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RICHARD PENNELL AND TRI-COUNTY APARTMENT HOUSE OWNERS ASSOCIATION v. CITY SAN JOSE AND CITY COUNCIL SAN JOSE

decided: February 24, 1988.

RICHARD PENNELL AND TRI-COUNTY APARTMENT HOUSE OWNERS ASSOCIATION, APPELLANTS
v.
CITY OF SAN JOSE AND CITY COUNCIL OF SAN JOSE



ON APPEAL FROM THE SUPREME COURT OF CALIFORNIA.

Rehnquist, C.j., delivered the opinion of the Court, in which Brennan, White, Marshall, Blackmun, and Stevens, JJ., joined. Scalia, J., filed an opinion concurring in part and dissenting in part, in which O'connor, J., joined, post, p 15. Kennedy, J., took no part in the consideration or decision of the case.

Author: Rehnquist

[ 485 U.S. Page 4]

 CHIEF JUSTICE REHNQUIST delivered the opinion of the Court.

The case involves a challenge to a rent control ordinance enacted by the City of San Jose, California, that allows a hearing officer to consider, among other factors, the "hardship to a tenant" when determining whether to approve a rent increase proposed by a landlord. Appellants Richard Pennell and the Tri-County Apartment House Owners Association sued in the Superior Court of Santa Clara County seeking a declaration that the ordinance, in particular the "tenant hardship" provisions, are "facially unconstitutional and therefore . . . illegal and void." The Superior Court entered judgment on the pleadings in favor of appellants, sustaining their claim that the tenant hardship provisions violated the Takings Clause of the 5th and 14th Amendments. The California Court of Appeal affirmed this judgment, 201 Cal. Rptr. 728 (1984), but the Supreme Court of California reversed, 42 Cal. 3d 365, 721 P. 2d, 1111 (1986), each by a divided vote. The majority of the Supreme Court rejected appellants' arguments under the Takings Clause of the 5th and 14th Amendments and the Equal Protection and Due Process Clauses of the 14th Amendment; the dissenters in that court thought that the tenant hardship provisions were a "forced subsidy imposed on the landlord" in violation of the Takings Clause. Id., at 377, 721 P. 2d, at 1119. On appellants' appeal to this Court we postponed consideration of the question of jurisdiction, 480 U.S. 905 (1987), and now having heard oral argument we affirm the judgment of the Supreme Court of California.

The City of San Jose enacted its rent control ordinance (Ordinance) in 1979 with the stated purpose of

"alleviating some of the more immediate needs created by San Jose's housing situation. These needs include but are not limited to the prevention of excessive and unreasonable rent increases, the alleviation of undue hardships

[ 485 U.S. Page 5]

     upon individual tenants, and the assurance to landlords of a fair and reasonable return on the value of their property." San Jose Municipal Ordinance 19696, § 5701.2.*fn1

At the heart of the Ordinance is a mechanism for determining the amount by which landlords subject to its provisions may increase the annual rent which they charge their tenants. A landlord is automatically entitled to raise the rent of a tenant in possession*fn2 by as much as eight percent; if a tenant objects to an increase greater than eight percent, a hearing is required before a "Mediation Hearing Officer" to determine whether the landlord's proposed increase is "reasonable under the circumstances." The Ordinance sets forth a number of factors to be considered by the hearing officer in making this determination, including "the hardship to a tenant." § 5703.28(c)(7). Because appellants concentrate their attack on the consideration of this factor, we set forth the relevant provision of the Ordinance in full:

"5703.29 Hardship to Tenants. In the case of a rent increase or any portion thereof which exceeds the standard set in Section 5703.28(a) or (b), then with respect to such excess and whether or not to allow same to be part of the increase allowed under this Chapter, the Hearing Officer shall consider the economic and financial hardship imposed on the present tenant or tenants of the unit or units to which such increases apply. If, on balance, the Hearing Officer determines that the proposed increase

[ 485 U.S. Page 6]

     constitutes an unreasonably severe financial or economic hardship on a particular tenant, he may order that the excess of the increase which is subject to consideration under subparagraph (c) of Section 5703.28, or any portion thereof, be disallowed. Any tenant whose household income and monthly housing expense meets [certain income requirements] shall be deemed to be suffering under financial and economic hardship which must be weighed in the Hearing Officer's determination. The burden of proof in establishing any other economic hardship shall be on the tenant."

If either a tenant or a landlord is dissatisfied with the decision of the hearing officer, the Ordinance provides for binding arbitration. A landlord who attempts to charge or who receives rent in excess of the maximum rent established as provided in the Ordinance is subject to criminal and civil penalties.

Before we turn to the merits of appellants' contentions we consider the claim of appellees that appellants lack standing to challenge the constitutionality of the Ordinance. The original complaint in this action states that appellant Richard Pennell "is an owner and lessor of 109 rental units in the City of San Jose." Appellant Tri-County Apartment House Owners Association (Association) is said to be "an unincorporated association organized for the purpose of representing the interests of the owners and lessors of real property located in the City of San Jose." App. 2-3. The complaint also states that the real property owned by appellants is "subject to the terms of" the Ordinance. But, appellees point out, at no time did appellants allege that either Pennell or any member of the Association has "hardship tenants" who might trigger the Ordinance's hearing process, nor did they specifically allege that they have been or will be aggrieved by the determination of a Hearing Officer that a certain proposed rent increase is unreasonable on the ground of tenant hardship. As appellees put it, "at this point in time, it is speculative"

[ 485 U.S. Page 7]

     whether any of the Association's members will be injured in fact by the Ordinance's tenant hardship provisions. Thus appellees contend, appellants lack standing under either the test for individual standing, see, e.g., Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 472 (1982) (individual standing requires an "'actual injury redressable by the court'"), or the test for associational standing, see Hunt v. Washington Apple Advertising Comm'n, 432 U.S. 333, 343 (1977) (an association has standing on behalf of its members only when "its members would otherwise have standing to sue in their own right").*fn3

We must keep in mind, however, that "application of the constitutional standing requirement [is not] a mechanical exercise," Allen v. Wright, 468 U.S. 737, 751 (1984), and that when standing is challenged on the basis of the pleadings, we "accept as true all material allegations of the complaint, and . . . construe the complaint in favor of the complaining party," Warth v. Seldin, 422 U.S. 490, 501 (1975); see also Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91, 109 (1979). Here, appellants specifically alleged in their complaint that appellants' properties are "subject to the terms of" the Ordinance, and they stated at oral argument that the Association represents "most of the residential unit owners in the city and [has] many hardship tenants," Tr. of Oral Arg. 42; see also id., at 7; Reply Brief for Appellants 2.

[ 485 U.S. Page 8]

     Accepting the truth of these statements, which appellees do not contest, it is not "unadorned speculation," Simon v. Eastern Kentucky Welfare Rights Organization, 426 U.S. 26, 44 (1976), to conclude that the Ordinance will be enforced against members of the Association. The likelihood of enforcement, with the concomitant probability that a landlord's rent will be reduced below what he or she would otherwise be able to obtain in the absence of the Ordinance, is a sufficient threat of actual injury to satisfy Art. III's requirement that "[a] plaintiff who challenges a statute must demonstrate a realistic danger of sustaining a direct injury as a result of the statute's operation or enforcement." Babbitt v. Farm Workers, 422 U.S. 289, 298 (1979).*fn4

This said, we recognize that the record in this case leaves much to be desired in terms of specificity for purposes of determining the standing of appellants to challenge this ordinance. Undoubtedly this is at least in part a reflection of the fact that the case originated in a state court where Art. III's proscription against advisory opinions may not apply. We strongly suggest that in future cases parties litigating in this Court under circumstances similar to those here take pains to supplement the record in any manner necessary to enable us to address with as much precision as possible any question of standing that may be raised.

Turning now to the merits, we first address appellants' contention that application of the Ordinance's tenant hardship provisions violates the Fifth and Fourteenth Amendments'

[ 485 U.S. Page 9]

     prohibition against taking of private property for public use without just compensation. In essence, appellants' claim is as follows: § 57O3.28 of the Ordinance establishes the seven factors that a Hearing Officer is to take into account in determining the reasonable rent increase. The first six of these factors are all objective, and are related either to the landlord's costs of providing an adequate rental unit, or to the condition of the rental market. Application of these six standards results in a rent that is "reasonable" by reference to what appellants' contend is the only legitimate purpose of rent control: the elimination of "excessive" rents caused by San Jose's housing shortage. When the Hearing Officer then takes into account "hardship to a tenant" pursuant to § 5703.28(c)(7) and reduces the rent below the objectively "reasonable" amount established by the first six factors, this additional reduction in the rent increase constitutes a "taking." This taking is impermissible because it does not serve the purpose of eliminating excessive rents -- that objective has already been accomplished by considering the first six factors -- instead, it serves only the purpose of providing assistance to "hardship tenants." In short, appellants contend, the additional reduction of rent on grounds of hardship accomplishes a transfer of the landlord's property to individual hardship tenants; the Ordinance forces private individuals to shoulder the "public" burden of subsidizing their poor tenants' housing. As appellants' point out, "it is axiomatic that the Fifth Amendment's just compensation provision is 'designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.'" First English Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 U.S. 304, 318-319 (1987) (quoting Armstrong v. United States, 364 U.S. 40, 49 (1960)).

We think it would be premature to consider this contention on the present record. As things stand, there simply is no evidence that the "tenant hardship clause" has in fact ever

[ 485 U.S. Page 10]

     been relied upon by a Hearing Officer to reduce a rent below the figure it would have been set at on the basis of the other factors set forth in the Ordinance. In addition, there is nothing in the Ordinance requiring that a Hearing Officer in fact reduce a proposed rent increase on grounds of tenant hardship. Section 5703.29 does make it mandatory that hardship be considered -- it states that "the Hearing Officer shall consider the economic hardship imposed on the present tenant" -- but it then goes on to state that if "the proposed increase constitutes an unreasonably severe financial or economic hardship . . . he may order that the excess of the increase" be disallowed. § 5703.29 (emphasis added). Given the "essentially ad hoc, factual inquiry" involved in the takings analysis, Kaiser Aetna v. United States, 444 U.S. 164, 175 (1979), we have found it particularly important in takings cases to adhere to our admonition that "the constitutionality of statutes ought not be decided except in an actual factual setting that makes such a decision necessary." Hodel v. Virginia Surface Mining & Reclamation Assn., Inc., 452 U.S. 264, 294-295 (1981). In Virginia Surface Mining, for example, we found that a challenge to the Surface Mining Control and Reclamation Act of 1977, 91 Stat. 447, 30 U. S. C. § 1201 et seq., was "premature," 452 U.S., at 296, n. 37, and "not ripe for judicial resolution," id., at 297, because the property owners in that case had not identified any property that had allegedly been taken by the Act, nor had they sought administrative relief from the Act's restrictions on surface mining. Similarly, in this case we find that the mere fact that a Hearing Officer is enjoined to consider hardship to the ...


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