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DELAWARE VALLEY APT. HOUSE OWNERS ASSN. v. UNITED

October 12, 1972

DELAWARE VALLEY APARTMENT HOUSE OWNERS ASSOCIATION et al.
v.
UNITED STATES of America et al.


Hannum, District Judge.


The opinion of the court was delivered by: HANNUM

HANNUM, District Judge.

 Plaintiffs are the owners or managers of apartments and other rental property units subject to regulations promulgated by the Price Commission pursuant to the Economic Stabilization Act of 1970 and amendments thereto. *fn1" They do not challenge the delegation of legislative rulemaking power to the Price Commission. Their Complaint alleges that a regulation promulgated by the Commission exceeds the authority granted by Congress to the President to ". . . stabilize prices, rents, wages, and salaries . . ." *fn2" and that the regulation arbitrarily discriminates against them in violation of due process. They seek a declaratory judgment that the regulation is invalid and a permanent injunction enjoining defendants from enforcing the regulation against them. This Court must first decide whether the Price Commission had the authority to promulgate the challenged regulation. If the Commission exceeded the statutory power, the regulation is invalid and it will be unnecessary to reach the claim of discrimination.

 The challenged regulation, *fn3" referred to as the "8 percent rule", determines the "base rent" for residences with leases of greater than one year's duration entered into before May 15, 1971 where:

 (1) The "average transaction formula" method for determining "base rents" yields a figure of 8 percent or more, and

 (2) the landlord demands a rent increase of 8 percent or more when the lease expires.

 The term "base rent" is intended by the Price Commission to accurately reflect the market value of an apartment during the period of time just prior to the freeze of August 15, 1971. It is a floor to which future allowable increases are added. Thus, for month to month leases the most recent rent charged prior to the freeze would constitute an accurate "base rent" since the landlord had monthly opportunities to adjust the rent. For leases of longer duration than one month, signed during the 90 day period before the freeze, the Commission considered the rent specified in the lease to be a fair reflection of the market value just prior to the freeze. For leases entered into prior to May 16, 1971, the "base rent" is determined by employing an "average transaction formula". This method allows a landlord to calculate the average percentage that he increased rents on similar residences on which leases of longer than one month expired during the 90 day period before the freeze. The rent specified in the lease increased by the percent derived by use of the formula was considered to be a fair reflection of the market value just prior to the freeze.

 In the Commission's view, use of the "average transaction formula" to fix "base rents" for residences upon which leases of greater than one year were expiring did not accurately reflect the market value just prior to the freeze, but rather, generated substantial inflationary increases in rents. The Commission attributes this fact to prospective leasing practices engaged in by lessors who traditionally lease residences for periods of greater than one year (generally two or three years). When a lease expires, these landlords base the new rent on their expectation of inflation over the long term of the new lease. *fn4" With inflation somewhat curtailed after August 15, 1971, the Commission contends that use of the "average transaction formula" by these landlords yielded increases that were unjustifiably high. The Commission states it was aware that application of the formula by landlords who traditionally write leases for periods greater than one year would result in large increases, but it assumed that these landlords would continue their traditional leasing practices, thereby spreading the large increases over several years and contributing stability to the national rent structure. The Commission contends that it became aware of many instances where rents were being increased by large amounts derived from application of the "average transaction formula" while the duration of leases was being reduced to terms of one year or less. The Commission emphasizes that this application of a large rent increase to a shorter term lease provides an artificially high floor for future rent increases. It states that the "8 percent rule" was promulgated in response to this inflationary situation.

 Essentially the "8 percent rule" affords a tenant certain options if a landlord demands a rent increase of 8 percent or more. The landlord must give his tenant the option of a lease of the same duration as the expiring lease or a lease of one year but with an increase over the old lease rent of not more than 8 percent.

 Plaintiffs contend that the regulation exceeds the authority granted to the Commission under the Act in three respects: (1) the regulation affects the length of leases while the Act grants authority only to stabilize rents; (2) the regulation is an unauthorized interference with the constitutionally protected right to contract, and (3) the term of some leases entered into because of the options required by the regulation may extend beyond the termination date of the Act. In support of their first contention, plaintiffs argue that the Commission is without statutory authority to require that a tenant be given the options specified in the regulation. Citing Amalgamated Meat Cutters & Butcher Workmen of North America v. Connally, 337 F. Supp. 737, 754-759 (D.D.C.1971), plaintiffs state in their brief:

 
"It has been recognized that the Act does not give the President and his delegates a 'blank check' to promulgate whatever regulations they desire, but that such regulations must be authorized by and in furtherance of the statute." (p. 4)

 The Commission argues that a landlord is not required to offer his tenant options unless he demands a rent increase of 8 percent or more, an amount the Commission considers unjustified. It is emphasized that:

 
"The 8% figure is not a randomly chosen limit on the degree of inflation which will be tolerated. It was chosen to assure that this class of leases would be treated in a manner equitable and consistent with the treatment given other types of leases. The 8% consists of the 2 1/2% allowed to all transactions, and 5.5% which is a base rent adjustment roughly comparable to the increase nationally in rents during the period May 25, 1970 to August 15, 1971." *fn5"

 The Commission further argues that the regulation involves the least possible disturbance to traditional leasing practices consistent with the statutory objective of stabilizing rents. To the extent the tenant's options, when applicable, will affect the length of leases; the Commission contends this effect is incidental to the stabilization of rents.

 
"The Price Commission has determined that the quality of a product is a part of its price and that a reduction in quality is a reduction (sic) [an increase] in price. Rent is simply the price one pays for the right to inhabit a residence i.e., a lease. A part of the 'quality' of a lease is its duration. A reduction in the duration of a lease from that previously granted is, in the opinion of the Rent Advisory Board, an increase in rent. Regulation of duration is incidental to regulation of amount. It is the opinion of the Board that if § 301.208, [the 8 percent rule] explicitly or impliedly, regulates duration, it is a reasonable regulation designed to achieve the goals of the Act and in (sic) [is] neither arbitrary nor capricious in application or effect." *fn6"

 Plaintiffs refer the Court to the Amalgamated Meat Cutters case in support of their position that "regulations must be authorized by and in furtherance of the statute". In that opinion, upholding the constitutionality of the Economic Stabilization Act of 1970, the court considered the scope of authority delegated and stated "In other contexts when agencies have been given enormous regulatory tasks, the courts have interpreted the underlying statutes to take account of what is feasible". (p. 758) The Supreme Court has ...


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