335-7 LLC v. City of New York

Background

Five landlords—335-7 LLC, FGP 309 LLC, 226 LLC, 431 Holding LLC, and 699 Venture Corp.—brought a civil-rights action under 42 U.S.C. § 1983 against the City of New York, the New York City Rent Guidelines Board, and Ruthanne Visnauskas, in her official capacity as commissioner of the New York State Division of Homes and Community Renewal. New York Tenants & Neighbors and Community Voices Heard intervened as defendants.

The landlords challenged New York’s rent-stabilization laws generally and the 2019 amendments in particular. They claimed that the laws caused several unconstitutional takings under the Fifth and Fourteenth Amendments: a physical taking, a regulatory taking, a confiscatory taking, and a taking for a nonpublic use. They alleged that the laws restricted rent increases, limited recovery for improvements, eliminated certain forms of deregulation, made eviction and conversion more difficult, restricted tenant screening, and limited their ability to leave the rental market. They requested declaratory and injunctive relief and damages.

The complaint alleged that some properties contained both regulated and unregulated units, while others consisted entirely of rent-stabilized units. It also alleged financial losses, including reduced rent, unrecovered improvement costs, and a lower sale price for one building. The landlords agreed to dismissal of their due-process claim and conceded that a damages claim against the state official was barred by sovereign immunity; the court therefore dismissed those claims as well.

312 West 93rd Street Associates, which owned a single-room-occupancy property, moved to intervene as a plaintiff. It proposed adding equal-protection claims and claims that the rent-stabilization laws operated as physical and regulatory takings specifically as applied to single-room-occupancy properties.

Legal standards

The defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint alleges enough facts to state a legally plausible claim. The court was required to accept well-pleaded factual allegations as true and draw reasonable inferences for the plaintiffs, but it did not have to accept legal conclusions or unsupported assertions.

The court also considered intervention under Federal Rule of Civil Procedure 24. Intervention as of right requires, among other things, a timely request and an interest that may be impaired without intervention. Permissive intervention requires a timely request involving a common question of law or fact, and the court may deny it if intervention would cause undue delay or prejudice. Under Rule 15, leave to amend may be denied when amendment would be futile, meaning the proposed claims still could not survive dismissal.

Physical-taking claims

The court dismissed both the facial and as-applied physical-taking claims. A physical taking generally involves the government’s direct appropriation or physical occupation of private property. The court relied on decisions holding that regulating the landlord-tenant relationship does not itself create a physical taking when landlords voluntarily offer property for rent.

The court found that the rent-stabilization laws did not transfer possession or disposal rights to the government. The laws still allowed landlords to collect rent, evict tenants for specified unsatisfactory behavior, recover apartments for certain personal or business uses, demolish buildings in permitted circumstances, sell buildings, and otherwise leave the rental market. The court also found that the laws were not permanent because the City reevaluates housing conditions and vacancy rates every three years.

The landlords’ as-applied allegations did not change the result. Restrictions on screening tenants by prior landlord-tenant litigation did not prevent screening by credit report or eviction for specified misconduct. The fact that demolition might be infeasible for a fully occupied building also did not legally prevent leaving the market because the building could be sold.

Regulatory-taking claims

The court also dismissed the facial and as-applied regulatory-taking claims. A regulatory taking occurs when regulation goes so far that it is functionally equivalent to a direct appropriation of property. The court considered the three categories discussed in Supreme Court precedent: a total deprivation of economically beneficial use, a land-use exaction, and other regulatory takings evaluated under the factors from Penn Central Transportation Co. v. City of New York.

The court held that the rent-stabilization laws did not completely deprive the landlords of economically beneficial use. The landlords could continue collecting rent, seek hardship exemptions under specified conditions, convert or sell buildings, and use other remedies allowed by the laws. The court also held that the land-use-exaction test did not apply because the case did not involve a government demand for a public easement in exchange for a development permit.

Applying the Penn Central factors to the facial challenge, the court found that reduced profits or property values alone were insufficient to establish a taking. It also found that the landlords could not reasonably expect rent regulation to remain unchanged because rent regulation had existed in New York City for decades. Finally, the court considered the rent-stabilization system a longstanding, broad regulation intended to promote community stability and protect tenants from eviction and homelessness.

The court found the as-applied claims unripe because the landlords had not sought available hardship exemptions. A claim is unripe when it depends on future events or when the relevant agency has not made a final decision about how the law applies to the property. The court stated that the landlords needed to take reasonable steps to allow the regulatory agencies to exercise their discretion before bringing these claims.

The court added that the as-applied claims would fail even if they were ripe. The alleged loss from a lower sale price, reduced profits, unrecovered improvement costs, or the ability to charge higher rents in an unregulated market did not establish a taking under the authorities the court applied. The court also emphasized that landlords have no constitutional right to the rents available in an unregulated market.

Confiscatory-taking and public-use claims

The court dismissed the confiscatory-taking claim because that doctrine applies to private companies required to provide public utilities at regulated rates, not to landlords participating in the rent-stabilization market. The court found that the landlords were not compelled to enter or remain in that market and retained several ways to leave it.

The court dismissed the claim that the rent-stabilization laws involved a taking for a nonpublic use. It first stated that the landlords had not adequately alleged any taking. It then held that, even if they had, providing affordable housing and addressing a housing emergency were public uses under longstanding precedent. The court declined to question the legislature’s determination that rent regulation served public needs.

Intervention and amendment

Because the complaint was dismissed in its entirety, the court denied 312 West 93rd Street Associates’ motion to intervene as moot. The court also stated that the motion was untimely in any event.

The court denied the plaintiffs leave to amend because amendment would be futile. It granted the defendants’ motions to dismiss, denied the intervention motion as moot, directed the clerk to terminate the motions, and closed the case.