Taken By Regulation

The 9th Circuit considers the constitutionality of rent control

According to the Takings Clause of the Fifth Amendment, "private property [shall not] be taken for public use without just compensation." The classic example of this is eminent domain, where the government seizes property, compensates the owner with taxpayer dollars, and puts the property to an alleged public use. But what happens when government regulations violate property rights? Do regulatory takings require just compensation as well?

It depends. In Pennsylvania Coal Company v. Mahon (1922), the Supreme Court held that "while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking." But how far is too far?

That's the question the federal 9th Circuit Court of Appeals will confront on June 22 when it rehears the controversial case of Guggenheim v. City of Goleta. At issue is a Goleta, California, rent control ordinance enacted "to protect the owners and occupiers of mobile homes from unreasonable rents." According to a 2009 decision written by Judge Jay Bybee for a three-judge panel of the 9th Circuit, the Goleta ordinance amounts to little more than a government "wealth transfer" from the owners of mobile home parks to their rental tenants, and thus "looks much more like a classic taking than a mere regulatory burden." Under Bybee's ruling—which the full 9th Circuit will reconsider—the city must either pay just compensation to the owners or scrap the law entirely.

For property rights activists, Guggenheim came as a welcome and somewhat surprising victory in the long war against California's noxious regulatory regime. Yet there's good reason to believe this victory will prove short-lived. No less an authority than University of Chicago law professor Richard Epstein, author of the influential 1985 book Takings: Private Property and the Power of Eminent Domain, argues that Bybee's decision is riddled with "multiple technical deficiencies" and that Bybee tried to "bite off more than he could chew."

The trouble lies in the Supreme Court's treatment of the Takings Clause, particularly the Court's disastrous 1978 precedent in Penn Central Transportation Co. v. New York. In that regrettable decision the Court permitted New York's Landmarks Preservation Commission to strip Penn Central of its lucrative air rights over Grand Central Station without providing any compensation—just or otherwise—for the loss. In essence, the commission forbid the company from erecting an office tower on top of Grand Central in order to preserve the train depot's famous physical appearance.

That certainly sounds like a public use. After all, if the public gets to enjoy the aesthetic benefits of this untouched architectural marvel, why shouldn't the public foot the bill via just compensation? As Justice William Rehnquist correctly observed in his dissent—where he was joined by Chief Justice Warren E. Burger and Justice John Paul Stevens—New York had clearly "destroyed—in a literal sense, 'taken'—substantial property rights of Penn Central."

Furthermore, if the public thought its tax dollars were being ill-spent on that particular use, voters could take political action against the officials responsible for the offending regulation. That's how it works when the government seizes land via eminent domain. (Which is not to say that eminent domain takings are free from corruption or abuse.) At the very least the property owners shouldn't be the only ones bearing the cost of New York's commitment to historical preservation.

Yet in his majority opinion in Penn Central, Justice William Brennan showed little concern for either property rights or public accountability. "A 'taking' may more readily be found when the interference with property can be characterized as a physical invasion by the government," Brennan wrote. It was a convenient trick that denied Penn Central its air rights so long as the government didn't build anything on top of Grand Central either—which was the whole point of the regulation in the first place. Furthermore, Brennan's decision placed the burden of proof entirely on the victimized property owners, establishing a pro-government standard that gave the green light to uncompensated regulatory takings across the country.

That's the ill-conceived precedent hovering over the Goleta rent control case. Until the Supreme Court reconsiders Penn Central and its dangerously flawed approach to the Takings Clause, property owners will remain at the mercy of unaccountable politicians, overzealous regulators, and precedent-bound courts. There's nothing just about that.

Damon W. Root is an associate editor at Reason magazine.