Sommer v. Hilton, 46 N.Y.2d 831 (1978)
The Contract Clause of the United States Constitution is not violated when a state law requires landlords to refund rent exceeding fair market value, if the leases were entered into after the enactment of the law, as the landlords were already operating in a regulated environment.
Summary
The New York Court of Appeals addressed whether the Emergency Tenant Protection Act of 1974 (ETPA), requiring landlords to refund excess rent paid before a rent control resolution’s adoption, unconstitutionally impaired contracts. The court held that because the leases were made after the ETPA’s passage, landlords were on notice of potential rent adjustments. The court reasoned that the ETPA’s power to determine fair market rent and order refunds was a reserved state power, negating any claim of unconstitutional retroactivity under the Contract Clause. Landlords’ argument for a hearing on comparable rents was also rejected because the law distinguishes between tenant and owner applications for rent adjustments. The order of the Appellate Division was affirmed.
Facts
Landlords entered into leases with tenants before the Village of Freeport adopted a resolution declaring a rent control emergency under the ETPA. After the resolution, the state division determined that the rent charged exceeded fair market rent and ordered a refund of the excess. The landlords challenged the refund requirement, arguing it was an unconstitutional impairment of contract and that they were entitled to a hearing on comparable rents.
Procedural History
The landlords challenged the order requiring a refund of excess rent. The Appellate Division ruled against the landlords. The landlords then appealed to the New York Court of Appeals.
Issue(s)
1. Whether the ETPA’s requirement that landlords refund rent exceeding fair market value, for leases entered into before the adoption of a rent control resolution, constitutes an unconstitutional impairment of contract under the Contract Clause of the United States Constitution.
2. Whether landlords were entitled to a hearing on comparable rents in the process of establishing the fair market rent for the housing units involved.
Holding
1. No, because the leases were entered into after the passage of the ETPA, making them subject to the state’s reserved power to regulate rents and order refunds of excess payments.
2. No, because the ETPA distinguishes between tenant and owner applications for rent adjustments, and the landlords did not file an application that would necessitate consideration of comparable rents.
Court’s Reasoning
The court reasoned that the leases were made after the ETPA’s enactment, which expressly allowed for refunds of rent exceeding fair market value. Therefore, the landlords operated in an “enterprise already regulated in the particular” at the time the leases were made. Citing Ogden v. Saunders and Veix v. Sixth Ward Assn., the court stated that the “retroactivity” claim was invalid because the landlords were aware of the potential for rent adjustments under the ETPA. The court emphasized that every lease entered after the ETPA’s effective date was subject to the State’s power to determine the emergency need for rent control and to require refunds for rent exceeding fair market value.
Regarding the comparability argument, the court noted that subdivision b of section 9 of the ETPA mandates that the State Division of Housing and Community Renewal be guided by guidelines promulgated by the local rent guidelines board when considering a tenant application. Comparability of rents in the area is only considered for applications made under subdivision a of section 9. Since the landlords did not file an application under subdivision a, their argument for a hearing on comparable rents was rejected. The court pointed out that subdivision a allows an owner to seek adjustment of the “initial legal regulated rent,” which “has nothing to do with local guidelines.”