Daily Development for
Thursday, January 22, 1998

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

Thanks to Jonathan Rivin of Springs, Rivin in San Francisco for this report. Comments are the editor's.

EMINENT DOMAIN; POWER TO CONDEMN; PUBLIC USE; RENT CONTROL: Honolulu City Ordinance providing a mechanism to convert leasehold interests in condominiums into fee interests through the City's condemnation power is constitutional because it takes private property for a sufficiently public purpose, but a contemporaneous City Ordinance limiting increases in ground rent due the owner of land under the condominiums is unconstitutional because it does not further a legitimate governmental interest.

City and County of Honolulu, 97 C.D.O.S. 7283 (9th Cir., 1997).

The feudal land ownership system existing in Hawaii prior to statehood has resulted in a pattern of land ownership akin to an oligopoly, where large private landowners control almost all non-government-owned land and lease it on a long term basis for development, including condominiums. Rent is usually fixed for a period, then is re-set at a percentage of the market value of the land. Usually, the re-set rent is substantially higher than the initial rate. Honolulu passed the ordinances in question in 1991 to break up this pattern of land ownership and to control escalating housing costs.

The lease-to-fee conversion ordinance provides that if 25 owners (or 50% of the leasehold owners, whichever is less) of a condominium project apply to purchase the fee, then the City will condemn the property unless the owner agrees to sell the leased fee to the lessees. If the City condemns the land, then the lessees must purchase the land from the City within 60 days. The ordinance included findings about defects in the housing market in the City and the potential for economic instability created by the market conditions.

The conversion ordinance is similar to Hawaii's Land Reform Act of 1967 which was upheld by the U.S. Supreme Court in Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984). The Midkiff Court concluded that the power of eminent domain could be used to further the public purpose of breaking up a land oligopoly, that the judiciary should defer to the legislature unless the public use determination was "palpably without reasonable foundation" or was not "rationally related to a conceivable public purpose."

The Richardson Court refused to distinguish Midkiff on any of the three grounds proposed by the plaintiffs. First, the court found that the heightened scrutiny required by Dolan v. City of Tigard, 512 U.S. 374 (1994), Lucas v. South Carolina Coastal Commission, 505 U.S. 1003 (1992), and Nollan v. California Coastal Commission, 483 U.S. 825 (1987) was not applicable because those cases involved uncompensated regulatory takings, whereas the lease-to-fee conversion ordinance was an express exercise of condemnation power, with full compensation for the taking. Applying the Midkiff standards, the court found that the public purpose of the ordinance was based on a reasonable foundation and that the method used to achieve the public purpose was rationally based.

The Richardson court found that the plaintiffs' claims that the conversion ordinance did not provide just compensation were not ripe. The condemnation procedure had not been activated by any lessee group, and the ordinance's standard for compensation ("current fair market value of the leased fee interest") was sufficient on its face.

The rent control ordinance (1) limits the number and timing of rent increases under ground leases to no sooner than fifteen years after lease inception and no more often than every ten years thereafter, (2) ties rent increases to the CPI, and (3) provides that transfers by an owner-occupant to another owner-occupant do not permit resetting of the rent but that other transfers do.

The court found that the rent control ordinance did not substantially further the legitimate governmental interest of creating affordable housing, and thus failed the Nollan test. As written, the ordinance permitted lessees to transfer their interests and capture the net present value of reduced land rent afforded by the ordinance; thus, the price of housing will remain the same.

A dissenting opinion by Judge O'Scannlain asserted that the lease-to-fee conversion ordinance does not provide just compensation for the taking because the formula for compensation ("the current fair market value of the leased fee interest") did not include any payment for the current rental stream from tenants to the owner. The majority's view was that the formula could be interpreted to include the value of the rent stream from the date of taking to the date of lease expiration, but the dissent argued that the language was not susceptible of that interpretation.

Comment 1: The distinction between the analysis of compensated and uncompensated takings is an important one that, although obvious, sometimes is easy to overlook in the rush to find good language to load into one's brief.

Comment 2: Anyone who has spent any time in New York City knows that every telephone kiosk is papered with advertisements selling information or opportunities relating to assumptions of rent controlled apartments. "Take over the lease at its current rate, but pay $5000 for the sofa." There are also statements about "key fees" to be paid to the manager. In short, New York rent control (and, the editor suspects, rent control in other cities that do not have provisions for decontrol on vacancy), operates in practice the same way that the Hawaii ordinance operated in law. Of course, it likely is impossible for courts to look beyond the requirements of a statute and condemn it for the way in which the society applies it, but the Ninth Circuit's view here that rent control arrangements that do not involve vacancy decontrol are unconstitutional puts an ironic twist on the operation of rent control ordinances elsewhere.

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