The United States Court of Appeals for the Second Circuit recently ruled against landlords in a lawsuit challenging New York’s rent stabilization law and the Housing Stability and Tenant Protection Act of 2019 (HSTPA). The court affirmed the New York Eastern District Court’s decision when it dismissed the case in September 2020.

The plaintiffs in this lawsuit were led by the Community Housing Improvement Program and the Rent Stabilization Association (RSA). They sued the city, arguing that the rent stabilization laws violate the Constitution’s Fifth Amendment “Takings Clause.” The argument was that limits on rent increases and evictions passed in 2019 were so strict that they constituted an unlawful seizure of property.

The context: In 2019, the HSTPA made dramatic changes to how rents of regulated apartments can be raised. It changed formulas for vacancy leases, major capital improvements, and individual apartment improvements. It also limited owners’ ability to raise rents to make up for years where they raised rents below the legally allowable maximum. In addition, legislators eliminated ways owners could "deregulate" units and start charging market rents where rents had passed a certain threshold or which were occupied by someone making $250,000 or more a year.

The Takings Clause of the Fifth Amendment provides that "private property [shall not] be taken for public use, without just compensation.” In the lawsuit, the landlords argued that the rent stabilization law's provisions forcing them to renew leases with existing tenants and allow those tenants to pass on their rent-stabilized units to family members, dependents, and partners amounted to a government-imposed physical taking of their property. In addition, the limits on rent increases amounted to a regulatory taking by diminishing their property values and holding rents below what was necessary to make a reasonable profit.

The bottom line: The Second Circuit opinion shows how difficult it is to make constitutional challenges to economic regulation generally and rent regulation specifically. According to the Second Circuit opinion, "The caselaw is exceptionally clear that legislatures enjoy broad authority to regulate land use without running afoul of the Fifth Amendment's bar on physical takings."

The court rejected the landlords’ claims that New York's rent stabilization law was a facial regulatory taking on the grounds that not all landlords' buildings had been made unprofitable by the law. The court said the rent stabilization law may have an appreciable economic impact on profitability of some buildings. “When permissible rent increases are outpaced by operating cost increases, the result may be a reduction or, in some cases, the elimination of net operating income. We acknowledge that some property owners may be legitimately aggrieved by the diminished value of their rent-stabilized properties as compared with their market-rate units.” However, the "appellants have simply not plausibly alleged that every owner of a rent-stabilized property has suffered an adverse economic impact."

And with regard to renewal lease requirements and the right of tenants to pass on their lease to a successor, the court said that even if the law did require landlords to unconditionally rent to an "uninvited successor," that didn't amount to a physical taking because it "would deprive the Landlords only of the ability to decide who their incoming tenants are." The landlords' ability to remove those tenants wasn't totally eliminated, just conditioned. Therefore, it wasn't a permanent physical taking.

• Cmty. Hous. Improvement Program v. City of New York, February 2023