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Contracting Out of Rent Control

Published online by Cambridge University Press:  10 November 2009

Thomas J. Lewis  and
R. Andrew Muller
Thomas J. Lewis
Affiliation:
McMaster University
R. Andrew Muller
Affiliation:
McMaster University
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Abstract

Contracting out of rent control is possible if the tenant's right to a controlled tenancy is made legally transferable, thereby allowing the landlord to decontrol the property by purchasing the right to a controlled tenancy. This article outlines the basic features of contracting out and compares three forms of contracting out with vacancy decontrol. It argues that one form of contracting out may be much more politically feasible than other methods of decontrol because of the way it distributes the benefits of decontrol between landlords and sitting tenants.

Résumé

Il serait possible de dénoncer par voie contractuelle les droits conférés à un locataire par une régime de réglementation des loyers, si la loi permettait de transféror les droits ainsi conférés. Le propriétaire pourrait ainsi redisposer d'un logement à loyer libre en rachetant au locataire les « droits » antérieurement conférés par la législation. L'article souligne les principaux aspects de ce processus contractuel et compare trois formes de dénonciation contractuelle d'un bail de location avec la formule de libération du loyer liée au départ du locataire. Cette étude veut démontrer qu'une de ces formes de dénonciation contractuelle serait politiquement plus acceptable que d'autres méthodes de libération des loyers car elle est dans l'intérêt et du propriétaire et du locataire.

Type
Research Article
Information
Canadian Journal of Political Science/Revue canadienne de science politique , Volume 25 , Issue 3 , September 1992 , pp. 557 - 572
Copyright
Copyright © Canadian Political Science Association 1992

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References

1 108 S. Ct. 849 (1988).

2 Barnes, John A., “Preempting Local Rent Control,” Policy Review 47 (1989), 84–85.Google Scholar

3 In the United States about 10 per cent of the rental stock is under some form of rent control, although rent-controlled jurisdictions are currently confined to Massachusetts, New York, New Jersey, California and Washington, D.C.

4 Fora summary of decontrol in Canada, see Muller, R. Andrew, “Ontario's Options in the Light of the Canadian Experience with Decontrol,” in Arnott, R. J. and Mintz, J. M., eds., Policy Forum on Rent Controls in Ontario (Kingston: John Deutsch Institute, 1988), 21–38Google Scholar. Manitoba and Nova Scotia also retain rent controls.

5 For an overview of rent control in Ontario, see Enid Slack, “Ontario's Experience with Rent Regulation,” in ibid., 7–20, and Smith, Lawrence, “Economic Implications of Ontario's New Housing Legislation, Bills 11 and 51,” Canadian Public Policy 14 (1988), 390–398.CrossRefGoogle Scholar

6 On June 6, 1991, the Ontario Minister of Housing introduced new rent control legislation which would remove most cost-pass-through provisions, cap the remaining pass-throughs to 3 per cent above the guideline, and exempt new construction for five years (Ontario Ministry of Housing, “Housing Minister Introduces Rent Control Legislation,” News Release, June 6, 1991).

7 For an indication of the current state of this debate, see Epstein's, Richard A. attack on rent control, “Rent Control and the Theory of Efficient Regulation,” Brooklyn Law Review 54(1988), 741–780Google Scholar; “Responses,” ibid., 1215–80; and Epstein's “Reply,” ibid., 1281–1304.

8 For a description of contracting out in Israel, see Werczberger, Elia, “Rent Control in Israel,” in Arnott, R. J. and Mintz, J. M. eds., Rent Control: The International Experience (Kingston: John Deutsch Institute, 1988), 124–140Google Scholar. For the use of contracting out in Hong Kong, see Bradbrook, A. J., “The Future of Domestic Rent Control in Hong Kong,” Hong Kong Law Journal 7 (1977), 321–361Google Scholar, and O'Brien, Roderick, “Rent and Tenure Controls for Pre-War Buildings,” Hong Kong Law Journal 7 (1977), 5–40Google Scholar. Richard Arnott provides a concise summary of the provisions for contracting out in Hong Kong in Rent Controls and Options Policy Studies Series No. 2 (Toronto: Ontario Economic Council, 1981), 146–49. Ken Watson's suggestion for using contracting out in Canada is also based on the Hong Kong example. See his “Rent Decontrol,” Housing and People 8 (1977), 3–7.Google Scholar

9 Shreiber, Chanoch and Tabriztchi, Sirousse, “Rent Control in New York City—A Proposal to Improve Resource Allocation,” Urban Affairs Quarterly 11 (1976), 511–522CrossRefGoogle Scholar, and Wolkoff, Michael J., “Property Rights to Rent-Regulated Apartments: A Path Toward Decontrol,” Journal of Policy Analysis and Management 9 (1990), 260–265.CrossRefGoogle Scholar

10 Richard Arnott outlines the customary forms of decontrol in Rent Controls and Options, 72–102.

11 Ibid., 15–16. For assessments of the impact of rent control on the prices of controlled rents compared with uncontrolled rents, see Fallis, George and Smith, Lawrence B., “Price Effects of Rent Control on Controlled and Uncontrolled Rental Housing in Toronto: A Hedonic Approach,” Canadian Journal of Economics 18(1985), 652–659CrossRefGoogle Scholar, and Marks, Denton, “The Effect of Rent Control on the Price of Rental Housing: A Hedonic Approach,” Land Economics 60 (1984), 81–94.CrossRefGoogle Scholar

12 We have expressed the relationship between market rent and controlled rent in a conventional manner, rather than in a precise manner. The difference between controlled rent and market rent is a hypothetical quantity rather than a directly observable quantity. Controlled rent can be directly observed. Thus in the absence of a market for uncontrolled units, the difference between the controlled rent and the market rent cannot be directly observed, but must be inferred from the negative side effects discussed above.

13 After comparing rents in controlled cities and uncontrolled cities in New Jersey, John Gilderboom concludes that controlled rents and uncontrolled rents were not significantly different, and he suggests that in many places rent control may have a mainly symbolic purpose. However, he allows that in the case of Santa Monica, California, a city with very restrictive controls and high rates of property appreciation, controlled rents are well below market rents (Gilderboom, John I., “The Impact of Rent Control on Rent in New Jersey Communities,” Social Science Research 71 [1986], 11–14).Google Scholar

14 To keep the argument moderately straightforward, we must make a number of simplifying assumptions. For example, we neglect the possibility that equilibrium rents for uncontrolled units may change with the proportion of controlled stock available (see Fallis and Smith, “Price Effects of Rent Control”).

15 The numerical assumptions are made for the sake of providing a clear example. The assumptions of risk neutrality, infinite life for the building, and a constant probability of leaving allow us to apply a simple formula for capitalizing a perpetual stream of income, namely V = P/i, where V is the capital value of perpetual annual payment P and i is the effective interest rate. It would be straightforward to assume a fixed life of, say, 50 years for the building and a fixed expectancy of, say, 10 years for the tenancy, but this would complicate the computations without adding new insight. For an interest rate of 5 per cent the present value of the perpetuity P is only 9.6 per cent greater than the present value of the same payment for 50 years.

16 That is, the tenant would be willing to pay up to $120 per month to remain.

17 Calculated as where i = 5 per cent is the interest rate and p = 10 per cent is the annual probability of losing the benefits. Note that this computation neglects the possibility that the tenant may find another rent-controlled apartment after leaving the present one.

18 This is the classic form of vacancy decontrol, not to be confused with vacancy decontrol as a part of rent control. Some US jurisdictions use vacancy decontrol as part of rent control by allowing the rent for a new tenant to be set at market rate. Rent control then continues based on the new higher rent.

19 Calculated as in footnote 17, substituting $200 for $120.

20 As noted in footnote 18, some US municipalities use a vacancy decontrol mechanism as part of ongoing rent control. Even though landlords can only obtain a higher controlled rent, rather than freedom from rent control, the threat of harassment is still considered serious enough that some municipalities have introduced formalized procedures to control it. For example, in some New Jersey municipalities, in order to obtain approval for the higher market-based rent, landlords must provide evidence that the previous tenant did not vacate because of harassment. For samples of non-harassment forms to be signed by sitting tenants, see Barr, Kenneth, “Guidelines for Drafting Rent Control Laws: Lessons of a Decade,” Rutgers Law Review 35 (1983), 721–885.Google Scholar

21 New York City provides examples of the virtual state of war between some landlords, who are prepared to do almost anything, and tenants who stand in the way of landlords intent on realizing the market value of residential property. For an indication of what some landlords are prepared to do, see Makin, Kirk, “In New York, Some Landlords Fight Dirty,” Globe and Mail, February 3, 1987Google Scholar, 1(A) and 12(A). The case of Lisa Hampton provides a less extreme example in Toronto. Ms. Hampton was given the “tenant of the year” award by the Federation of Metro Tenants' Associations for resisting the efforts of her landlord to empty his building (Toronto Star, November 27, 1988, 16[A]). Ms. Hampton was eventually “bought out”—an informal form of contracting out—for $21,000 (Globe and Mail, December 5, 1988, 1 and 2 [A]).

22 A recent District Court decision in Ontario provides a good example. After purchasing a building in Toronto the new owner made some repairs but then began to drive out the tenants. The judge found that the landlord harassed the tenants by refusing to do repairs and by withholding water, heat and electricity. The landlord was ordered to make specified repairs and to compensate the tenants by rebating 40 per cent of their rent from July 1, 1987, until repairs were made—a period of nearly three years (Globe and Mail, April 6, 1990, 10[A]).

23 Strictly, a rent increase determined by the recent control legislation.

24 For the implications of extending this right of transfer to prospective tenants, see the section below “Contracting Out with a Competitive Market.”

25 Margaret Radin argues that some tenants may “personalize” their tenancy right. By “personalize” she means that the individual becomes self-invested in the property such that the property takes on a unique value for the individual. Such personalized property is very much the opposite of fungible property, which is held for purely instrumental reasons, and can be readily replaced with, or exchanged for, other property of equal market value. For a general consideration of personalized property, see Radin's, Margaret “Property and Personhood,” Stanford Law Review 34 (1982), 957–1015CrossRefGoogle Scholar. Radin applies this line of thought to the issue of rent control in “Residential Rent Control,” Philosophy and Public Affairs 15 (1986), 350–380.Google Scholar

26 Arnott, Rent Control and Options, 116. Epstein's argument that rent control is unconstitutional because it is an “uncompensated taking” (an argument rejected by a series of legal decisions) is entirely consistent with Arnott's observations (see Epstein, “Rent Control and the Theory of Efficient Regulation,” 742–59).

27 For explorations of the idea of contracting out with some differences in application, see Shreiber and Tabriztchi, “Rent Control in New York City,” and Wolkoff, “Property Rights to Rent-Regulated Apartments.”

28 The landlord has paid $12,800 to obtain a present value of $48,000 in increased rents, for a net gain of $35,200. The tenant has received a payment of $12,800 but gives up rent-control benefits worth $9,600, for a net gain of $3,200.

29 Richard Epstein notes that a competitive market would have these advantages. However, he does not explore the possibility of using such a market to contract out of rent control. Rather, he concludes that rent control is politically palatable and constitutionally allowable only because it disguises the fact of confiscation of a landlord's property. Then he dismisses the idea of a market in controlled tenancies on the grounds that, if a tenant were allowed to sell the right to a controlled tenancy and to pocket the landlord's money, the confiscation would become too blatant to withstand criticism (Epstein, “Rent Control and the Theory of Efficient Regulation,” 755).