A Rohnert Park mobile home park owner’s demand that a court grant a rent increase because an unconstitutional city law held down rents has been rejected.

The landlord sought a rent hike to make up for a rent cap based on an ordinance that a federal court threw out. But the First District Court of Appeal denied the increase because the property owner did not show that it was denied a fair return on its investment. In fact, the property owner argued that it did not have to show it was deprived a fair rate of return, a legal strategy that “defeats any possible right to recovery,” the court ruled.

The controversy here started nearly 20 years ago, when the City of Rohnert Park adopted a rent control ordinance that limited mobile home park rent increases. Park owners chafed under the ordinance, and in 1996 a federal district court ruled the law unconstitutional because it did not provide landlords with a fair rate of return on capital improvements.

The city appealed that decision, but the Ninth Circuit declared the appeal moot because the city in 1995 had amended the ordinance to allow park owners to recoup the cost of capital improvements. In 2002, a district court ruled that the amendment had corrected the constitutional defect.

In 2003, the owners of the Rancho Grande Mobilehome Park — Hillsboro Properties and Goldstone Enterprises, whom the court called simply “Hillsboro” — filed an application for a rent increase to compensate for the period from 1988 to 1995, when the unconstitutional ordinance limited rents. The park owners contended that they were due a “Kavanau adjustment.”

In Kavanau v. Santa Monica Rent Control Bd., (1997) 16 Cal.4th 761, the state Supreme Court said that future rent increases could make up for prior enforcement of a rent control law that overreaches. In a follow up case, Galland v. City of Clovis, (2001) 24 Cal.4th 1003 (see CP&DR Legal Digest, March 2001), the state Supreme Court ruled that a property owner could receive damages for a violation of constitutionally protected rights only by showing that a rent ceiling had been confiscatory and a Kavanauadjustment was inadequate.

Rohnert Park, however, refused to process the application because the city’s Mobile Home Rent Review Board has no jurisdiction over such an application. The city contended that the property owners had to seek either a net operating income (NOI) adjustment or a capital improvement pass-through.

In September 2004, the park owners sued the city, alleging inverse condemnation. Sonoma County Superior Court Judge Raymond Giordano ruled for the city, finding that the takings claims were precluded by the five-year statute of limitations and that the challenge to the ordinance was also filed too late. He also ruled that the park owners had not shown that they were due a Kavanau adjustment. A unanimous three-judge panel of the First District Court of Appeal upheld the outcome, although it took a different approach to the case.

The appellate court first determined that the statute of limitations might not bar the takings claim because the claim might not have arisen until the city refused to process the 2003 application. The court did not decide on the statute of limitations issue, though, because it determined the property owners had not “made the allegations necessary to support any form of relief.”

“[T]he crux of the dispute in this case,” Justice Stuart Pollak wrote for the court, “comes down to a single issue: Is Hillsboro entitled to recover rental income (either from its tenants or from the city) that it was precluded from charging by a constitutionally defective rent control ordinance if it was not thereby deprived of a fair rate of return on its investment?”

Yes, the property owners argued, because the mere application of the defective ordinance denied them their substantive due process rights. There was no need to show they were denied a fair rate of return, the property owners contended.

“Hillsboro’s position is based on a faulty premise,” Pollak countered. “One is not denied substantive due process simply because one is affected by the application of a governmental promulgation that for some reason is found to be constitutionally defective. A denial of due process giving rise to a claim for relief arises only if application of the defective measure deprives one of a constitutionally protected right.”

“The constitutionally protected right that is involved in this case, as in Kavanau, is the right to receive a fair rate of return on one’s property,” Pollak continued. “Hillsboro’s argument proceeds on the unarticulated premise that a property owner has the constitutionally protected right to charge as much as it wants for the use of its property, so that enforcement of an invalid rent ceiling deprives it of a constitutionally protected right. That is not what the federal or state constitutions, or Kavanau, Galland or any other case, protect.”

“A rent control measure is ‘confiscatory’ and its enforcement constitutes a violation of the substantive due process rights of the owner if it deprives a property owner a fair return,” the court ruled.

Siding with the city, the court said the property owners should have sought an NOI adjustment or capital improvement pass-through. “[W]e are unable to conceive of any circumstance in which an owner would not receive a fair return that does not come within the scope of the NOI increase or capital improvement provisions,” Pollak wrote.

The Case:
Hillsboro Properties v. City of Rohnert Park, No. A110441, 06 C.D.O.S. 2882, 2006 DJDAR 4147. Filed April 6, 2006.

The Lawyers:
For Hillsboro: David Spangenberg, (707) 473-4340.
For the city: Michelle Marchetta Kenyon, McDonough, Holland & Allen, (510) 273-8780.