The authority of the government to adopt laws to regulate rents charged to residential tenants has been firmly established for nearly 40 years. Even though there is near-unanimous consensus among economists that rent control does not improve the availability or quality of affordable housing, many municipalities still cling to their rent control ordinances as political security blankets.
Since the state government has ceded control of the issue to the municipal governments (with the exception of a state-imposed exemption for newly constructed rental housing), rent control is a comfortable fit with the state’s propensity to promote “home rule” rather than rational planning. Continuing support for local rent control is viewed as a convenient and straightforward way to pander to a local constituency and allows the politically motivated to identify with “tenant protection” and “affordable housing.”
The challenge of the next decade will be to promote a seasoned and intelligent discourse regarding the issue. Historically, the battle lines have been drawn—with tenants vigorously advocating strong rent control, and landlords seeking to eliminate it. From my perspective, a more workable view of rent control can be achieved by understanding three important factors and risks.
First, municipalities that use rent control to maintain rents below the level of the market lower the value of the multifamily property, depress tax assessments on that class of property and shift a disproportionate burden on the remaining taxpayers in the municipality.
Experts have testified that below-market rents protected by rent control can lower the assessed valuation of a property by as much as 50 percent, and the relative tax burden is reduced accordingly.
This economic fact makes it important for the multifamily industry to educate the other taxpayers in town that they are subsidizing the continuation of rent control through a higher tax burden placed on their property. I have appeared before many local town councils advocating for fair and balanced rent control, but nothing is more persuasive than the single-family owner challenging this hidden rent control subsidy paid by their higher property tax burden.
Second, a municipality that does want to retain its rent control ordinance must include a mechanism to allow the rent to be adjusted to market-rate when a tenant voluntarily vacates the property. While there is no legal requirement that rent control schemes include this vital safety valve, most ordinances now contain vacancy decontrol provisions, which allow operators to obtain a market-rate when an existing tenant vacates.
Vacancy decontrol does not adversely affect any existing tenant and, in fact, has been shown to improve conditions of their tenancy without an increase in their rent payments. My experience demonstrates that inclusion of vacancy decontrol in rent-controlled areas can even be popular among tenants.
When the issue was placed on the ballot as part of an effort to amend rent control in Morristown, N.J., the measure was supported by nearly 70 percent of the voters. A majority of the tenants that voted supported the measure as well. After the measure was implemented, many buildings experienced an increase in capital investment (new windows, improved common facilities), as landlords had a financial incentive to attract new tenants at market rates.
Finally, landlords must know the financial consequences of failing to comply with the local rent control ordinance. Most laws have provisions that make illegal rent increases void and require rent rollback. The excess amounts of rent charged must also be returned to the tenant.
Further, a violation of the rent control ordinance is considered to be a violation of state consumer fraud law, entitling the tenant to recover three times the amount of the overcharge, plus attorney’s fees against the landlord. The financial consequences of non-compliance—even for one tenant—can be devastating. Frequently, when one tenant challenges their rent as non-compliant, a series of additional tenants are also likely to file claims.
Most recently, class action litigation has been utilized to create building-wide claims on behalf of both current and former tenants for failure to comply with rent control. This development changes an individual claim worth perhaps a few thousand dollars, to an exposure that can be in the millions, with all of the attendant costs of litigation as well.
Even though elimination of rent control might not be politically obtainable, incremental improvements and more rational rent control is realistic. Understanding these core regulatory issues can help the multifamily industry advocate for smarter and more balanced rent control in the local marketplace.
Charles X. Gormally chairs the litigation practice at Brach Eichler LLC in Roseland, N.J.
To comment on this story, e-mail Diana Mosher at email@example.com.