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Court Finds County Process Unfair, Orders New Rent Hearing

A mobile home park owner in San Luis Obispo County has won a state court order for a new county hearing on a rent increase. The Second District Court of Appeal ruled that Manufactured Home Communities is due a new hearing because it did not have the opportunity to cross-examine tenants who testified against the proposed rent increases at an earlier county hearing.

However, the state appellate court panel declined to consider Manufactured Home Communities' argument that the county's application of its rent control ordinance was an unconstitutional taking of private property.

In a federal court case involving exactly the same ordinance and proposed rent hikes, the Ninth U.S. Circuit Court of Appeals withdrew a 2007 ruling against the mobile home park owner, but once again rejected all the property owner's contentions that its Fifth and Fourteenth Amendment rights had been violated.

One of largest owners of mobile home parks in the United States and Canada, Manufactured Home Communities (also known as MHC and Equity Lifestyle Properties) has vigorously fought rent control measures in numerous California cities and counties with minimal success. In 1997, the company purchased the 126-space Sea Oaks Manufactured Home Community, located in the unincorporated coastal town of Los Osos, just south of Morro Bay. The park is subject to San Luis Obispo County's mobile home rent stabilization ordinance, which voters approved in 1984. The ordinance limits annual rent hikes to 60% of the increase in the consumer price index, although park owners may boost rents by 10% upon transfer of a mobile home. The ordinance also provides a hardship exception when park owners have extraordinary expenses, and an exception when tenants sign leases or contracts for a period longer than month-to-month.

The company's San Luis Obispo County lawsuits stemmed from its 2002 proposal to increase rents by 185% for nine tenants in Sea Oaks. MHC said the rent control ordinance did not apply to those tenants because they had signed 12-month rental agreements. The county's rent review board conducted a hearing at which the tenants said the park manager had told them they were covered by the rent control ordinance and that MHC had engaged in "deception" and "mob-like bullying tactics." An MHC attorney asked to cross-examine the tenants, but the board refused to allow the questioning. The board rejected the rent increase after finding that the tenants had treated the leases like month-to-month agreements and that MHC had misrepresented the contracts' terms. MHC appealed to the Board of Supervisors, which upheld the rent review board.

The company then filed suit, alleging that the county had denied MHC a fair hearing because it would not allow cross-examination of witnesses, and that the county's rent control ordinance was unconstitutional. A San Luis Obispo County Superior Court judge ruled the 12-month contracts were invalid and not exempt from rent control, and rejected arguments about the ordinance's constitutionality.

On appeal, MHC argued it had a constitutional right to cross-examine the tenants. The county argued MHC had no such right in a rent control proceeding akin to a public hearing. In a unanimous ruling, a three-judge panel of the Second District, Division Six, agreed with MHC.

"The tenants had an unfair advantage. They could select the facts they wanted the board to hear, and avoid questions concerning those facts," Presiding Justice Arthur Gilbert wrote. "There are valid reasons for restricting cross-examination in some administrative proceedings. But this was not a quasi-legislative hearing or an informal public hearing where speakers are not sworn and cross-examination could inhibit public comment.

"This was an adversarial hearing where the tenants requested the board to make findings against MHC. The rent control ordinance requires findings and testimony under oath, and the board exercised ‘judicial-like' powers in deciding the parties' rights involving their individual leases," Gilbert explained. "Where it makes a decision based on a party's testimony, the adversary is entitled to question his or her opponent."

The court then turned to the question of the leases' validity. The trial court found them invalid because one paragraph permits the park owner to raise rents upon a 90-day notice. The court ruled this provision conflicted with the county's rent control procedures. However, the appellate court noted that the same paragraph in the leases says that rent increases are subject to state and local laws. The leases are not necessarily invalid, the court ruled, although it is possible the county could reject the leases if it determines the tenants were misled or that MHC was somehow barred from claiming a rent control exemption. The court sent the matter back to the county's rent review board for a new hearing at which it permits cross-examination.

Because it ordered a new hearing, the Second District declined to consider MHC's contention that the county's application of the rent control ordinance to MHC's proposed rent increase was an unconstitutional taking.

In federal court, the Ninth Circuit withdrew a 2007 decision in which it rejected all of MHC's arguments about the validity of the county's rent control ordinance and refused to consider challenges to the rent increase process (see CP&DR Legal Digest, November 2007). In November, the Ninth Circuit rejected MHC's petition for rehearing and issued a new opinion similar to the 2007 ruling.

On MHC's taking claim, the court continued to maintain MHC could not seek federal court relief without first requesting a "Kavanau adjustment," the state process in which future rents increase to compensate for previous confiscatory rents (see CP&DR Legal Digest, February 2004). The court found no basis for MHC's arguments that the county violated the company's due process and equal protection rights. The rent control ordinance serves a legitimate public purpose, and the shortage of mobile home spaces along with the impracticality of moving a mobile home justify the county's singling out park owners, the court found.

State Court Case:
Manufactured Home Communities, Inc. v. County of San Luis Obispo, No. B196426, 08 C.D.O.S. 13243, 2008 DJDAR 15820. Filed October 15, 2008.

Federal Court Case:
Equity Lifestyle Properties, Inc., v. County of San Luis Obispo, No. 05-55406, 2008 DJDAR 17425. Filed November 25, 2008.  

The Lawyers:
For MHC: Edith Matthai, Robie & Matthai, (213) 624-3062.
For the county: Henry Heater, Endeman, Lincoln, Turek & Heater, (619) 544-0123.

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