By Paul F. Utrecht, SPOSF Board Member

This is not an April Fool's joke, but it might as well be an early Christmas for small property owners. On April 1, 2004, the federal Ninth Circuit Court of Appeals decided in Chevron v. Lingle that Hawaii’s rent control for gas station is an unconstitutional “taking.” While “takings” law is complicated even to those steeped in constitutional law, the implications of this decision are not: it is a startling and remarkably good step towards finding that residential rent control is also unconstitutional. In 1997, Hawaii adopted rent control for gas prices. In Hawaii, a major oil company often owns the property under a gas station, which is then rented to a franchise who operates the station. The Legislature believed that gas prices would go down if the oil company could not raise the rent charged to the franchisees for the land. (Why hasn’t our Board of Supervisors adopted this easy solution to San Francisco’s skyrocketing gas prices?)

Chevron’s reaction to this new rent control law was immediate: It filed suit, contending that the law would not accomplish its purpose of lowering gas prices. Chevron argued that rent control would only shift wealth between the oil company and the franchisees: the franchisees would continue to charge the market price, but would make more money because their rent was fixed. Moreover, when a franchise is sold, the seller could get a higher price for the business because future profitability would be enhanced by the existence of rent control. Chevron argued that there is a heightened test for constitutionality under the Takings Clause: To be constitutional, it is not enough that the government thinks that a law will work; the government must prove that the law will (or does) work. In 1998, a District Court Judge in Hawaii agreed with Chevron. The judge found that there was no factual dispute and ruled, without a trial, that the rent control law is an unconstitutional taking because it would not lower gas prices; it would simply take money from oil companies and give it to franchisees. Attorneys for the state of Hawaii responded by appealing to a higher court, the Ninth Circuit. That time, in 2002, the decision came down in Hawaii’s favor. The Ninth Circuit held that the trial judge should not have ruled in favor of Chevron without having a trial because there was a factual question of whether the price of gas would go down. It was theoretically possible that the franchisees would pass the lower rent on to consumers in the form of lower gas prices. The Ninth Circuit sent the case back for a trial to resolve that fact question.

Chevron fought back in the lower court with a different judge at the trial. The judge, not surprisingly, found that the franchisees would charge market price and would not reduce the price of gas because their rent was lower. The judge also found the law unconstitutional. Again, Hawaii appealed to the Ninth Circuit Courtundefined with a stunning outcome. By a 2-1 vote, the Ninth Circuit agreed with the lower court that the rent control law is unconstitutional. The most important part of the ruling of small property owners is that all rent control laws are now subject to a heightened test for constitutionality under the Takings Clause. Essentially, the Ninth Circuit agreed with Chevron that the government cannot just say that it thinks rent control works; instead, the federal courts must look at the facts and determine whether rent control works in the real world. If not, the law is an unconstitutional taking. While the Ninth Circuit’s ruling only applies to gas station rent control, its implications are far-reaching. Just listen to the words of the dissenting judge: As a result of this ruling, “virtually all rent control laws in the Ninth Circuit are not subject to (a heightened test under the Takings Clause) and many of those laws may well be held unconstitutional under that test.”

While dissenting opinions are never the final word, they can be prescient. Take Justice Scalia’s dissent from the Supreme Court’s decision that state laws prohibiting homosexual conduct are unconstitutional: He predicted that the decision would lead to same sex marriages. The City Attorney is now relying on that very dissent to argue that Mayor Newsome was simply observing the constitutional right of everyone to marry. The Ninth Circuit’s decision in Chevron shines a new beacon of hope on SPOSF ultimate goal of abolishing rent control.

Reprinted from the Small Property Owners of San Francisco Journal. SPOSF Board member Paul F. Utrecht is an attorney specializing in property law.