EARL W. KAVANAU, Plaintiff and Appellant, v. SANTA MONICA RENT CONTROL BOARD, Defendant and Respondent.
Earl W. Kavanau, in pro. per., for Plaintiff and Appellant.
James S. Burling, R. S. Radford, Paul C. Mileck, Sherman L. Stacey, Kimball & Weiner and George Kimball as Amici Curiae on behalf of Plaintiff and Appellant.
Anthony A. Trendacosta, Ralph H. Goldsen, Doris Ganga, Karl M. Manheim, Hedges & Caldwell, David Pettit and Joan Mack for Defendant and Respondent.
Louise H. Renne, City Attorney (San Francisco), Andrew W. Schwartz, Deputy City Attorney, Richards, Watson & Gershon and Rochelle Browne as Amici Curiae on behalf of Defendant and Respondent.
In this case, we consider the inverse condemnation claim of Earl W. Kavanau, a property owner who prevailed in a prior action against the Santa Monica Rent Control Board (Rent Board) on the ground that the rent control regulations of the City of Santa Monica (the City) violated his right to due process of law. The Court of Appeal affirmed the trial court's dismissal order, rejecting Kavanau's inverse condemnation claim because he [16 Cal. 4th 767] had not lost "all use of his property." We disagree that a property owner must lose all use of his property in order to have a viable inverse condemnation claim. Nevertheless, we conclude Kavanau is not entitled to maintain an inverse condemnation action, because he may obtain a full and adequate remedy for any interim loss flowing from the due process violation through an adjustment of future rents under the rent regulation process. Accordingly, we affirm the judgment of the Court of Appeal.
Kavanau's complaint alleges as follows. In 1988, he purchased a 10-unit apartment building in the City. At that time, the building was already subject to the City's rent control law, which limited rent increases to 12 percent per year regardless of increases in landlord expenses. Between November 1, 1988, and October 31, 1989, Kavanau collected rents totaling $43,444 and spent $33,565 operating and maintaining the property, $82,934 improving the property, and $44,000 servicing debt on the property. On November 30, 1989, Kavanau applied to defendant Rent Board for rent increases on nine of the ten units in his building. The Rent Board's hearing examiner determined Kavanau was entitled to rent increases totaling approximately $35,000 per year, but required Kavanau to impose these increases over the course of eight years so as not to exceed the 12 percent limit in any one year. The hearing examiner approved rent increases for the first year totaling $5,184.
In Kavanau I, the Court of Appeal concluded that the 12 percent limit on rent increases deprived Kavanau of "a just and reasonable return" and therefore was unconstitutional. (Kavanau I, supra, 19 Cal.App.4th at p. 736 & fn. 7.) The Court of Appeal directed the superior court to issue a writ of mandate prohibiting application of the 12 percent limit to his rent increase petition. (Id. at pp. 736-737.) We denied the Rent Board's petition for review. The Rent Board complied with the superior court's mandate.
Kavanau then filed the complaint in this case, seeking damages for temporary application of the 12 percent limit. In his first cause of action, he alleges he "has suffered a 'taking' and 'damaging' of his property rights" within the meaning of article I, section 19 of the California Constitution and the Fifth Amendment of the United States Constitution. He seeks "just [16 Cal. 4th 768] compensation" in the form of lost rental income and interest. In his second cause of action, Kavanau alleges a violation of his right to due process of law and seeks damages, including emotional distress damages, under 42 United States Code section 1983 (section 1983).
The Rent Board demurred to Kavanau's complaint, and the superior court sustained the demurrer without leave to amend. Kavanau appealed, and the Court of Appeal affirmed. The Court of Appeal noted that Kavanau had abandoned his cause of action under section 1983. As for the cause of action alleging a taking of his property requiring just compensation under the state and federal Constitutions, the Court of Appeal rejected Kavanau's claim because he never lost "all use of his property." For example, he continued to receive rents and enjoy tax benefits, and he could borrow against the property, hold it for investment, convert it to condominiums, or sell it. One justice dissented, stressing that Kavanau I had already decided the Rent Board had applied its regulations in an unconstitutional manner. Because Kavanau lost substantial rental income as a result of this constitutional breach, the dissenting justice argued Kavanau had suffered a taking of his property and should receive just compensation. We granted review in order to consider whether a taking occurred and what, if any, right to just compensation Kavanau might have.
The City's rent control law conforms generally to this model. An April 10, 1979, amendment to the city charter (Charter) created the Rent Board and empowered it "to regulate rentals ... so that rents will not be increased unreasonably and so that landlords will receive no more than a fair return." (Charter, § 1800.) Pursuant to this charter amendment (Charter, § 1803(g)), the Rent Board adopted comprehensive regulations (Rent Board Regulations).
The Rent Board Regulations define net operating income as gross income less operating expenses. (Rent Bd. Regs., reg. Nos. 4101(a), 4104.) The Rent Board Regulations also establish a presumption that the net operating income during the 1978 calendar year provided a landlord with a fair return. (Rent Bd. Regs., reg. No. 4102.) A landlord can rebut this presumption by showing that operating expenses during 1978 were unusually high (Rent Bd. Regs., reg. No. 4103A) or that base rent was unusually low (Rent Bd. Regs., reg. No. 4103B). A landlord is entitled not only to maintain 1978 net [16 Cal. 4th 770] operating income (Rent Bd. Regs., reg. No. 4102), but also to petition for rent increases that will increase net operating income at a rate equal to 40 percent of any increase in the consumer price index (Rent Bd. Regs., reg. No. 4106).
To establish an erosion of net operating income, and therefore entitlement to a rent increase, a landlord may present evidence of an increase in operating expenses. Under the Rent Board Regulations, operating expenses include capital improvement costs (Rent Bd. Regs., reg. No. 4101(c)(1)(viii)), but the landlord must amortize these costs over their useful life in accordance with an amortization schedule (Rent Bd. Regs., reg. No. 4041(a)-(c)).
 Two independent constitutional protections are at issue in this case. The due process clauses of the state and federal Constitutions guarantee property owners "due process of law" when the state "deprive[s] [them] of ... property." (Cal. Const., art. I, §§ 7, 15; U.S. Const., 14th Amend., § 1.) On the other hand, the takings clauses of the state and federal Constitutions guarantee property owners "just compensation" when their property is "taken for public use." (Cal. Const., art. I, § 19; U.S. Const., 5th Amend.) These distinct constitutional protections limit the legislative power of government in different but related ways. The due process protection focuses on the [16 Cal. 4th 771] government's means and purpose: whether the government's method rationally furthers legitimate ends. The takings protection focuses on the impact of the government's action: whether the government has in effect appropriated private property for its own use, rather than merely regulating a private use of the property. This conceptual distinction, however, blurs somewhat in cases applying the due process and takings clauses to price regulations, including rent control. In that context, courts sometimes employ overlapping terminology and standards, treating the two clauses as a single constitutional protection of private property rights.
 We applied these due process standards to rent control laws in Fisher, supra, 37 Cal. 3d 644, Carson, supra, 35 Cal. 3d 184, and Birkenfeld, supra, 17 Cal. 3d 129. Though the state and federal Constitutions do not mandate a particular administrative formula for measuring fair return (Fisher, supra, 37 Cal.3d at p. 681), we did note certain characteristics that would weigh in favor of a finding of constitutionality. For example, due to the effects of inflation, the law "may not indefinitely freeze the dollar amount of ... profits without eventually causing confiscatory results." (Id. at p. 683, original italics.) In addition, when a rent control law establishes a "base rent" by reference to rents on a specified date, the law should permit adjustments of that base rent for those rental units that had artificially low rents at that time. (Birkenfeld, supra, 17 Cal.3d at p. 168.) Similarly, the law should permit individualized rent adjustments in appropriate cases even if the base rent was not artificially low (Fisher, supra, 37 Cal.3d at pp. 689-690), and the procedural mechanism by which landlords may obtain any of these adjustments must not be prohibitively burdensome (Birkenfeld, supra, 17 Cal.3d at pp. 169-171; see also Fisher, supra, 37 Cal.3d at p. 690). Among other things, this process may not entail "a substantially greater incidence and degree of delay than is practically necessary." (Birkenfeld, supra, 17 Cal.3d at p. 169; see also Fisher, supra, 37 Cal.3d at p. 687.) In this regard, we recommended that the law permit "general rental adjustments for all or any class of rental units based on generally applicable factors." (Birkenfeld, supra, 17 Cal.3d at p. 171; see also Fisher, supra, 37 Cal.3d at p. 687; but see Carson, supra, 35 Cal.3d at p. 194.) We also indicated rent control laws should (1) allow landlords to petition for rent adjustments without having to prove building code compliance, (2) allow the governing agency to consolidate petitions for rental units in the same building, and (3) allow the governing agency to delegate hearings on petitions to hearing [16 Cal. 4th 773] officers. (Birkenfeld, supra, 17 Cal.3d at pp. 170-171; see also Fisher, supra, 37 Cal.3d at pp. 690-691.) All these characteristics would serve to reduce delay and make the petition process less burdensome to landlords, but we did not hold the state or federal Constitution required any of them per se.
Of course, the fair return principle is not limited to the property as it was when the landlord purchased it. A landlord is also entitled to a fair return on necessary capital improvements. (Sierra Lake Reserve v. City of Rocklin (9th Cir. 1991) 938 F.2d 951, 958, vacated in part (1993) 987 F.2d 662; see also Guaranty Nat. Ins. Co. v. Gates (9th Cir. 1990) 916 F.2d 508, 515.) For example, if a landlord retrofits an older building in order to comply with new building code requirements, the capital improvements may be the larger part of the building's value. In that case, if fair return did not take those capital improvements into consideration, it would be an empty promise. As the high court noted in Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 310 [109 S. Ct. 609, 617, 102 L. Ed. 2d 646] (Duquesne), "fair rate of return" depends on "the amount of capital upon which the investors are entitled to earn that return." (See also Hope Gas, supra, 320 U.S. at p. 603 [64 S.Ct. at p. 288] ["return ... should be sufficient ... to attract capital"].) Thus, a rent control law that merely allows a landlord to recoup the bare cost of a necessary capital improvement runs the risk of being confiscatory and thereby violating the landlord's right to due process of law.
A regulation, however, may effect a taking though, as is true here, it does not involve a physical invasion and leaves the property owner some economically beneficial use of his property. In Lucas, the high court expressly rejected the "assumption that the landowner whose deprivation is one step short of complete is not entitled to compensation." (Lucas, supra, 505 U.S. at p. 1019, fn. 8 [112 S.Ct. at p. 2895].) "Such an owner" merely lost "the benefit of [the court's] categorical formulation." (Ibid.; see also Nollan v. California Coastal Comm'n (1987) 483 U.S. 825, 831 [107 S. Ct. 3141,3145-3146, 97 L. Ed. 2d 677] (Nollan).) Of course, we held in Agins v. City of Tiburon (1979) 24 Cal. 3d 266, 277 [157 Cal. Rptr. 372, 598 P.2d 25], "that a zoning ordinance may be unconstitutional ... only when its effect is to deprive the landowner of substantially all reasonable use of his property." (See also Fisher, supra, 37 Cal.3d at p. 686 [paraphrasing and citing Agins v. City of Tiburon].) But the regulation at issue in Agins v. City of Tiburon left the plaintiffs a substantial use of their five-acre property, including building as many as five single-family homes on it. In order to uphold the regulation, we did not need to limit the protections of the takings clause to total deprivations of "substantially all reasonable use" of property, because the case before us did not even approach a total deprivation. Thus, our holding was dictum. Moreover, Lucas makes clear we misinterpreted the federal Constitution, and nothing in our opinion in Agins v. City of Tiburon suggests we were interpreting the state takings clause more narrowly than the federal [16 Cal. 4th 775] clause. Finally, even if we did intend to interpret the state right more narrowly than the federal right, the federal Constitution would nevertheless apply here to protect Kavanau.
 When a regulation does not result in a physical invasion and does not deprive the property owner of all economic use of the property, a reviewing court must evaluate the regulation in light of the "factors" the high court discussed in Penn Central and subsequent cases. Penn Central emphasized three factors in particular: (1) "[t]he economic impact of the regulation on the claimant"; (2) "the extent to which the regulation has interfered with distinct investment-backed expectations"; and (3) "the character of the governmental action." (Penn Central, supra, 438 U.S. at p. 124 [98 S.Ct. at p. 2659]; MacDonald, Sommer & Frates v. Yolo County (1986) 477 U.S. 340, 349 [106 S. Ct. 2561, 2566, 91 L. Ed. 2d 285]; Kaiser Aetna v. United States (1979) 444 U.S. 164, 175 [100 S. Ct. 383, 390, 62 L. Ed. 2d 332].) Subsequent cases, as well as a close reading of Penn Central, indicate other relevant factors: (1) whether the regulation "interfere[s] with interests that [are] sufficiently bound up with the reasonable expectations of the claimant to constitute 'property' for Fifth Amendment purposes" (Penn Central, supra, 438 U.S. at p. 125 [98 S.Ct. at p. 2656]); (2) whether the regulation affects the existing or traditional use of the property and thus interferes with the property owner's "primary expectation" (id. at pp. 125, 136 [98 S.Ct. at pp. 2659, 2665]); (3) "the nature of the State's interest in the regulation" (Keystone Bituminous Coal Assn. v. DeBenedictis (1987) 480 U.S. 470, 488 [107 S. Ct. 1232, 1243, 94 L. Ed. 2d 472] (Keystone); see also Mugler v. Kansas (1887) 123 U.S. 623, 668-669 [8 S. Ct. 273, 300-301, 31 L.Ed. 205]) and, particularly, whether the regulation is "reasonably necessary to the effectuation of a substantial public purpose" (Penn Central, supra, 438 U.S. at p. 127 [98 S.Ct. at p. 2660]); (4) whether the property owner's holding is limited to the specific interest the regulation abrogates or is broader (id. at pp. 127-128 [98 S.Ct. at p. 2661]); (5) whether the government is acquiring "resources to permit or facilitate uniquely public functions," such as government's "entrepreneurial operations" (id. at pp. 128, 135 [98 S.Ct. at pp. 266, 2665]); (6) whether the regulation "permit[s the property owner] ... to profit [and] ... to obtain a 'reasonable return' on ... investment" (id. at p. 136 [98 S.Ct. at p. 2665]); (7) whether the regulation provides the property owner benefits or rights that "mitigate whatever financial burdens the law has imposed" (id. at p. 137 [98 S.Ct. at p. 2666]; Keystone, supra, 480 U.S. at p. 491 [107 S.Ct. at p. 1245]; Agins v. Tiburon, supra, 447 U.S. at p. 262 [100 S.Ct. at p. 2142]); (8) whether the regulation "prevent[s] the best use of [the] land" (Agins v. Tiburon, supra, 447 U.S. at p. 262); (9) whether the regulation "extinguish[es] a fundamental attribute of ownership" (ibid.); and (10) whether the government is demanding the property as a condition for [16 Cal. 4th 776] the granting of a permit (Dolan v. City of Tigard (1994) 512 U.S. 374, 385 [114 S. Ct. 2309, 2316, 129 L. Ed. 2d 304] (Dolan); Nollan, supra, 483 U.S. at pp. 831, 841 [107 S.Ct. at pp. 3150-3151]).
In Kavanau I, the Court of Appeal determined that the Rent Board's application of its 12 percent limit to Kavanau's petition for rent increases was unconstitutional. Though the court did not state whether it found a violation of Kavanau's due process rights or a taking without just compensation, the court applied a due process analysis and relied on our decisions in Calfarm, supra, 48 Cal. 3d 805, Fisher, supra, 37 Cal. 3d 644, and Birkenfeld, supra, 17 Cal. 3d 129, which were all due process cases. (Kavanau I, supra, 19 Cal.App.4th at pp. 734-735.) Thus, we conclude the court did not find a taking.
In addition, rather than amortizing the costs of Kavanau's capital improvements over their useful life, the Court of Appeal apparently treated those costs in the same way as ongoing operating or maintenance costs. (Kavanau I, supra, 19 Cal.App.4th at p. 736, fn. 7.) The court also apparently included as capital improvement costs certain expenditures the Rent Board had found unnecessary. (Ibid.) As a result, the court determined that Kavanau incurred a large deficit.
Moreover, the Court of Appeal assumed the City's maintenance of net operating income formula without the 12 percent limit established the minimum "fair return" under the state and federal Constitutions. (Kavanau I, supra, 19 Cal.App.4th at p. 733.) Based on this assumption, the Court of Appeal concluded the 12 percent limit put Kavanau's return below the constitutional minimum. But the court did not explain why the 12 percent limit could not be one aspect of a comprehensive scheme that as a whole provided landlords a fair return. (Cf. Pennell v. San Jose, supra, 485 U.S. at pp. 13-14 [108 S.Ct. at p. 858].) "The economic judgments required in rate proceedings are often hopelessly complex .... The Constitution is not designed to arbitrate these economic niceties." (Duquesne, supra, 488 U.S. at p. 314 [109 S.Ct. at p. 619].) Thus, courts do not "examine piecemeal" the "subsidiary aspects of [a state agency's] ratemaking methodology" (id. at p. 313 [109 S.Ct. at p. 618]), and flexibility in one part of a regulatory scheme may offset restrictiveness in another (id. at p. 314 [109 S.Ct. at p. 619]). We see no reason why a reasonable annual limit on rent increases cannot be consistent with a fair return.
Finally, the essential inquiry in due process cases involving price controls is whether the regulatory scheme's result is just and reasonable. (Hope Gas, supra, 320 U.S. at p. 602 [64 S.Ct. at pp. 287-288].) The Court of Appeal did not expressly find that the 12 percent limit prevented Kavanau from " 'operating successfully.' " (20th Century, supra, 8 Cal.4th at p. 295.) [16 Cal. 4th 779] Rather, the 12 percent limit merely delayed Kavanau's rent increase. Regulated prices must fall within a "broad zone of reasonableness" to be constitutional (Permian Basin, supra, 390 U.S. at p. 770 [88 S.Ct. at p. 1361]; see also Pipeline Co., supra, 315 U.S. at p. 585 [62 S.Ct. at pp. 742-743]), and due process requires fundamentally a balancing of interests (Hope Gas, supra, 320 U.S. at p. 603 [64 S.Ct. at p. 288]). The 12 percent limit achieved this balance. It balanced landlords' interests in recouping their increased costs against tenants' interests in avoiding sudden, large rent increases. Of course, in certain circumstances-such as during times of very high inflation-a 12 percent limit on rent increases might be confiscatory, but the Court of Appeal did not adequately explain why application of the 12 percent limit to Kavanau's petition for rent increases violated his constitutional rights.
Thus we have serious doubts about the Court of Appeal's reasoning in Kavanau I. Nevertheless, the Court of Appeal's judgment in that case is final and precludes relitigation of certain issues in this proceeding. (See, e.g., Perez v. City of San Bruno (1980) 27 Cal. 3d 875, 883 [168 Cal. Rptr. 114, 616 P.2d 1287].) For example, we must accept as true for purposes of this proceeding that application of the Rent Board's 12 percent limit on rent increases violated Kavanau's right to due process of law. Of course, Kavanau obtained a remedy in the form of a writ of mandate, but he also seeks damages.
 In Hensler v. City of Glendale (1994) 8 Cal. 4th 1, 14 [32 Cal. Rptr. 2d 244, 876 P.2d 1043], we held that, if a property owner brings a timely action to set aside or void a regulation, he may but need not join a claim for damages. Instead, he may bring a damages claim separately after successfully challenging the regulation. (Id. at pp. 7, 26.) Thus, in Hensler we identified an exception to the general rule against splitting claims. (See also Healing v. California Coastal Com. (1994) 22 Cal. App. 4th 1158, 1170 [27 Cal. Rptr. 2d 758]; Mata v. City of Los Angeles (1993) 20 Cal. App. 4th 141, 149 [24 Cal. Rptr. 2d 314]; Patrick Media Group, Inc. v. California Coastal Com. (1992) 9 Cal. App. 4th 592, 607 [11 Cal. Rptr. 2d 824]; Gallagher v. Frye (9th Cir. 1980) 631 F.2d 127, 130.) In accordance with Hensler, Kavanau brought his present claim for damages, alleging two causes of action.
Kavanau's allegations, if true, are not sufficient to establish a taking, and therefore the trial court was correct to sustain the Rent Board's demurrer. This case does not fall within either of the "two discrete categories of regulatory action" that constitute a taking. (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]; Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141].) Rent control does not generally constitute a physical invasion of property (Yee v. Escondido, supra, 503 U.S. 519), and we agree with the Court of Appeal that Kavanau did not lose "all economically beneficial or productive use of" his property (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]).
Nor do the factors the high court articulated in Penn Central and subsequent cases indicate a taking in this case. The "economic impact" (Penn Central, supra, 438 U.S. at p. 124 [98 S.Ct. at p. 2659]) on Kavanau of the 12 percent limit, which in effect merely delayed his rent increase, was not significant when compared to the benefits he continued to receive from his property, including significant rental income (id. at p. 130 [98 S.Ct. at p. 2662] [rejecting assertion that a reviewing court should consider the property interest that a regulation affects in isolation from unaffected property interests]). Similarly, the "interfere[nce] with [Kavanau's] distinct investment-backed expectations" (id. at p. 124 [98 S.Ct. at p. 2659]) was minor, considering he had constructive knowledge of the 12 percent limit when he chose to improve his property. Finally, the "character of the governmental action" (ibid.) does not compel us to find a taking.
This case does not involve a regulation that "prohibited a beneficial use to which [Kavanau's building] had previously been devoted" (Penn Central, supra, 438 U.S. at p. 125 [98 S.Ct. at p. 2660]), thus interfering with Kavanau's "primary expectation" (id. at p. 136 [98 S.Ct. at p. 2665]). Rather, the 12 percent limit affected Kavanau largely because he changed the use of his building by making costly capital improvements. Nor did the 12 percent limit abrogate Kavanau's entire property holding, as might occur when [16 Cal. 4th 781] someone owns only mineral rights and a land-use regulation prohibits mining those minerals. (Penna. Coal, supra, 260 U.S. at pp. 412-416 [43 S.Ct. at pp. 159-160]; Penn Central, supra, 438 U.S. at pp. 127-128 [98 S.Ct. at p. 2661].) Furthermore, by imposing the 12 percent limit, the Rent Board was not acquiring "resources to permit or facilitate uniquely public functions" such as government's "entrepreneurial operations." (Penn Central, supra, 438 U.S. at pp. 128, 135 [98 S.Ct. at pp. 2661, 2665].) Nor did the 12 percent limit "prevent the best use" of Kavanau's building or "extinguish a fundamental attribute of ownership." (Agins v. Tiburon, supra, 447 U.S. at p. 262 [100 S.Ct. at p. 2142].) In addition, the Rent Board did not impose the 12 percent limit as a condition for granting a permit. (Dolan, supra, 512 U.S. at p. 385 [114 S.Ct. at p. 2316]; Nollan, supra, 483 U.S. at pp. 831, 841 [107 S.Ct. at pp. 3145-3146, 3150-3151].) Finally, the Rent Board has a "legitimate ... interest" in easing the burden on tenants of sudden, large rent increases, and the 12 percent limit "substantially advance[d]" that interest. (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141]; see also Penn Central, supra, 438 U.S. at p. 127 [98 S.Ct. at pp. 2660-2661]; Keystone, supra, 480 U.S. at p. 488 [107 S.Ct. at p. 1243].) Thus, the factors that have proved relevant in other takings cases do not indicate a taking in this case.
But Kavanau emphasizes the Court of Appeal's finding in Kavanau I that application of the 12 percent limit deprived him of a fair return and thus violated his right to due process. We must, of course, accept that finding as true for purposes of this proceeding. Put simply, Kavanau argues that, because he lost rental income as a direct result of the Rent Board's unconstitutional application of its 12 percent limit, he has suffered a taking requiring just compensation. Thus, Kavanau asks us to consider whether a rent regulation that violates a particular property owner's right to due process by depriving him of a fair return also necessarily constitutes a taking.
 As noted, the United States Supreme Court has declared that a regulation of property "effects a taking if [it] does not substantially advance legitimate state interests." (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141].) [9b] The similarity of this takings standard to the due process requirement that a regulation "have a reasonable relation to a proper legislative purpose" (Nebbia, supra, 291 U.S. at p. 537 [54 S.Ct. at p. 516]) supports Kavanau's argument that a due process violation in this context constitutes a taking. In fact, when the high court first articulated this takings standard, it cited Nectow v. Cambridge (1928) 277 U.S. 183, 188 [48 S. Ct. 447, 448, 72 L. Ed. 842], a due process case. (Agins v. Tiburon, supra, 447 U.S. at p. 260 [100 S.Ct. at p. 2141].) Kavanau's argument might also find [16 Cal. 4th 782] some support in cases such as Duquesne, supra, 488 U.S. 299, Florida Power, supra, 480 U.S. 245, and 20th Century, supra, 8 Cal. 4th 216, which apply standards under the takings clause similar to those that apply under the due process clause.
On the other hand, the Rent Board stresses the distinct functions of the due process clause and the takings clause. The Rent Board argues that the due process protection focuses on method. It requires that a regulation not be arbitrary or capricious and that the regulatory agency give due consideration to conflicting interests. The takings protection focuses on result. According to the Rent Board, a taking occurs only in cases of " 'deep financial hardship' " (20th Century, supra, 8 Cal.4th at p. 258) or when a regulation deprives a property owner of nearly all use of the property (Lucas, supra, 505 U.S. at p. 1015 [112 S.Ct. at p. 2893]). The Rent Board asserts we should no more treat a due process violation affecting property as a taking than we would treat an equal protection or free speech violation affecting property as a taking.
Under the due process clause, future rent ceilings must enable Kavanau to earn a fair return that will "maintain financial integrity, attract necessary capital, and fairly compensate [him] for the risks [he has] assumed." (Permian Basin, supra, 390 U.S. at p. 792 [88 S.Ct. at p. 1373].) Among other things, this standard requires the Rent Board to consider, when setting rent ceilings, Kavanau's costs, which include certain costs associated with rent control. (Civ. Code, § 1947.15 [stating circumstances in which rent control agencies must consider the cost to a landlord of professional services associated with rent control].) We think one of the costs associated with rent control that the Rent Board must consider is the cost to Kavanau of any confiscatory rent ceilings the Rent Board previously imposed on the apartments in question. (Cf. Communications Satellite Corp. v. F. C. C. (D.C. Cir. 1977) 611 F.2d 883, 894 & fn. 19 [198 App.D.C. 60] [past deficiency "may not be capitalized into the rate base for future years" unless "rates ... have for some time been under strictures set by an administrative agency" and the deficiency is the result of agency "miscalculation"].) Thus, irrespective of whether section 1983 would have afforded Kavanau a remedy for the due process violation, his continuing right to an adjustment of future rents can provide an adequate remedy.
An adjustment of future rents that takes into consideration past confiscatory rents is the converse of the refund that producers in price-regulated industries may have to pay if, during litigation over price levels, they charge [16 Cal. 4th 784] prices that a court later determines to be excessive. (See, e.g., Trans Alaska Pipeline Rate Cases (1978) 436 U.S. 631, 655 [98 S. Ct. 2053, 2066-2067, 56 L. Ed. 2d 591].) Moreover, this remedy, as opposed to an award of damages against the Rent Board, places the cost of compensating Kavanau roughly on those tenants who benefited from unconstitutionally low rents. (Cf. State of California v. Levi Strauss & Co. (1986) 41 Cal. 3d 460, 472-473 [224 Cal. Rptr. 605, 715 P.2d 564] [antitrust class action applying "fluid recovery" whereby fund roughly benefits those who suffered damages]; Blue Chip Stamps v. Superior Court (1976) 18 Cal. 3d 381, 388, fn. 1 [134 Cal. Rptr. 393, 556 P.2d 755] (conc. opn. of Tobriner, J.) [price reduction as remedy for overcharges].) We note in this regard that if any of Kavanau's tenants has vacated an apartment, then state law may have authorized Kavanau to set the rent for his new tenants at a level that enabled him, or will enable him, to recoup past losses. (Civ. Code, §§ 1954.50-1954.53.) In that case, he would not be entitled to an additional rent adjustment. Thus, in practice, future rent adjustments are likely to affect only those tenants who have not moved and who benefited from unconstitutionally low rents.
Finally, the remedy of future rent adjustments avoids putting a reviewing court in the position of declaring the appropriate regulated rent ceiling for a particular apartment in order to measure damages. (Cf. United States v. Western Pac. R. Co. (1956) 352 U.S. 59, 63-64 [77 S. Ct. 161, 165, 1 L. Ed. 2d 126] [deferring to the "primary jurisdiction" of an administrative agency "whenever enforcement of the claim requires the resolution of issues which ... have been placed within the special competence of an administrative body"].) Setting rent ceilings is essentially a legislative task, and agencies, not courts, choose which administrative formula to apply. (Fisher, supra, 37 Cal.3d at p. 681.) The state and federal Constitutions require only a fair process that reasonably takes into consideration the landlord's interests, and a landlord's return need only fall within a "broad zone of reasonableness." (Permian Basin, supra, 390 U.S. at p. 770 [88 S.Ct. at p. 1361]). Accordingly, courts are in no position to determine the appropriate rent ceiling for an apartment as a means of assessing damages. We strongly resist any rule that would impose on a reviewing court the impossible task of finding somewhere in the penumbra of the Constitution a stipulation that a particular apartment in a particular building should rent for $746 per month rather than $745.
Here, the City's rent control scheme is sufficiently flexible to permit the Rent Board to consider past confiscatory rent ceilings when evaluating a landlord's petition for a rent increase. (Charter, § 1805(e).) Kavanau, of course, is not necessarily entitled to rent increases equal to the exact amount by which his past rents fell below some imagined constitutional minimum. [16 Cal. 4th 785] Rather, he is merely entitled to future rent ceilings that will "maintain financial integrity, attract necessary capital, and fairly compensate [him] for the risks [he has] assumed, and yet provide appropriate protection to the relevant public interests, both existing and foreseeable." (Permian Basin, supra, 390 U.S. at p. 792 [88 S.Ct. at p. 1373].) But, in measuring the future rent ceiling for a particular apartment, the Rent Board must take into consideration the effect on Kavanau, if any, of the temporary enforcement of its confiscatory regulation with respect to that apartment. In this regard, we note Kavanau's actual loss in this case may be small or nonexistent. For example, the Rent Board arguably could have satisfied the Kavanau I mandate by waiving the 12 percent limit, but imposing a higher limit, under some other regulatory provision, that adequately accommodated Kavanau's interest in a fair return. If, in response to Kavanau I, the Rent Board allowed Kavanau to increase rent in accordance with its maintenance of net operating income formula, but without any annual limit, it may already have enabled Kavanau to recoup his losses. In addition, the 12 percent limit was not confiscatory to the extent market conditions would have prevented Kavanau from increasing rent more than 12 percent even if the Rent Board had not enforced the limit.
Kavanau asserts he would have to double his rents in order to recoup his losses within a reasonable period of time. He points out that he operates in a competitive environment, and he argues that future rent adjustments are an inadequate remedy because they will price his apartments above market levels and leave him with an empty building. If Kavanau's assertion is true, then those same market forces might well have prevented Kavanau from increasing his rents regardless of the 12 percent limit. The Constitution does not protect investors from the risks inherent in the marketplace. In addition, Kavanau does not persuade us that his losses, if any, are so great as to prevent him from recouping them through future rent adjustments. In fact, Kavanau conceded at oral argument that his rents remained well below free market levels even with the full increase he sought. Moreover, if a landlord acts promptly to challenge a confiscatory regulation, and seeks a stay of that regulation during litigation, his losses, and thus any future rent adjustments, are likely to be relatively small. A landlord who unnecessarily permits large losses to accumulate cannot complain if the market prevents him from recouping those losses. Finally, we do not here decide what alternative remedy might be appropriate if a landlord can establish that the remedy of future rent adjustments is for some reason unavailable. But before Kavanau can allege the unavailability of future rent adjustments, he must petition for those adjustments, the Rent Board must determine, subject to judicial review, their appropriate amount, and he must attempt to impose them.
Just as a reviewing court averages the effects of subsidiary aspects of a price-setting scheme by looking at "net effect" (Duquesne, supra, 488 U.S. at [16 Cal. 4th 786] p. 314 [109 S.Ct. at p. 619]), a reviewing court can also average the effects of a price-setting scheme over time. Thus, a fair return over the course of several years will offset a confiscatory return during a particular year. Recognizing that Kavanau has a continuing right under the due process clause to future rent adjustments that will enable him to earn a fair return, we believe he has not suffered a taking. Put another way, the ongoing process of setting rent ceilings dispels the due process violation, which in this case is the sole basis for a potential takings clause violation. (Cf. Mountain Water v. Mont. Dept. of Public Serv. Reg. (9th Cir. 1990) 919 F.2d 593, 601 [no violation of Constitution because water utility "may seek just compensation for its property taken through [future] rate setting"].) Accordingly, we agree with the trial court and the Court of Appeal that Kavanau has not stated a viable inverse condemnation claim.
Kavanau I determined that application of the Rent Board's 12 percent limit on rent increases violated Kavanau's right to due process. The remedy of future rent adjustments available to Kavanau under the due process clause precludes a finding of a taking in this case. Accordingly, we affirm the judgment of the Court of Appeal.
George, C. J., Mosk, J., Kennard, J., and Werdegar, J., concurred.
I concur in the majority opinion. I write separately to attempt further clarification of the relationship between due process and takings jurisprudence in the context of rent control and rate regulation generally.
The term "due process" has at least two distinct meanings or applications in the field of rate regulation: (1) substantive due process, i.e., whether the scheme of regulation in question is " ' "arbitrary, discriminatory, or demonstrably irrelevant to the policy the Legislature is free to adopt ...." ' " (Pennell v. San Jose (1988) 485 U.S. 1, 11 [108 S. Ct. 849, 857, 99 L. Ed. 2d 1] (Pennell)); (2) what can be termed "confiscatory" due process, i.e., whether a given scheme of rate regulation, although not per se or facially invalid, is confiscatory in its result and has prevented an opportunity to obtain a just and reasonable rate of return on investment. (See Duquesne Light Co. v. Barasch (1989) 488 U.S. 299, 307-308 [109 S. Ct. 609, 615, 102 L. Ed. 2d 646] (Duquesne Light Co.).) As explained below, it is this latter confiscatory due process analysis that significantly overlaps the takings clause.
Although a government agency's capacity under the police power to regulate rents in some manner is seldom in doubt, the particular form the regulation takes will not pass constitutional scrutiny if it is confiscatory. This confiscatory analysis, although it also goes under the rubric of "due process," is substantially different from the substantive due process analysis discussed immediately above. The fixing of a " 'just and reasonable' rate involves a balancing of the investor and the consumer interests.... [T]he investor interest has a legitimate concern with the financial integrity of the company whose rates are being regulated." (Power Comm'n v. Hope Gas Co. (1944) 320 U.S. 591, 603 [64 S. Ct. 281, 288, 88 L. Ed. 333] (Hope).) In determining a just and reasonable rate, "it is the result reached not the method employed which is controlling. [Citations.] It is not theory but the impact of the rate order which counts. If the total effect of the rate order cannot be said to be unjust and unreasonable, judicial inquiry under the Act is at an end. The fact that the method employed to reach that result may contain infirmities is not then important." (Id. at p. 602 [64 S.Ct. at pp. [16 Cal. 4th 789] 287-288].) Thus in Hope, for example, Justice Douglas discussed the utility's historical earnings and financial status in considerable detail and concluded that it was able to maintain its "financial integrity." (Hope, supra, 320 U.S. at pp. 604-605 [64 S.Ct. at p. 289].) The court more recently did the same in Duquesne Light Co., supra, 488 U.S. at page 312 [109 S.Ct. at page 618].
Similarly, regulation that set rates for insurers at less than a fair rate of return in order to compensate for supposedly excess profits was determined to be a violation of due process in Calfarm Ins. Co. v. Deukmejian (1989) 48 Cal. 3d 805, 819 [258 Cal. Rptr. 161, 771 P.2d 1247]. "[T]he concept that rates may be set at less than a fair rate of return in order to compel the return of past surpluses is not one supported by precedent." (Ibid.) Again, this aspect of the law was declared unconstitutional because it failed to pursue a legitimate state purpose-an essentially substantive due process violation-not because it resulted in fact in the undermining of the financial integrity of the various insurance companies.
In the present case, the basis of the Court of Appeal's holding in the original Kavanau decision (see Kavanau v. Santa Monica Rent Control Bd. [16 Cal. 4th 791] (1993) 19 Cal. App. 4th 730 [23 Cal. Rptr. 2d 724] (Kavanau I)) is unclear. The opinion can be read as a substantive due process case, concluding that the 12 percent cap found in the Santa Monica ordinance is arbitrary. As the majority herein explain, however, there is no reason why a 12 percent cap cannot "be one aspect of a comprehensive scheme that as a whole provide[s] landlords a fair return." (Maj. opn., ante, at p. 778.) It appears from the dollar figures alleged in Earl W. Kavanau's complaint and stated in the majority opinion (maj. opn., ante, at p. 767), that Kavanau may have made a bad business decision purchasing the rental property in question, since the amount of debt service and operating expenses exceed rental income. These facts on their face do not indicate a constitutional violation. " 'A regulated firm has no constitutional right to a profit.' " (20th Century Ins. Co., supra, 8 Cal.4th at p. 294, brackets omitted.) Although, as the majority point out, we are bound by the law of the case to the Court of Appeal's conclusion that a 12 percent cap was arbitrary, this conclusion does not signify that Kavanau was in fact subject to "deep financial hardship" as the result of the rent regulation. The judgment of the Kavanau I court does not translate into the claim that Kavanau deserves just compensation under the Fifth Amendment to the United States Constitution.
Thus, one who persists in engaging in a regulated activity over an extended period of time, when withdrawal from that activity is an option, cannot lay at the doorstep of government regulation the reason for its economic failure. Government regulation may indeed place some firms in financial jeopardy, but that in itself does not give rise to a constitutional violation when the government does not block the outflow of assets from these no-longer-profitable enterprises. Some features of the rate regulation may be a violation of substantive due process if they cannot be said to be part of a rational regulatory scheme, and these would therefore be subject to invalidation through injunctive and declaratory relief. But it does not follow that one who has a right to withdraw his capital from the regulated enterprise in question may press a damages claim against the government, either a just compensation claim for a taking or a statutory claim for damages under section 1983 of title 42 of the United States Code. It appears doubtful therefore that a landlord who is subject to lower-than-reasonable rents, and has the option of withdrawing from the rental market, or recouping his previous losses prospectively through a compensatory rent order, can ever press such a claim.
I respectfully dissent from the majority's holding that a compensable taking cannot occur even though the government, acting through its rent control board, deprives a landlord of the opportunity to earn a fair and reasonable return on the landlord's property through unconstitutional and confiscatory application of its rent control regulations. I share Justice Croskey's view, expressed in his dissent below: "I can perceive of no reason in law or logic why a confiscatory rent control regulation, found to be unconstitutional on due process grounds, would not result in a compensable taking if it were nevertheless enforced and a monetary deprivation resulted. I can imagine no clearer example of a case where compensation should be paid than where the government has illegally taken or diverted to its own social goals the private property of one of its citizens. Indeed, such a [16 Cal. 4th 793] common sense result and statement of principle should need no citation of authority."
In a decision now final (Kavanau v. Santa Monica Rent Control Bd. (1993) 19 Cal. App. 4th 730 [23 Cal. Rptr. 2d 724] (Kavanau I), the Court of Appeal held that, as a result of the constitutionally impermissible action of defendant Santa Monica Rent Control Board, plaintiff was denied a fair and reasonable return on his rental property. As a result he allegedly suffered damages of $113,095 as of the date of his complaint. He sought to recover that amount plus interest, attorney fees, costs, and other sums from the governmental body responsible for his loss, the Santa Monica Rent Control Board (the Board), in a complaint stating a cause of action in inverse condemnation. His complaint was dismissed. The Court of Appeal affirmed the trial court judgment and a majority of this court now affirms that judgment on the grounds that plaintiff's allegations, if true, do not establish a taking and, even if the Board's action denied him due process because it denied him a fair return on his property, he has another remedy-increased rents-by which means third parties may eventually reimburse him for what the Board allegedly took from him.
The majority err. There has been a taking of a substantial property right-plaintiff's right to seek a fair and reasonable return from his property. Plaintiff has both a federal and a state constitutional right to recover the loss he suffered as a result of that taking from the Board. By mandating rents so low that its action denied plaintiff due process of law, the Board took from him a significant stick in the bundle of sticks that together constitute ownership of real property (see Kaiser Aetna v. United States (1979) 444 U.S. 164, 176 [100 S. Ct. 383, 391, 62 L.Ed.2d 332])-the opportunity to earn a reasonable return on his property. Since the rent ceiling imposed by the Board denied plaintiff the reasonable return his property would otherwise have earned, it necessarily denied plaintiff economically productive use of his rental property and to that extent took a right to which he was constitutionally entitled. Under both the Fifth and Fourteenth Amendments to the United States Constitution (Fifth Amendment) and article I, section 19 of the California Constitution (article I, section 19), plaintiff must be compensated for that taking by the governmental entity that took his property. It is not sufficient that he is permitted to raise the rent paid by his tenants from which increases he may eventually recoup his losses.
The majority assume, but are reluctant to decide, whether a rent regulation which, as applied, denies a property owner due process constitutes a taking within the meaning of the Fifth Amendment and article I, section 19. I do not share that reluctance and I disagree with the view that there has been no taking in this case. I would hold that, because the rent regulation was adjudicated in Kavanau I to be so arbitrary as to deny due process by preventing plaintiff from earning a fair and reasonable return on the property, a taking occurred for which just compensation must be paid by the Board.
The interests which enjoy constitutional protection as "property" are generally defined by state law. (Civ. Code, § 755; Lucas v. South Carolina Coastal Council (1992) 505 U.S. 1003, 1030 [112 S. Ct. 2886, 2901, 120 L. Ed. 2d 798].) In California "[t]he right to acquire and possess property, guaranteed by the constitution, includes the right to dispose of it, or any part of it, and for that purpose to divide it in any possible manner, either by [16 Cal. 4th 795] separating it into estates for successive periods or otherwise, and to dispose of one or more of such estates." (Tennant v. John Tennant Memorial Home (1914) 167 Cal. 570, 575 [140 P. 242]; Gregory v. City of San Juan Capistrano (1983) 142 Cal. App. 3d 72, 88 [191 Cal. Rptr. 47].) Just as that right encompasses the power to grant a license to use a portion of the owner's property temporarily (see Ex Parte Quarg (1906) 149 Cal. 79 [84 P. 766] [theater ticket]), it includes the right to create a leasehold estate.
Because the Board has not appropriated or physically invaded plaintiff's property, his claim is that there was a "regulatory taking," a restriction on his use of the property that went "too far" (Penna. Coal Co. v. Mahon (1922) 260 U.S. 393, 415 [43 S. Ct. 158, 160, 67 L. Ed. 322, 28 A.L.R. 1321] (Penna. Coal)), during the period for which he seeks damages. There was a "temporary taking." The contrary conclusion implicit in the majority opinion is foreclosed by the final judgment of the Court of Appeal in Kavanau I, supra, 19 Cal. App. 4th 730. The majority err both factually and legally therefore when they hold that there has been no taking because application of the Santa Monica rent control ordinance has not denied plaintiff " 'all economically beneficial or productive use of' his property." (Maj. opn., ante, at p. 780.) The Board did deny plaintiff all economically beneficial use of his property.
The legal conclusion that a taking occurred during the time that plaintiff was denied a fair and reasonable return on his rental property cannot be avoided under the United States Supreme Court precedent on which the majority rely. As the majority recognize, a regulatory taking may occur in a variety of contexts. The Supreme Court has identified many, implicitly concluding in some that because the governmental restriction went "too far," the property owner had been unfairly called upon to sacrifice a property interest for the benefit of the public in circumstances in which the burden should be shared by the public as a whole. While the contexts in which the court has found a regulatory taking or rejected a taking claim differ, a common thread runs through the analysis. Although phrased somewhat differently in the court's various decisions, the economic impact of the regulation on the property owner has been a determinative factor. When the regulation denies the owner economically productive use of the owner's property for its customary use, the regulation goes too far. It is irrelevant in those circumstances that the regulation furthers or is necessary to accomplish a legitimate public purpose that is otherwise within the police power of the government. A taking occurs for which just compensation must be paid.
The takings clause necessarily applies to rent control ordinances which affect the ability of a property owner to earn a fair return on property which is generally used for rental purposes since the regulations restrict both the owner's fundamental right to create leasehold estates and the owner's right to make economically productive use of the property. The Fifth Amendment takings clause "is addressed to every sort of interest the citizen may possess," including leasehold interests. (U.S. v. General Motors Corp. (1945) 323 U.S. 373, 378 [65 S. Ct. 357, 359, 89 L. Ed. 311, 156 A.L.R. 390].) That the Fifth Amendment takings clause applies to restrictions imposed by rent control ordinances has been acknowledged by the United States Supreme Court since at least 1921. In Block v. Hirsh (1921) 256 U.S. 135 [41 S. Ct. 458, 65 L. Ed. 865, 16 A.L.R. 165], the court upheld a rent control law applicable to the District of Columbia and made necessary by exigencies of the first World War. In so doing, the majority recognized that rent control regulations could be so restrictive as to amount to a taking. (Id. at p. 156 [41 S.Ct. at pp. 459-460].) In Bowles v. Willingham (1944) 321 U.S. 503, 518 [64 S. Ct. 641, 649, 88 L. Ed. 892], the court upheld a World War II price control act, some provisions of which applied to rental property, stating in reference to those provisions that "the restraints imposed on the national government in this regard by the Fifth Amendment are no greater than those imposed on the States by the Fourteenth."
It is beyond dispute, therefore, that a rent control regulation that denies due process may also violate the takings clause of the Fifth Amendment, and [16 Cal. 4th 797] article I, section 19. That being so, it is necessary to determine whether denying plaintiff the right to seek a fair return on his property did so. None of the decisions to which the majority look for identification of the factors relevant to determining whether a taking has occurred support the conclusion that no taking occurred here. It is clear to me that there has been a compensable taking.
In Penna. Coal, supra, 260 U.S. 393, a seminal decision in the regulatory taking area, the Supreme Court considered the application of a Pennsylvania statute prohibiting anthracite coal mining in such a manner as to cause subsidence to a parcel of property. The property was subject to a deed executed by a coal company conveying the surface but expressly reserving the right to mine coal. The grantee of the surface interest expressly assumed all risk and waived all damage claims arising from the mining. The court held that application of the statute in these circumstances exceeded the police power of the state and constituted a compensable taking.
Subsequent decisions applying and further explicating that general rule make it clear that the property interest at issue here is a valuable right and [16 Cal. 4th 798] that the manner in which the Board applied its rent control ordinance to plaintiff went "too far."
Here, of course, the holding in Kavanau I, supra, 19 Cal. App. 4th 730, establishes that plaintiff was not permitted "economically viable" or "reasonably beneficial" use of his property. Application of the rent control ordinance to the property seriously interfered with his, or any owner of rental property's, "primary expectation" about the use of rental property, since the Board did not permit him to earn a reasonable rate of return. Moreover, by denying plaintiff that right, the Board effectively extinguished a fundamental attribute of ownership of rental property.
While the determination of whether a taking has occurred often does require weighing of private and public interests (Agins v. Tiburon, supra, 447 U.S. at p. 261 [100 S.Ct. at pp. 2141-2142]), outside the realm of measures [16 Cal. 4th 800] necessary to protect life and property (see, e.g., Miller v. Schoene (1928) 276 U.S. 272 [48 S. Ct. 246, 72 L.Ed. 568]), the balance has never been struck in favor of public interest when governmental action has denied an owner economically viable use of the owner's property.
Under any of the high court's formulations of the test or factors relevant in assessing whether a regulatory taking has occurred, there has been a compensable taking in this case. When application of a rent control ordinance to a parcel of property is so arbitrary and unreasonable as to be confiscatory and deny due process, by definition that application has denied the owner all economically beneficial use of the property. When a rent ceiling is constitutionally impermissible because it denies a property owner a fair and reasonable return on the property, the owner's investment-backed expectations have been extinguished as the state has made use of the property "commercially impracticable," an action which constitutes a taking. (See Penna. Coal, supra, 260 U.S. at pp. 414-415 [43 S.Ct. at p. 160].) fn. 3 The character of the government action is placement of the burden of assuring [16 Cal. 4th 801] affordable rental housing, a burden that should be borne by the public as a whole, unfairly on the individual property owner. The owner is denied a reasonable return on his investment in order to benefit tenants. And, because the opportunity to lease property for an amount that will generate a reasonable return on the owner's investment is a fundamental aspect of property ownership, application of a rent control ordinance in a manner which denies the owner that opportunity extinguishes that incident of ownership.
1. The regulation of plaintiff's right to seek a reasonable return from his rental property does interfere with a property interest. Contrary to the majority view, the regulation did not simply delay the time at which plaintiff would receive the constitutionally adequate rents to which he was entitled. Application of the Santa Monica rent control ordinance by the Board has already denied plaintiff a fair return on his property. That temporary taking of this fundamental aspect of ownership allegedly cost plaintiff $113,095. Additionally, as his complaint alleges, the delay in receiving what would have been a fair return denied plaintiff the use of that money and interest of $30,956 that could have been earned.
Moreover, even assuming, as do the majority, that the government's obligation to pay just compensation may be shifted to third parties, there is no assurance that plaintiff will ever recoup his losses. It is true that he [16 Cal. 4th 802] received some rental income, but that income was not a fair and reasonable return on the property. The complaint in inverse condemnation seeks to recover the rents that would have assured plaintiff a reasonable return, the amount taken from him by the Board's illegal application of the rent control ordinance.
2. The regulation did affect the existing use of plaintiff's rental property. It interfered to a constitutionally impermissible extent with his primary ownership expectation of receiving a reasonable return from rental property. Kavanau I, supra, 19 Cal. App. 4th 730, determined this.
3. It may be assumed that Santa Monica has a substantial interest in maintaining an adequate supply of affordable rental units, but that establishes only that the rent regulation is not invalid per se and that plaintiff's property was taken for a public purpose. None of the authorities on which the majority rely suggest that this factor may ever outweigh the denial of an economically feasible use of property for its customary purpose in determining whether a taking has occurred.
4. The regulation did abrogate a substantial interest plaintiff holds in the property-the use of the property to produce a fair and reasonable return on plaintiff's investment. While he still owns the property, when rental property cannot be used to produce a fair and reasonable return, the only alternative to use of it for producing rental income is to sell it at a depressed price. Neither the Fifth Amendment nor article I, section 19 contemplates sale as an alternative economically feasible use. Both protect existing ownership interests.
5. The regulation has taken plaintiff's property to serve a public purpose.
6. It is given that the regulation did not permit plaintiff to earn a reasonable return.
7. Unlike Suitum v. Tahoe Regional Planning Agency, supra, ___ U.S. ___ [117 S. Ct. 1659], and Penn Central, supra, 438 U.S. 104, which involved use retrictions, here the value of offsetting benefits such as the possibility that future increased rents permitted by the Board will offset some of plaintiff's losses is relevant only to whether just compensation has been paid. The existence of that possibility does not negate the fact that a taking has already occurred.
The majority apparently assume that plaintiff's rental units are and will continue to be occupied by some tenants who enjoyed the benefit of past impermissibly low rents. Therefore, the majority reason, we may justify compelling those tenants to pay rents which exceed the amount necessary to ensure plaintiff a reasonable return in order to reimburse plaintiff for what the government took. fn. 5 Additionally, new tenants who pay market rate rents will help to reimburse him since those rents also exceed the amount necessary to ensure a reasonable return. Because plaintiff may recover his losses in this manner, there has been no taking and there is no need for an inverse condemnation remedy. Again, I disagree.
Thus, the majority's holding that increasing the rents allowed for plaintiff's rental units is an adequate alternative to an action in inverse condemnation, rests entirely on speculation that plaintiff will someday recover the amount he allegedly lost from past tenants who will remain tenants even though the permitted rent increases will of necessity fix their rents at a figure above that otherwise permitted. It should be apparent to all that this illusory alternative remedy will not and cannot be considered an offsetting benefit that mitigates plaintiff's loss and relieves the Board of its obligation to pay for taking plaintiff's property. The increased rents "remedy" neither precludes a finding that there has been a taking nor satisfies the constitutional command that just compensation be paid when a taking occurs.
The judgment dismissing plaintiff's cause of action for inverse condemnation should be set aside. For that reason, I would reverse the judgment of the Court of Appeal.
FN 1. The notion that rent control laws may now be subject to a more exacting form of constitutional scrutiny is predicated on a reading of Nollan v. California Coastal Comm'n (1987) 483 U.S. 825 [107 S. Ct. 3141, 97 L. Ed. 2d 677]. (See Radford, Regulatory Takings Law in the 1990's: The Death of Rent Control?, supra, 22 Sw.U.L.Rev. at p. 1030.) We have rejected elsewhere the contention that Nollan and the related case of Dolan v. City of Tigard (1994) 512 U.S. 374 [114 S. Ct. 2309, 129 L. Ed. 2d 304] represent a new standard of scrutiny of government regulation other than those regulations that require either a physical dedication of property, or a development fee levied on an "individual and discretionary basis." (Ehrlich v. City of Culver City (1996) 12 Cal. 4th 854, 876 [50 Cal. Rptr. 2d 242, 911 P.2d 429].) In the present case, rent control neither requires a physical dedication nor amounts to an individual and discretionary development fee. Indeed, as explained above, it is not a land-use regulation at all but a form of price control.
Moreover, the fact that the Pennell decision, which postdates Nollan, relies on traditional substantive due process analysis in determining whether a rent control law is within a city's police power (Pennell, supra, 485 U.S. at pp. 11-12 [108 S.Ct. at p. 857]) indicates that Nollan does nothing to undermine the fundamental constitutional validity of rent control laws. "[W]e have 'consistently affirmed that States have broad power to regulate housing conditions in general and the landlord-tenant relationship in particular without paying compensation for all economic injuries that such regulation entails.' " (Pennell, supra, 485 U.S. at p. 12, fn. 6 [108 S.Ct. at p. 857].) In short, nothing in recent Supreme Court case law indicates an intent to replace the traditionally deferential substantive due process standard with some heightened takings standard when reviewing the basic validity of a rent control law or other form of price regulation. And the mere fact that a plaintiff chooses to label his or her action as a suit for just compensation after a "taking," when it is in essence a substantive due process challenge to an economic regulation, is without constitutional significance.
FN 2. It is admittedly true that Supreme Court precedent is not entirely clear on where substantive due process ends and takings law begins. In the area of land-use regulation, the court has held that a general zoning law is a taking of property if it "does not substantially advance legitimate state interests." (Agins v. Tiburon (1980) 447 U.S. 255, 260 [100 S. Ct. 2138, 2141, 65 L. Ed. 2d 106].) Whether and to what extent this standard differs from the ordinary substantive due process "rationally related" standard is a question beyond the scope of this opinion. The "substantially advance" standard has not been applied by the Supreme Court outside the special area of forced dedications of property in exchange for development permits. (See Nollan v. California Coastal Comm'n, supra, 483 U.S. 825; Dolan v. City of Tigard, supra, 512 U.S. 374.) In any case, the Supreme Court has not indicated any intent to extend the "substantially advance" test beyond the realm of zoning and similar laws which restrict the use of land, and has not applied such a test to price regulations. (See fn. 1, ante).
FN 3. An apartment building, unlike undeveloped land, is not amenable to a variety of uses or any alternative economically feasible use.
FN 4. The 10th factor identified by the majority-permit-related requirements-is not involved here.
FN 6. It might be argued that because market rate rents in a tight rental market exceed a fair return on investment, the amount of that difference balances the losses suffered by an owner of rent regulated rental property when rents are set too low-i.e., the overall return meets the fair and reasonable return criterion. It does not follow, however, that receipt of market rate rental income to which the owner is entitled when a vacancy occurs, may be treated as compensation for past losses. Income which would be received in any case does not replace lost income.