Behind real estate’s scramble to fight the new rent law in court
“Rush to legislate leaves them open to challenges,” said one legal expert on RSA, CHIP’s play for a federal case
The real estate industry was always going to fight the tenant-friendly rent laws to the bitter end. On Monday, two of the city’s largest landlord organizations announced plans to launch a constitutional challenge to the rent regulation package by mid-July.
The industry organizations, the Rent Stabilization Association and the Community Housing Improvement Program, tapped Mayer Brown’s appellate specialist Andrew Pincus to lead the case, which will likely be argued on the basis that the property owners’ Fifth Amendment rights were violated.
But multiple sources told The Real Deal that it is one among several potential legal challenges various industry players may use to attempt to strike down the state rent law package, which was signed into law by Gov. Andrew Cuomo on June 14.
Some multifamily landlords are independently hiring lawyers to conduct legal research on the viability of a case, while others are waiting for RSA and CHIP to take action.
A collection of landlords are even forming informal groups to potentially bringing cases, multiple sources said.
Stuart Saft, of Holland & Knight and chairman of the Council of New York Cooperatives and Condominiums, said he’s been retained to do legal research for a client who’s weighing whether to proceed with a planned condo conversion, take legal action, or sell off his stabilized multifamily holdings.
“It has thrown the rental real estate industry into panic,” said Saft. Though he did not elaborate on the nature of the advice or strategy his firm was preparing, Saft noted that the “rush to legislate leaves them open to challenges.”
Real estate attorney Martin Heistein, who specializes in Major Capital Improvement and Individual Apartment Improvement work, said he’s been on the phone 16 hours a day with clients since the first draft of what became the new rent law came out. His firm, Belkin Burden Wenig & Goldman, is one of a handful that organized seminars early this week to update clients on the key elements of the legislation.
“I think the feeling across the board is disbelief and anger,” he said.
Is the law on Real Estate’s side?
Legal experts TRD interviewed were torn on the likelihood that RSA and CHIP’s case could succeed.
The substance of the challenge, according to Scott Mollen, a partner at Herrick, Feinstein LLP, who is not part of RSA and CHIP’s legal team, is that “generally, government cannot take private property without due process and just compensation.” So a constitutional challenge would likely invoke the Fifth Amendment, asserting that the new rent laws create “substantial limitations” on building owners’ ability to turn a profit from their building, which is “an unconstitutional taking” of property.
Others say that strategy is a long-shot.
“A legal challenge is substantially down the road,” said attorney Debbie Riegel of Rosenberg & Estis.
Heistein said that filing a lawsuit against the new laws “on an individual basis, I think, that’s just throwing money out.”
Other lawyers echoed the sentiment but declined to give their names, saying it would compromise their firms if they were retained to research and fight the rent laws.
Mayer Brown and Pincus did not immediately return a request for comment.
But Charles Moerdler, a partner at Stroock, which frequently represents the Real Estate Board of New York, said he believes the new rent law package “raises serious, serious questions of constitutional dimension.”
Moerdler, who is also a board member of the New York Housing Development Corporation, said that he feels the recent changes — particularly related to the costs owners can pass on to tenants when making apartment and building upgrades — disincentivizes owners and developers from investing in affordable housing.
“Anything that discourages or diminishes that [investing in affordable housing] is not in the public interest, and that is from a proponent of rent control,” he said.
To Moerdler, the outstanding issue around a constitutional case is actually a question: “What is the best way of getting to this Supreme Court as fast you can?”
The Supreme Court itself may have paved the way for the real estate industry with a recent decision last Friday in a case called “Knick v. Township of Scott, Pennsylvania,” which ruled that government violates the Fifth Amendment when it immediately takes property without paying for it.
The significance of the case to New York landlords’ cause is that “the new case provides landlords with the procedural option of suing in the federal court rather than having to start their case in the State court system,” Herrick, Feinstein’s Mollen explained.
He noted that the federal courts are thought to be less politically motivated than the state system as justices are appointed for life, instead of facing re-election. At least one landlord who spoke to TRD on background is considering incorporating their company outside New York to justify their case being heard in federal court.
Despite the “real issues” that Moerdler has with the new rent laws, he identified what he sees as a potentially “dangerous” aspect of RSA and CHIP’s forthcoming constitutional challenge.
“You could wind up with a challenge to all rent control statues,” he said, depending on how the court constitutes government’s “taking” of property.
Additional reporting by Georgia Kromrei