] As previously mentioned, ETPA allows the City to extend RSL protections if the housing accommodation vacancy rate within the City drops to five percent (5%) or less by declaring a local emergency.^[14]

The Rent Stabilization Law (RSL) requirements in New York City require ongoing attention from both the State and City Legislatures. The aim is to find a fair balance between the often-conflicting interests of landlords and tenants. Although no party may be completely satisfied with the amendments that are passed, elected officials work to tackle complex and challenging issues related to the landlord-tenant relationship, which is an essential function of local and state legislatures. ^[15]

The 2019 RSL Amendments Subject to Legal Dispute   

The 2019 Housing Stability and Tenant Protection Act (HSTPA) aims to address the ongoing housing shortage crisis due to a significantly low vacancy rate. ^[16]

Certain amendments within the act are currently undergoing litigation. These include restrictions on landlords charging excess rent for major capital and individual apartment improvements, the removal of units from regulations based on rent or tenant income levels, and the repeal of certain vacancy and longevity increases that allowed landlords to raise rent above the allowable limit. ^[17]

Additionally, landlords are limited in their ability to recover one rent-stabilized unit per building for personal use and face further restrictions if the tenant affected is a senior citizen. ^[18]

Landlords often argue that rent stabilization regulations hinder their capacity to gather adequate rents to cover necessary repairs and upgrades, generate reasonable investment returns, and retain full control over their properties. ^[19] They believe that the RSL has fallen short of its goal of increasing the availability of low- and moderate-income housing, despite its stated objectives.^[20]

Tenant rights advocates argue that the RSL does not adequately address the issue of affordable housing for people with modest incomes in the city. Despite this, they believe that the RSL protections have positive effects, such as reducing community disruption, enabling families to establish long-term homes, and increasing the supply of apartments for low- and moderate-income residents, resulting in flourishing neighborhoods. ^[21]

Moreover, the City believes most individuals who profit from rent stabilization belong to the low- and middle-income brackets.^[22] Consequently, if RSL is abolished, it would lead to a significant increase in homelessness, and many essential workers would be unable to afford to live in the city.^[23] Both State and City representatives have agreed that RSL serves as a protective measure against the displacement of hundreds of thousands of New Yorkers. ^[24]

The First Bite of the Big Apple

Following the enactment of the HSTPA, landlords and their advocacy groups sued New York City and the Rent Guidelines Board in federal court. Their primary contention is that the revised RSL cannot be equitably or reasonably enforced in any circumstance, due to the amendments being viewed as a violation of private property rights through physical and regulatory takings. ^[25]

According to the district court, a physical taking happens when all property rights, including possession, use, and disposal, are deprived. The district court determined that the Rent Stabilization Law (RSL) only limits the landlord’s right to use the property, not their possession or disposal rights. As a result, the landlord’s claim of physical taking failed, indicating that the 2019 HSTPA is constitutionally sound based on its written form. ^[26]

Landlords cannot find instances where a challenge to rent-controlled legislation based on its written form succeeds.  The court assesses the economic impact, interference with investment-backed expectations, and character of the governmental action using the factors outlined in the Penn Central case. ^[27] The landlords failed to prove that the RSL is unconstitutional in all its applications, so the facial regulatory takings claim is dismissed.

The Second Bite of the Big Apple

The Landlords submitted an appeal to the 2nd Circuit following the decision of the lower court. Upon the review of previous 2nd Circuit decisions regarding rent stabilization, the Court notes that the regulatory regime of the RSL has been persistent while also being adjusted over time. ^[28]

The Landlords argue that the RSL amendments constitute a physical taking on its face, as they mandate that tenants be offered lease renewals, impede their ability to evict tenants and reclaim properties for personal use, and allow tenancies to be transferred to successors.^[29] The Landlords perceive these provisions as a permanent physical occupation that is forced upon them by the government.^[30] The 2nd Circuit clarifies that none of these provisions are unconditional requirements established by the legislature.^[31] Landlords must comply with these provisions only when specific conditions are satisfied.

The Landlords, also, challenge the HSTPA, by claiming that it unfairly restricts their ability to use their property. They can only mount a facial regulatory taking challenge if the restrictions go “too far.”^[32] To determine whether the restrictions constitute a taking, the 2nd Circuit uses the balancing test established in the Penn Central case, which dealt with a challenge to New York City’s historic preservation law.^[33] This involves conducting a factual inquiry and considering three factors: 1) the economic impact of the regulation; 2) the extent to which it interferes with distinct investment-backed expectations; and 3) the character of the governmental action.^[34]

The Economic Impact of the Regulation

The Landlords asserts that the RSL puts property owners in a difficult position where they must choose between making unprofitable investments or allowing their properties to deteriorate.^[35] They claim that rent-stabilized properties are worth significantly less (up to 50%) than similar properties with market-rate units.^[36] While the 2nd Circuit acknowledges that some property owners may be negatively affected by the RSL’s amended provisions, they also state that under the Penn Central standard, the Landlords did not make a convincing argument that every owner of a rent-stabilized property would suffer an adverse economic impact.^[37]

Distinct Investment-back Expectations

The 2nd Circuit admits that certain landlords may not have foreseen the removal of preferential rent increases or sunset provisions in the 2019 RSL; there is currently no conclusive evidence presented to suggest that the RSL has had a uniform effect on all landlord investment expectations.^[38] The Court explains that various landlords who bought properties under different RSL programs would have distinct expectations, making it difficult to evaluate them as a collective group.^[39] The New York Court of Appeals has emphasized that operating in a regulated environment like the New York City rental market means that no party can assume that the RSL will remain unchanged.^[40]

Character of the Governmental Action

Finally, Landlords believes the 2019 Rent Stabilization Law (RSL) unfairly places the burden of providing local public assistance benefits on a select group of building owners in New York City, rather than the government.^[41] When analyzing the “character” of governmental action, the U.S. Supreme Court instructs courts to consider whether a regulation enacted solely for the benefit of private parties or to serve important public interests.^[42] The 2nd Circuit determines that the 2019 RSL is part of a comprehensive regulatory regime, and since the New York legislature deemed it necessary to prevent “serious threats to the public health, safety, and general welfare,” courts should not second-guess legislative decisions.^[43]

Will There Be a Third & Final Bite of the Big Apple?

The rent stabilization law in New York City is currently safe, but there may be challenges ahead. The law is facing this federal lawsuit filed by landlords four years ago, anticipating a final appeal to the Supreme Court.

In May 2023, the landlords filed a petition with the Supreme Court to decide the fate of New York City’s rent stabilization laws.^[44] Their petition steadfastly argues the law places an “undue burden” on select property owners who are forced to provide “public assistance” to tenants through low rents, lease renewals, and succession rights.^[45] The landlords are grounding their case theory on the 2021 decision by the U.S. Supreme Court, Cedar Point Nursery v. Hassid, deciding  a state regulation authorizing very limited temporary entry by union organizers onto private agricultural property amounted to a physical taking of property that violated the Fifth and Fourteenth Amendments of the Constitution.^[46] The landlords seek clarification from the Supreme Court on the Takings framework that applies when a law places the burden of solving a societal problem, i.e. affordable housing, on a select group of property owners.

The Landlords are hopeful that current composition of the high court will help strike down New York City’s rent stabilization laws and declare rent regulation as a violation of owners’ right to use their property.^[47] They acknowledge that there is no guarantee that the U.S. Supreme Court will hear the challenge to the rent law, as the U.S. Supreme Court has declined to take up such cases in the past.

New York City’s rent stabilization law has been in effect since 1969 and has survived every legal challenge so far. If the Supreme Court chooses not to hear the case, the 2nd Circuit’s ruling will stand, and the rent stabilization program will continue.

Citations

[1] Anna Kodé, The Typical American Renter is Now Rent-Burdened, a Report says, The New York Times, (available at https://www.nytimes.com/2023/01/25/realestate/rent-burdened-american-households.html#:~:text=Residents%20in%20some%20cities%20are,Los%20Angeles%20at%2035.6%20percent).

[2] Testimony of the New York City Department of Housing Preservation and Development: Hearing on 2021 NYCHVS Selected Initial Findings before the New York City Rent Guidelines Board (Jun. 12, 2022) (statement of Elyzabeth Gaumer, PhD, Chief Research Officer of HPD).

[3] City of New York, Department of Housing Preservation and Development (HPD), Initial Findings from the 2021 New York City Housing and Vacancy Survey (May 2022) (available at NYCHVS Selected Initial Findings | City of New York).

[4] Testimony of the New York City Department of Housing Preservation and Development: Hearing on 2021 NYCHVS Selected Initial Findings before the New York City Rent Guidelines Board (Jun. 12, 2022) (statement of Elyzabeth Gaumer, PhD, Chief Research Officer of HPD).

[5] Id.

[6] Id.

[7] Id.

[8] See Harmon v. Markus, 412 F. App’x 420 (2d Cir. 2011); W. Hous. Corp. v. N.Y.C Dep’t of Hous. Pres. & Dev., 31 F. App’x 19 (2d Cir. 2002); Fed. Home Loan Mortg. Corp. v. New York State Div. Of Hous. & Cmty. Renewal, 83 F.3d 45 (2d Cir. 1996); Rent Stabilization Ass’n of City of New York v. Dinkins, 5 F.3d 591 (2d Cir. 1993); Rent Stabilization Ass’n of New York City, Inc. v. Higgins, 83 N.Y.2d 156 (N.Y. 1993); Teeval Co. v. Stern, 301 N.Y. 346 (N.Y. 1950); Greystone Hotel Co. v. City of New York, 13 F. Supp. 2d 524 (S.D.N.Y. 1998); Silberman v. Biderman, 735 F. Supp. 1138 (E.D.N.Y. 1990); Tonwal Realties, Inc. v. Beame, 406 F. Supp 363 (S.D.N.Y. 1976); Somerset-Wilshire Apt., Inc. v. Lindsay, 304 F. Supp. 273 (S.D.N.Y. 1969).

[9] N.Y.C. Admin. Code §26-501 et seq. (pursuant to N.Y. Emergency Tenant Protection Act of 1974 § 3).

[10] Id; See Rachel Holliday-Smith, NYC Apartment Vacancy Rate Jumps Up, But ‘Housing Emergency’ Status Survives, The City (May 2022) (available at NYC Apartment Vacancy Rate Jumps Up, But ‘Housing Emergency’ Status Survives – THE CITY).

[11] 26 N.Y. Unconsol. Laws, § 26-510(b)

[12] Id.

[13] Timothy Collins, An Introduction to the NYC Rent Guidelines Board and the Rent Stabilization System, NYC Rental Guidelines Board (January 2020) (available at An Introduction to the NYC Rent Guidelines Board and the Rent Stabilization System – Rent Guidelines Board (cityofnewyork.us).

[14] See New York Division of Housing and Community Renewal, Office of Rent Administration, Rent Stabilization and Rent Control Fact Sheet (Sept. 2022).

[15] Yee v. City of Escondido, 503 U.S. 519, 529 (1992) (noting that States have a wide latitude to regulate the landlord-tenant relationship, such as by placing “ceilings on the rents the landowner can charge or requiring the landowner to accept tenants he does not like.”); see also, Loretto v. Teleprompter Manhattan CATV Crop., 458 U.S. 419, 440 (1982) (“This Court has consistently affirmed that States have broad power to regulate housing conditions, in general, and the landlord-tenant relationship in particular, without paying compensation for all economic injuries that such regulation entail.”).

[16] 2019 N.Y. Laws ch. 36, Part B-F, (available at NY State Senate Bill S6458 (nysenate.gov)).

[17]  See 2019 N.Y. Laws ch.36, Part B, D, I, and K, (available at NY State Senate Bill S6458 (nysenate.gov)).

[18] Id.

[19] See, e.g., Brief for Nat’l Apt. Ass’n and Nat’l Multifamily Hous. Council as Amicus Curiae, p.23, Community Housing Improvement Program v. City of New York, 59 F.4th 540 (2023).

[20] Id.

[21] See, e.g., Brief for Nat’l Hous. Law Project et. al. as Amicus Curiae, p. 12, Community Housing Improvement Program v. City of New York, 59 F.4th 540 (2023).

[22] See generally, Brief of District Council 37 as Amicus Curiae, Community Housing Improvement Program v. City of New York, 59 F.4th 540 (2023). 

[23] Id.

[24] Id.

[25] Community Housing Improvement Program v. City of New York, 59 F.4^th 540 (2023); A companion case, 74 Pinehurst LLC v. New York, 59F.4th 557 (2023), addresses as-applied Takings claims brought by other landlords. The court rejected Plaintiff’s as-applied challenges to the RSL. They were decided in a consolidated opinion in the district court and heard concurrently at oral argument before the appellate court. Many of the Takings issues, in this case, are addressed in CHIP decision.

[26] Community Housing Improvement Program v. City of New York, 492 F. Supp. 3d 33, 43 (E.D.N.Y. 2020).

[27] See generally, Penn Central Transp. Co. V. City of New York, 438 U.S. 104 (1978).

[28]  Community Housing Improvement Program v. City of New York, 59 F.4^th 540, 548-50 (2nd Cir. 2023).

[29] Id. at 552.

[30] Id.

[31] Id.

[32] Community Housing Improvement Program v. City of New York, 59 F.4^th 540, 553 (2nd Cir. 2023); See also, Horne v. Dep‘t of Agriculture, 576 U.S. 350, 360 (2015); Yee, 503 U.S. at 529; Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).

[33] See Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978).

[34] Id.

[35] Community Housing Improvement Program v. City of New York, 59 F.4^th 540, 554 (2nd Cir. 2023).

[36] Id.

[37] Id.

[38] Id.

[39] Id. at 555-56.

[40] Matter of Regina Metro. Co., LLC v. New York State Div. of Hous. & Cmty. Renewal, 35 N.Y.3d 332, 369 (N.Y. 2020).

[41]  Community Housing Improvement Program v. City of New York, 59 F.4^th 540, 555 (2nd Cir. 2023).

[42] See Keystone Bituminous Coal Ass’n v. DeBenedicts, 480 U.S. 470, 485-86 (1987).

[43] Community Housing Improvement Program v. City of New York, 59 F.4^th 540, 555 (2nd Cir. 2023); See also, N.Y.C. Admin. Code § 26-501 (enacted pursuant to N.Y. Emergency Tenant Protection Act of 1974 § 3).

[44] Kathryn Brenzel, Landlords take rent law challenge to Supreme Court, The Real Deal (available at https://therealdeal.com/new-york/2023/05/08/landlords-take-rent-law-challenge-to-supreme-court).

[45]  Id.

[46] Cedar Point Nursery v. Hassid, 141 S. Ct. 2063, 2071 (2021).

[47]  Jack Rogers, Challenge to NY’s Rent Control Law Heads to US Supreme Court, American Legal Magazine, (February 2023) (available at https://www.globest.com/2023/02/09/challenge-to-nys-rent-control-law-heads-to-us-supreme-court/?slreturn=20230307145004).