Friday, December 14, 2001
C.A. Revives Challenge to Forced Interest on Renter Security Deposits
By KENNETH OFGANG, Staff Writer/Appellate Courts
A Santa Monica rent control rule requiring landlords to pay 3 percent interest on security deposits may be an unconstitutional taking of property without just compensation, this district’s Court of Appeal ruled yesterday.
Div. One reinstated a suit by landlords who claim that their rights are being violated because they must dig into their own pockets to pay part of the interest. Such “confiscation by regulation,” they say, is a result of the city requiring them to pay 3 percent interest while compelling them to keep the money in federally insured financial institutions paying between 0.5 and 1.5 percent on those deposits at the time the complaint was filed.
The requirement that security deposits be placed in an insured institution is part of the city’s 1979 Rent Control Law. As amended, the law gives landlords the option of using the interest on those deposits for operating expenses or paying it to the tenants—unless the elected Rent Control Board determines otherwise.
In January 1999, the board decided that, for the first time, landlords would be required to pay a fixed rate of interest on security deposits. The rate was set at 3 percent, subject to review by the board every three years.
Action Apartment Association and landlord Herb Balter filed a class-action complaint last year, seeking declaratory and injunctive relief and damages under the “takings” clauses of the state and federal constitutions.
The total shortfall for the owners of the city’s 28,000 residential units, they say, is about $770,000 per year. Thus, they argue, the class will have lost more than $2 million by the time the interest rate comes up for its triennial review next month.
Los Angeles Superior Court Commissioner Bruce Mitchell sustained the city’s demurrer and dismissed the case. But Justice Robert Mallano, writing yesterday for Div. One, said the plaintiffs had pled a claim for a regulatory taking.
The California Supreme Court, Mallano noted, has divided sharply over the level of scrutiny to be applied in regulatory takings cases. But the Santa Monica landlords, he said, have a viable claim even under the most deferential standard.
“The Board has not offered any state interest, much less a legitimate one, for requiring landlords to pay 3 percent interest when banks are paying a lower rate,” the justice wrote.
Forcing landlords to pay a higher rate of interest than they can earn, he elaborated, is unrelated to the legitimate purpose of rent control—balancing the landlords’ interest in earning a fair return on investment against the tenants’ interest in maintaining affordable housing.
“Under the Board’s scheme, a security deposit is a better investment vehicle than a money market account,” he wrote. “There is no logic, fairness, or justice in that. When economic conditions cause banks to pay less than 3 percent on deposit accounts, as is the case today, a landlord should not become a tenant’s cash cow.”
Mallano rejected the city’s argument that the impact on individual landlords—about $82.50 per unit over three years—was de minimis. “A small taking is still a taking,” he said, noting that landlords must not only pay the interest, they also have to pay accounting costs and take time to explain the calculations to tenants.
Attorneys on appeal were Rosario Perry and Marie E. Berglund of the Law Offices of Rosario Perry for the landlords, and General Counsel Doris M. Ganga and Staff Attorney Joel Martin Levy for the Santa Monica Rent Control Board.
The case is Action Apartment Association v. Santa Monica Rent Control Board, B146227.
Copyright 2001, Metropolitan News Company