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Up for the Takings: Could New Holdings Destabilize Rent Stabilization in New York?

06/17/2022 | New York Law Journal
Sometimes, we have to wait.  Many involved in New York multifamily real estate have been doing exactly that since this past February, when the Second Circuit of the United States Court of Appeals heard combined argument on appeals from dismissals of two challenges to New York’s rent stabilization laws in Community Housing Improvement Program v. City of N.Y., and 74 Pinehurst LLC v. State of N.Y

Those cases, and others since, assert, among other claims, that the latest version of rent stabilization, under the Housing Stability and Tenant Protection Act of 2019, is an unconstitutional taking, with the State having perpetually commandeered covered units, rather than just regulating tenancies, to provide, by the very language of the act, “affordable housing,” with neither means testing for renting beneficiaries, nor recompense for owner providers. See Cmty. Hous. Improvement Program v. City of N.Y., 492 F.Supp.3d 33 (E.D.N.Y. 2020).  The Second Circuit’s ruling is expected sometime this summer, the immediate question being whether the court will simply affirm the dismissals based on its own prior precedents upholding rent stabilization, such as Fed. Home Loan Mortg. Corp. v. N.Y. State Div. of Hous. & Cmty. Renewal, 83 F.3d 45 (2d Cir. 1996); W. 95 Hous. Corp. v. N.Y.C. Dep’t of Hous. Pres. & Dev., 31 Fed.Appx. 19 (2d Cir. 2002).

I. In the Knick of Time


The federal district court challenges to rent stabilization, though responding to HSTPA’s enactment in June 2019, were just then facilitated by the Supreme Court’s decision that same month in Knick v. Township of Scott, Pennsylvania, 139 S.Ct. 2162 (2019).  Overruling high court precedent, Knick opened the federal courts to takings challenges without need for plaintiffs to first exhaust applicable state court remedies for obtaining compensation for claimed governmental takings, reasoning that takings claims vest when properties are taken by governmental action, and not when just compensation is later denied.  Id. at 2167-68.  The dissent in Knick—while perhaps presciently calling attention to the conservative majority’s lax regard for stare decisis—worried that the ruling would open the floodgates on takings cases in the federal courts.  Id. at 2188-89.  Evidently, the majority was unbothered by that possibility.  Id. at 2179.

II. Taking the Heights


Flood or no, even as we wait for a ruling in CHIP and 74 Pinehurst, we are seeing post-Knick takings holdings that may well influence the course of the rent-stabilization challenges.  One of those holdings is the Eighth Circuit’s decision from this April in Heights Apartments v. Walz, 30 F.4th 720 (8th Cir. 2022).  In Heights, a property owner has claimed that Minnesota’s governor, through executive orders imposing a residential eviction moratorium during the pandemic, violated multiple constitutional protections, including the Constitution’s takings and contracts clauses.  Id. at 724-25.  Relevant here, after a wholesale dismissal at the District Court level, the Eighth Circuit reinstated the owner’s takings claims, finding that the owner had plausibly pleaded both a per se physical taking and a non-categorical regulatory taking.  Id. at 733-36.  The first finding drew from the owner’s allegation that the executive orders had “deprived Heights of its right to exclude existing tenants without compensation,” and the second from the Court’s pleading-stage application of the “flexible” regulatory takings test first articulated by the Supreme Court in Penn Central Transportation Co. v. N.Y.C., 98 S.Ct. 2646 (1978).  Heights, at 733-34.

Perhaps most significant for our purposes here is that the Eighth Circuit reinstated the per se physical takings claims by applying the Supreme Court’s 2021 holding in Cedar Point Nursery v. Hassid, 141 S.Ct. 2063 (2021), and expressly finding that Cedar Point controlled over Yee v. City of Escondido, 112 S.Ct. 1522 (1992).  Heights, at 733.  Yee, of course, is the last high court decision on rent regulation, and upheld rent limitations that did not deprive landlords of the right to evict or compel continued leasing.  Yee, at 1534.  Yet, last year, in the wake of Knick, Cedar Point found that a California regulation compelling agricultural employers to allow “union organizers onto their property for up to three hours per day, 120 days per year” constituted a per se physical taking—no matter that the intrusion was temporary and by nongovernmental actors (among other factors).  Cedar Point, at 2074.  Under that rubric, the Heights court found the owner’s per se physical takings claim to be well-pleaded and distinguishable from YeeHeights, at 733.

III. Final Takes (for Now)  


So, what might Heights mean for the cases now before the Second Circuit?  Heights isn’t binding there, but, were that court to affirm the dismissals of CHIP and 74 Pinehurst—while either ignoring or distinguishing Cedar Point—we would arguably have a split between the Second and Eighth Circuits on, at the least, the effect of Cedar Point on per se physical takings claims at the pleading stage.  This could be so, because, like the owner in Heights, the plaintiffs in CHIP and 74 Pinehurst have pleaded not just Penn Central regulatory takings claims, but per se physical takings claims premised upon the effectively permanent intrusion into covered rental units by third-party beneficiaries of rent-stabilized “affordable housing,” whether now in place or by future regulatory reservation.  CHIP, at 43-44.  Such a split on Cedar Point could bolster a bid for certiorari to the Supreme Court.  And that, in turn, might lead to that Court, stare decisis notwithstanding, reviewing the constitutionality of New York’s rent stabilization laws, even in the face of Yee.  Were New York’s rent stabilization laws to be deemed an unconstitutional taking, the decision—affecting many rental units and necessitating restrained successor legislation—would be, no exaggeration, without parallel in New York real-estate jurisprudence.   

But another, perhaps likelier, possibility could be a procedural punt: a remand for further consideration under Cedar Point.  As noted, Heights didn’t treat either takings claim on the merits, but merely reinstated them, so the Second Circuit could hypothetically abide Cedar Point and avoid a circuit split by reinstating covered claims, remanding for further proceedings, and leaving the merits of the New York property owners’ takings claims for another day.  Now, that sort of procedural stroke might not alter the Second Circuit’s ultimate decision, but any merits determination would certainly be delayed.  And that would bring us right back to where we are now: waiting.

Maxwell Breed, Esq.
Partner, Warshaw Burstein, LLP
Assisting with the Article:
Michael Nesheiwat, Esq.
Associate, Warshaw Burstein, LLP
Reprinted with permission from the “June 20, 2022 edition of the “NEW YORK LAW JOURNAL”© 2022 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.