Daily Development for Tuesday, September 14,
Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
LANDLORD/TENANT; RESIDENTIAL; RENT CONTROL;
MOBILE HOMES: In setting forth its operating profits as a basis for justifying
an increase in allowed rents under a rent control ordinance, a landlord must
amortize expenses that in fact are paid for with monies borrowed over a period
of more than a year, and must include attorney's fees as overhead, even
extraordinary attorney's fees related to environmental problems. Finally, new
units (not rent controlled) are not "capital improvements" justifying
an increased rate of return if they do not contribute to the attractiveness of
the other units in the project.
Carson Harbor Village, Ltd., v. City of
Carson Mobile home Park Rental Review Board, __ Cal. App. 4th ___ (1999 Cal.
App. LEXIS 156 (2nd Dist. February 24, 1999)).
Carson Harbor Village Mobile home Park
("CHV") is an upscale 420 doublewide space mobile home park situated
on 70 acres in the City of Carson. Of the park's 420 spaces, 407 are subject to
Carson rent control laws while eleven new spaces, completed in 1995, are not.
Under Carson's Mobile home Space Rent Control Ordinance ("Ordinance"),
requests for rent increases must be submitted for approval to a Mobile home Park
Rental Review Board ("Board"). In the face of decreased profitability
and rising operating expenses, CHV filed an application with the Board on June
29, 1995 for a general rent increase in an amount ranging between $163.42 and
$178.07. In large part, the increase in operating expenses was attributable to
remediation of contaminated wetlands located on the property. The Board sent out
notice to all of the park residents. A public hearing on the rent increase
application was set for October 9, 1996, but continued until December 11, 1996
at the request of the park owners, tenants, and homeowners' association. On
December 6, 1996, the Board's staff issued a report ("First Staff
Report") in which it recommended a monthly rent increase of $ 99.37,
approximately half of that requested by CHV. A few hours before the December 11,
1996 public hearing, staff issued another report ("Second Staff
Report") decreasing the recommended per space rent increase from $ 99.37 to
$ 76.91. The decrease resulted primarily from reducing by $100,063 the operating
expenses attributable to attorneys' fees. At the December 11, 1996 hearing,
despite CHF's objections, the Board granted the mobile home park homeowners'
association further continuance to study and respond to the new information and
issues presented in the Second Staff Report, rescheduling the hearing for
January 22, 1997. CHV requested but was denied an interim rent increase as
provided by the rent control ordinance. On January 2, 1997, CHV submitted
additional documentation disputing the downward adjustment of $100,063 in
attorneys' fees. On January 16, 1997, staff issued a final report ("Third
Staff Report"), recommending a monthly rent increase of $58.70 per space,
approximately one third of that requested by CHV. This amount was adopted by the
Board at the January 22, 1997 public hearing. On April 22, 1997, CHV filed a
petition for a writ of administrative mandate ("Petition") with the
Los Angeles Superior Court that was denied on November 6, 1997. The lower court
found the Board did not abuse its discretion in disallowing, as operating
expenses, a portion of the costs incurred in remediating the contaminated
wetlands and the cost of constructing 11 new spaces in the park. The court
further found CHV failed to establish that the monthly rent increase of $58.70
resulted in an unfair return on its investment. It finally found CHV was not
entitled to an interim rent increase because the time period between CHV's
submission of materials on January 2, 1997 and the Board's decision on January
22, 1997 was well within the statutory time limit.
On appeal: held: Affirmed:
The appeals court noted that
"Constitutionally valid rent control ordinances must be reasonably
calculated to eliminate excessive rents and provide landlords a just, fair and
reasonable return on their property. (Donohue v. Santa Paula West Mobile Home
Park, 47 Cal. App. 4th 1168, 1177 (1996); Birkenfeld v. City of Berkeley, 17
Cal. 3d 129, 165, 130 Cal. Rptr. 465, 550 P.2d 1001 (1976).)
"Mobile home rent control ordinances are
accorded particular deference as rational curative measures to counteract the
effects of mobile home space shortages that produce systematically low vacancy
rates and rapidly rising rents;" (Carson Mobile home Park Owners' Assn. v.
City of Carson, 35 Cal. 3d 184, 189, fn. 4, 197 Cal. Rptr. 284, 672 P.2d 1297
(1983) ); and that "[t]he Board's interpretation of Carson's rent control
laws merits great weight." Under this laissez faire approach, the Court
determined that it must "defer to the Board's interpretation and
application of the ordinance and implementation guidelines unless [it finds the
Board's] construction lacks substantial evidence to support its findings."
Under a "substantial evidence test" (301 Ocean Ave. Corp. v. Santa
Monica Rent Control Bd., 228 Cal. App. 3d 1548, 1556, 279 Cal. Rptr. 636
(1991)), the court presumes that the record contains evidence to sustain the
board's findings of fact. The board's interpretation of an ordinance's
implementation guidelines is given considerable deference and must be upheld
absent evidence the interpretation lacks a reasonable foundation. The burden is
on the appellant to prove the board's decision is neither reasonable nor lawful.
The primary issue raised by CHV on appeal related to the Board's decisions
regarding the calculation of CHV's operating expenses. CHV argued that the Board
erred when it disallowed attorneys' fees and misallocated other operating
expenses related to a wetlands remediation project. The court disagreed, finding
substantial evidence to support the board's conclusion that was "consistent
with the spirit and purpose of the ordinance and implementation
Under the Carson ordinance, profitability is
protected by increasing rent levels to cover rising expenses and inflation. CHV
submitted 1992 profit levels as targets to be used in computing the amount of
any rent increase to be applied after 1995. CHV submitted evidence of increases
in water expenses, property taxes, street maintenance, wetlands remediation and
related legal expenses. A component of these expenses included $190,333 to
remediate wetlands contamination and $100,063 in legal fees associated with the
contamination. This remediation amount was based on the cost of the project,
covered by a loan payable over a period of three years. CHV contended that
"an expenditure incurred in a given year is properly allowed as an expense
for the same year."
In the final staff report, the report
ultimately adopted by the Board, the remediation expense was spread over three
years rather than the first year in which the obligation was undertaken.
Additionally, the $100,063 in legal fees related to the wetlands contamination
were eliminated from the staff recommendation as an overhead expense for which
any rental increase would be permitted.
As to the $190,333, the Court agreed with the
Board staff's recommendation that the project amount be spread over three years.
While the cost was incurred in one year, the obligation to repay the cost was
spread over 28 months. Applying the entire obligation to the first year would
overstate the operating expenses for that year and create a "permanent,
artificially high monthly rent increase would permit CHV to realize unwarranted
profits from increased revenues long after repayment of the loan obligation
incurred to remediate the wetlands contamination." Regarding the attorneys
fees, the Court agreed with the Board that the legal services rendered in
connection with the contamination mitigation were not provided in connection
with regular mobile home park operations and noted similar treatment of
attorney's fees in remediation cases involving Unocal, CalTrans, as well as the
cities of Carson and Compton. While excluding the fees associated with
contamination litigation, the Board did permit some fees that were associated
with regulation compliance and obtaining of remediation plan approval.
Regarding the new construction of eleven park
spaces, the Board disallowed these costs as operating expenses, viewing the new
spaces as an investment an "expansion of a valuable revenue source"
and not capital improvements. The court agreed with the board's characterization
of the new spaces, noting that "the spaces do not contribute to the overall
use and enjoyment of the mobile home park by its residents, and in fact reduce
the number of available parking spaces for residential vehicles."
In affirming every component of the board's
decision, the Court also concluded that there was substantial evidence to
support the Board's decision not to grant CHV an interim rent increase. Despite
a provision of the municipal code permitting an interim increase when a final
decision is not reached within 75 days of the completion of a rent increase
application, the Board claimed that it had refused to grant an interim increase
after a number of continuances in the proceedings on the grounds that any delay
was caused by CHV's failure to submit material information.
Comment: Obviously, one can differ with the
very premise of rent control in an "upscale" area, even if it is a
neighborhood of mobile homes. California has particularly vicious rent control
schemes for mobile home parks. But if one goes with the logic, the case seems to
be an appropriate result. Clearly "loading up" expenses for one year
could artificially skew the computations, giving the landlord an unwarranted
high rent increase in future years when the costs are not likely to recur.
On the other hand one of the pet peeves of
rent controlled landlords is the fact that the time lag in any rent increase
application is such that the landlord already is earning an inadequate return
simply because of the delay before the latest increase can be approved. The park
owner's position on an interim increase, at least to the level recommended by
Board staff, seems to be sound. But rent control ordinances are "political
animals" and courts appropriately try to avoid micromanagement, as was the
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