Court of Appeal Holds Cities May Enact Various Forms of Residential Rent Control Measures
Cities can decide what rent control scheme to adopt and what base year to use for rent setting in drafting local rent control ordinances, a California appellate court has decided.
In 2015, the City of El Monte enacted a rent control ordinance. The ordinance extended rent control to all mobile home parks in the City regardless of size. The City Council acknowledged California’s severe housing shortage, the unique problems associated with mobile home ownership and the prior efforts to regulate a segment of mobile home parks in the City. The purpose of the ordinance was to prevent excessive and unreasonable rent increases, preserving available mobile home spaces in the City, enabling mobile home owners to receive fair return on their investment and preserving affordable spaces for rent in the City.
The ordinance stated that no rent could be charged in excess of the rent in effect as of July 1, 2015, unless the City authorized the increase through the application process. The ordinance identified 2012 as the base year for rent and presumed the net operating income received by the park owner in 2012 was fair and reasonable. The ordinance provided mobile home park owners an opportunity to rebut the presumption by demonstrating evidence of gross income, operating expenses and the determination of net operating income for the base year and the current year.
El Rovia Park was one of 33 mobile home parks within the City. El Rovia has 76 spaces and is one of two age-restricted parks. Roughly one month after the ordinance was enacted, El Rovia was charging rents as high as $550 per month, per space. In late 2016, El Rovia submitted to the City a petition to adjust its rents for all spaces to $665 per month. El Rovia provided real estate appraisals but failed to provide income and expense information. The City informed El Rovia that it nevertheless would review its application and found that, in 2012, the fair rental value for its spaces was $525 and, as of April 2017, the value per space was $575. El Rovia brought suit challenging that determination in the Superior Court. That court ruled against El Rovia and the Park appealed the decision.
El Rovia argued that 2015, the year the ordinance was enacted, not 2012, is the lawful base year for the determination of base rent adjustments.
The Second District Court of Appeal started its analysis with an established principle: cities are entitled to broad discretion in selecting the base year under rent control. Mobile home rent control ordinances are accorded particular deference as a rational curative measure to counteract the effects of mobile home space shortages that produce systematically low vacancy rates and rapidly rising rents. Further, it is within a city’s prerogative and legislative authority to determine what rent control scheme it will adopt and to decide what base year to employ in its rent control ordinance.
In measuring the constitutionality of a rent control ordinance, a fair return is the measuring stick. The state and federal constitutions do not mandate a particular formula in measuring fair return. “Under broad constitutional tolerance, California cities may enact various forms of residential rent control measures to satisfy a fair and reasonable rent standard,” the court said. “A just, fair and reasonable return is characterized as sufficiently high to encourage and reward efficient management, discourage the flight of capital, maintain adequate services, and enable operators to maintain and support their credit status,” but “such amount of return should not defeat the purpose of rent control.”
The court found that the City’s selection of 2012 as the base year was reasonable, constitutional and factually supported by the record. Thus, it rejected El Rovia’s challenge to the City’s base year.