Riger v. L & B LTD. PARTNERSHIP

Eldridge, J., delivered the opinion of the Court. This is the second time within a year that the constitutionality of the Montgomery County rent control law, Montgomery County Code (1972, 1974 Cum. Supp.), ²⁸³ Chapter 29, Article VI, has been before us. In Westchester West No. 2 v. Mont.

Co., 276 Md. 448 , 348 A. 2d 856 (1975), several landlords attacked the Montgomery County rent control law on so-called “substantive due process” grounds, arguing that no public emergency existed with respect to shortages in rental housing, and that, therefore, the rent control law constituted a deprivation of the landlords’ private property without due process of law in violation of the Fourteenth Amendment to the United States Constitution. This Court rejected that particular challenge, holding that “the constitutionality of . . . rent control law[s] does not depend upon the existence of an emergency shortage in rental housing” ( 276 Md. at 463 ) and that the law was a “reasonable exercise of the state’s police power” (id. at 464). The instant case, on the other hand, presents a tenants’ challenge to a portion of the rent control law on “procedural due process” grounds. The tenants, plaintiffs below and appellants here, argue that the procedure set forth in the statute under which landlords may seek “extraordinary” rent increases under certain circumstances, involves a taking of the tenants’ “property” without due process of law and thus abridges the tenants’ Fourteenth Amendment rights.

The Montgomery County rent control law applies to landlords owning three or more dwelling units (§ 29-48 d). Generally, it limits rent increases for holdover tenants under new leases to a maximum of 4% of the base rent (§ 29-51 a). 1 However, the law goes on to provide for what are deemed “extraordinary” rent increases as follows (§ 29-51 b): “When the basic rent increase would result in a hardship to the landlord, a new lease may be entered into which provides for an increase in rent ²⁸⁴ in excess of four percent of the base rent if the following procedures have been followed:” The law then sets forth in detail the procedures for obtaining an extraordinary rent increase. The landlord is required to file for the increase with the County Office of Landlord-Tenant Affairs at least 30 days prior to the effective date thereof. His application must be accompanied by an affidavit setting forth: (a) the “actual operating expenses” of the facility; (b) the “anticipated expenses for the . . . facility”; (c) “[t]he current and proposed rent schedule for each type of dwelling unit in the . . . facility”; (d) “[a] schedule of [the] other fees and income [received from] the .. . facility”; (e) “[t]he vacancy rates for each type of dwelling unit in the . . . facility”; (f) “[t]he schedule of current leases for dwelling units of the type affected by the proposed increase extending beyond the effective date of the increase”; and (g) “[d]etails of any other factors affecting the need for the proposed rent increase.” Contemporaneously with the filing of the request for the extraordinary rent increase, the landlord must also give the tenant notice of his application “accompanied with a copy of the above-described affidavit,” and “a statement that the holdover tenant has thirty days to file any appropriate comment regarding the proposed rent increase with the office of landlord-tenant affairs.” Such comment may also be filed by “any interested association or organization in the County.” Also within thirty days of the filing of the rent increase request, the landlord is required to file with the Office of Landlord-Tenant Affairs a statement that the landlord has met or attempted to meet with the affected tenant or tenants “for the purpose of explaining the basis for the [extraordinary rent] request.” Within 45 days of the landlord’s request for the rent increase, the Executive Director of the County Office of Landlord-Tenant Affairs must approve, disapprove, or modify the request by written findings, opinions and orders.

This action may be deferred at the discretion of the Executive Director by up to 30 days more. And if he should ²⁸⁵ decide that a hearing is necessary “in order to properly make a decision,” he has a reasonable period of time within which to schedule that hearing. Consequently, the initial administrative decision on the rent increase request may occur substantially after the rent increase takes place. The extraordinary rent increase may go into effect thirty days after the filing of the application, but the Executive Director is given a total of seventy-five days to render a decision, or, if the Executive Director desires a prior hearing, he is given a “reasonable” time.

The tenants have no statutory right to a hearing prior to the initial administrative decision. When the Executive Director makes his decision and issues his findings, a copy of his action must be given to the landlord, to any tenant affected by the rent increase and to any association or organization that filed a comment as to the request. The action of the Executive Director may be appealed by any aggrieved party within 10 days after receipt of notice of the Executive Director’s action. If the Executive Director’s initial decision was issued without a hearing, upon notice of appeal he must schedule and conduct a hearing “on such action” within a reasonable period of time.

Thus the only statutory right to a hearing is after the initial decision and the only time requirement is “reasonableness.” When conducting hearings, the Executive Director has the power to command the attendance of witnesses and the production of relevant documents and records through the issuance of a summons. Any party to a hearing may request the Executive Director to issue a summons, and persons appearing at the hearing are entitled to the assistance of counsel. “The parties may present testimony and evidence which shall be given under oath or by affirmation,” and the Office of Landlord-Tenant Affairs must keep a full record of the hearing. Whenever a hearing has been held, a person disagreeing with the Executive Director’s decision has 10 days within which to appeal to the Montgomery County Commission of Landlord-Tenant Affairs by filing a written notice of appeal. The Commission must then schedule a hearing within a reasonable period of time, or may, in its discretion, through ²⁸⁶ its chairman, summarily affirm the decision of the Executive Director.

After action is taken by the Montgomery County Commission of Landlord-Tenant Affairs, administrative procedures for testing a requested rent increase are at an end. An appeal may then be taken to the Circuit Court for Montgomery County. A somewhat unusual requirement of the rent increase procedure, and the aspect causing the tenants’ principal complaint in the present case, is that a tenant must pay the requested extraordinary increase as soon as it is scheduled to go into effect, and the tenant must continue to pay it throughout all administrative and judicial appeals, even when all earlier administrative decisions had been in the tenant’s favor. In other words, although the tenant may prevail at the administrative hearing ultimately provided for, he does not at that time receive the fruits of his victory if the landlord decides to pursue the matter.

The law thus provides in mandatory terms (§ 29-51 b(13)): “Pending the completion of all the rent increase procedures required for an extraordinary rent increase, including all appeal procedures and regardless of whether the executive director has initially approved, disapproved or modified the request for permission to offer the rent increase, any tenant affected by or subject to the increase shall pay it, and if it is finally determined that the increase is not approved in whole or in part, the landlord who has received payment of the increase shall refund the amount of all rent increases not approved.” The law makes no provision for paying the tenant interest on the increased rental payments which are returned if eventually determined to have been unwarranted. Turning to the specific facts of this case, on December 19, 1974, the appellee L & B Limited Partnership directed a letter to the tenants of the Warwick Towers apartments, owned by L & B, telling the tenants that the landlord was ²⁸⁷ applying to the Montgomery County Office of Landlord-Tenant Affairs for an extraordinary rent increase. The letters informed the tenants that a rent increase of 11%, applicable to all holdover tenants, was to become effective on February 1,1975, to all leases commencing thereafter. 2 On January 31, 1975, the Warwick Towers Tenants’ Association filed a “Petition for Injunctive Relief’ in the Circuit Court for Montgomery County. Following motions raising preliminary objections, an “Amended Petition for Injunctive Relief’ was filed, substituting as plaintiffs three individual holdover tenants living in the Warwick Towers apartments in place of the Tenants’ Association.

Named as defendants were L & B Limited Partnership which is the owner and landlord of the Warwick Towers apartments, the property manager of the apartments, the Executive Director of the Montgomery County Office of Landlord-Tenant Affairs, the Montgomery County Commission on Landlord-Tenant Affairs, and Montgomery County. The plaintiffs in their amended petition sought an injunction against the enforcement of the extraordinary rent increase provisions of the rent control law on the ground that those provisions deprived the tenants of their property without due process of law. The defendants demurred to the amended petition. After considering briefs and oral argument, the circuit court (Fairbanks, J.) held that the extraordinary rent increase provisions of the statute were constitutional, as “the careful and detailed procedures set forth in the Rent Control law . . . protect the interests of both tenants and landlords.” The court sustained the demurrers of all defendants without leave to amend and dismissed the amended petition for injunctive relief.

The tenants appealed to the Court of Special Appeals, and this Court granted a writ of certiorari prior to any decision by the Court of Special Appeals. ²⁸⁸ The tenants complain about the extraordinary rent increase procedures on essentially two grounds: (1) the length of time that may elapse before there is a hearing on the rent increase; and (2) the doubtful value of that hearing once it occurs, in light of the feature of the statute requiring the tenants to continue to pay the rent increase pending final administrative and judicial proceedings, without regard to which side prevailed at the prior proceedings and without payment of interest for the use of the tenants’ money. The tenants rely principally upon Fuentes v. Shevin, 407 U. S. 67 , 92 S. Ct. 1983 , 32 L.Ed.2d 556 (1972), and similar cases. They also rely upon cases involving statutory rent increase provisions applicable to government owned public housing projects, Thompson v. Washington, 497 F. 2d 626 (D.C. Cir. 1973); Escalera v. New York City Housing Authority, 425 F. 2d 853 (2d Cir.), cert. denied, 400 U. S. 853 , 91 S. Ct. 54 , 27 L.Ed.2d 91 (1970); Aguiar v. Hawaii Housing Authority, 55 Haw. 478 , 522 P. 2d 1255 (1974). See also Burr v. New Rochelle Municipal Housing Authority, 479 F. 2d 1165 (2d Cir. 1973); McKinney v. Washington, 442 F. 2d 726 (D.C. Cir. 1970).

In analyzing any contention that a state is depriving one of his property without due process of law, several issues are logically presented. There must be sufficient governmental involvement in the action complained of to constitute “state” action, Jackson v. Metropolitan Edison Co., 419 U. S. 345 , 95 S. Ct. 449 , 42 L.Ed.2d 477 (1974); Barry Properties v. Fick Bros., 277 Md. 15, 22 , 353 A. 2d 222 (1976). In addition, the governmental action must result in a “deprivation” of the complainant’s interest, Fuentes v. Shevin, supra, 407 U. S. at 84 ; Barry Properties v. Fick Bros., supra, 277 Md. at 23 . Moreover, the private interest involved must rise to a “property” interest within the meaning of the Due Process Clause, Goss v. Lopez, 419 U. S. 565, 576 , 95 S. Ct. 729, 737 , 42 L.Ed.2d 725 (1975); Board of Regents v. Roth, 408 U. S. 564, 569-571 , 92 S. Ct. 2701, 2705-2706 , 33 L.Ed.2d 548 (1972); Perry v. Sindermann, 408 U. S. 593, 599-602 , 92 S. Ct. 2694 , 33 L.Ed.2d 570 (1972); Fuentes v. Shevin, supra, 407 U. S. at 84 ; Goldberg v. Kelly, 397 U. S. 254, 261-262 , 90 S. Ct. 1011 , ²⁸⁹ 25 L.Ed.2d 287 (1970).

Finally, if there is state action depriving one of a property interest, the pertinent inquiry then relates to the procedure which is constitutionally required under the circumstances, as the requirements of procedural due process are flexible, involving a balancing of the various interests at stake, Hortonville J.S.D. No. 1 v. Hortonville Ed., 426 U. S. 482, 494 , 96 S. Ct. 2308, 2315 , 49 L.Ed.2d 1 (1976); Mathews v. Eldridge, 424 U. S. 319 , 96 S. Ct. 893, 902-903, 907, 909 , 47 L.Ed.2d 18 (1976); Goss v. Lopez, supra, 419 U. S. at 577-580, 95 S. Ct. at 738-739 ; Mitchell v. W. T. Grant Co., 416 U. S. 600, 604, 607, 610 , 94 S. Ct. 1895, 1898, 1900-1901 , 40 L.Ed.2d 406 (1974); Board of Regents v. Roth, supra, 408 U. S. at 570, 92 S. Ct. at 2705 ; Bell v. Burson, 402 U. S. 535, 539-540 , 91 S. Ct. 1586, 1589-1590 , 29 L.Ed.2d 90 (1971). While the matter is not entirely free of doubt, in the present case we shall assume arguendo that the provisions of the Montgomery County rent control law, and the actions of the Montgomery County officials pursuant to the law, constitute “state action” depriving the tenants of an interest. Cf. Geneva Towers Tenants Org. v. Federated Mortgage Inv., 504 F. 2d 483 , 487-488 (9th Cir. 1974); Dew v. McLendon Gardens Associates, 394 F. Supp. 1223, 1230 (N.D. Ga. 1975); Bloodworth v. Oxford Village Townhouses, Inc., 377 F. Supp. 709, 716 (N.D. Ga. 1974); Note, Procedural Due Process in Government Subsidized Housing, 86 Harv.

L. Rev. 880 , 895-896 (1973). 3 However, we do not believe that such ²⁹⁰ interest of the tenants amounts to a “property” interest protected by the Due Process Clause of the Fourteenth Amendment. Consequently, it is not necessary in this case for us to decide, and we therefore do not decide, whether the extraordinary rent increase procedures of the Montgomery County rent control law would meet due process requirements if the tenants had an actual property interest at stake. As the Supreme Court has pointed out recently, property interests, although protected by the Constitution, are not created by the Constitution; instead, they have an independent source such as state law or contract. Bishop v. Wood, 426 U. S. 341 , 344 n. 7, 96 S. Ct. 2074, 2078 , 48 L.Ed.2d 684 (1976); Goss v. Lopez, supra, 419 U. S. at 572-573, 95 S. Ct. at 735 ; Board of Regents v. Roth, supra, 408 U. S. at 577, 92 S. Ct. at 2709 .

The nature of an interest which is claimed to be “property” protected by the Fourteenth Amendment is determined by the source of the interest. Thus, the nature of an interest created by state law, or created by a contract subject to state law, is decided by reference to state law. Bishop v. Wood, supra, 426 U. S. at 344, 96 S. Ct. at 2077-2078 . Once the nature of the claimed property interest is determined, it then becomes a federal constitutional question as to whether the interest is encompassed by the Fourteenth Amendment.

If the extraordinary rent increase provisions of the Montgomery County rent control law applied to the rent which tenants were required to pay during the term of their leases, permitting the landlords to collect greater rent than the parties contracted for, there could be little doubt that such a law would affect “property” interests of the tenants. However, the rent increase provisions do not apply to existing leases; they apply only to new leases to be entered into between landlords and holdover tenants. As we pointed out in Westchester West No. 2 v. Mont. Co., supra, 276 Md. at 457-462 , the Montgomery County rent control law is not ²⁹¹ unlike any other price control legislation.

It merely restricts the future freedom to contract of both the landlord and the tenant, regulating the price which the parties may voluntarily agree should be paid for the tenant’s use of premises owned by the landlord during the term of a new lease. As the complaining tenants acknowledged in oral argument before us, but for the rent control law the tenants would have no claim of a property right. Unlike the