UPDATE: Ninth Circuit Court of Appeals Sitting En Banc Holds that City’s Rent Control Ordinance Does Not Constitute a Regulatory Taking of Property From Mobile Home Park Owners

In Guggenheim v. City of Goleta, (— F.3d, C.A.9 (Cal.), December 22, 2010), the United States Court of Appeals for the Ninth Circuit sitting en banc considered whether mobile home park owners stated a regulatory taking of property claim against a city that has a rent control ordinance (“RCO”) that affects mobile home parks. The court of appeals held that the mobile home park owners failed to prove a regulatory taking, reversing an earlier Ninth Circuit ruling that the RCO was invalid as a “naked transfer” of wealth from the park owners to the mobile home owners.

Facts

The County of Santa Barbara, California (“County”) first enacted an RCO for mobile homes in 1979 and amended the RCO in 1987. The RCO’s purpose is to relieve “‘exorbitant rents exploiting’ a shortage of housing and the high cost of moving mobile homes.” The RCO “has a complex scheme for setting rents, limiting how fast they rise, and affording landlords a mechanism for disputing the limits.”

Daniel and Susan Guggenheim and Maureen H. Pierce (collectively, the “Guggenheims”) bought Ranch Mobile Estates, a mobile home park burdened by the ordinance, in 1997. The date of purchase was 18 years after the original RCO went into effect and ten years after the RCO was amended. When the Guggenheims purchased the park, it was located in “unincorporated territory” within County.

In 2002, the City of Goleta (“City”) incorporated territory within County that included the Guggenheim’s property. Pursuant to California law, “a newly incorporated city comprising previously unincorporated territory [must] adopt, as its first official act, an ordinance keeping all the county ordinances in effect for 120 days or until the new municipality changes them, whichever happens first.” City immediately adopted County’s code by reference on February 1, 2002. County’s RCO became City’s RCO on City’s first day of existence. On April 22, 2002, which is within the 120-day sunset period, City adopted County’s code, which included the RCO but without the 120-day provision. City and the Guggenheims stipulated that there was a gap in time when the RCO was not in effect; the hours between when City came into existence and the time it performed the first official act that day, which was adopting an ordinance to keep all County’s ordinances. These few hours were the only time during the Guggenheim’s ownership of the park that there was no RCO.

In 2002, the Guggenheims brought a lawsuit against City claiming the RCO amounted to a taking of their property without just compensation. The trial court granted judgment in favor of City. A three-judge panel of the court of appeals held that the RCO did amount to a regulatory taking of the Guggenheims’ property. The court based its ruling on its finding that the RCO causes a transfer of wealth from a mobile home park owner to the tenants of the park, without holding down overall housing costs. However, the court decided to rehear the case en banc.

Decision

The court of appeal sitting en banc held that there was no regulatory taking of property. The Guggenheims challenged City’s initial adoption of the RCO in February 2002 and its readoption in April 2002. They did not challenge the 1979 or 1987 County ordinances. The Guggenheims asserted a facial challenge to the RCO, which means they alleged that the RCO on its face amounted to a taking of their property. They claimed that the sites in their mobile home park would rent for approximately $13,000 a year without rent control, but the rents average less than $3,300 because of the RCO. They also claim that a tenant who rents a site in their park could sell their mobile home for an average of $14,000 if the RCO was not in effect, but because of the RCO, the average mobile home in their park sells for approximately $120,000.

County’s RCO was promulgated long before the Guggenheims bought the mobile home park. Therefore, “the rent control regime created by the county ordinance limited the value of the land when the Guggenheims bought it.” The Guggenheims owned the mobile home park before, during, and after the 2002 adoption of the ordinances by City. “[T]he basis of a facial challenge is that the very enactment of the statute has reduced the value of the property or has effected a transfer of a property interest.” The harm is done when the law is passed. The court noted that it does not matter that the challenge was not worth making in 1979 or 1987 when the values for property were lower but then became worth challenging when housing prices rose.

The primary factor to consider in determining whether a regulatory taking has occurred is “the economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations.” The court found that even if the RCO transferred $10,000 in rent from the landlord of the mobile home park to the tenant, the transfer happened before the Guggenheims bought the mobile home park. The RCO was a matter of public record and the price the Guggenheims paid for the park would have “reflected the burden of rent control they would have to suffer.”

The Guggenheims could not have expected they would get the higher amount of rents when they purchased the property because the property was already subject to the RCO when they purchased it. “The Guggenheims bought a trailer park burdened by rent control, and had no concrete reason to believe they would get something much more valuable, because of hoped-for legal changes, than what they had.” The court concluded that the few hours when the RCO was not in effect could not have given rise to any expectations because they had bought the park years earlier “and even if they had bought the mobile home park during those few hours, they would have known that [City’s first official act would, under controlling law, have to be adoption of the county’s rent control ordinance.”

The court held that the Guggenheims failed to state a claim for regulatory taking of property. The court also rejected the Guggenheims’ argument that the RCO denied them due process or violated their right to equal protection of the law.

Questions

If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Jeffrey L. Massey | 916.321.4500

Jon E. Goetz | 805.786.4302