Source: https://reference.findlaw.com/lawandeconomics/literature-reviews/5840-renting.html
Timestamp: 2019-01-19 04:59:01
Document Index: 648069641

Matched Legal Cases: ['§6101', '§3601', '§3601', '§501', '§2', '§3601']

JEL classification: 619, 717, 722, 916, 917, 932, K11, K23
Keywords: Renting, Landlord-Tenant Relations, Rent Control, Habitability Laws,Housing Codes, Housing Discrimination Laws
Three classes of laws regulating landlord-tenant relations will be reviewed-- Rent control laws and, in conjunction with them, vacancy decontrol, no-faulteviction and anti-conversion laws since they tend to be associated with rentcontrol, Habitability laws and Anti-discrimination laws.
Nowhere is housing a single market in the neoclassical sense. In fact it is a setof submarkets which differ in their location, housing type, tenure, quality andother aspects Smith, et al. (1988, p. 30). They also differ in terms of thejurisdiction's tenure strategy, i.e., private versus public ownership of residentialrental housing. This strategy is well documented for Australia, Germany,Holland, New Zealand, Sweden, Switzerland and the United Kingdom J. Kemeny(1995, p. 75-129). Renting in a number of countries has also been discussed byHarloe (1985) and Emms (1990). Power (1990) has reviewed renting in fiveEuropean countries.
In order to analyze rental housing in general and the effects upon it oflandlord-tenant laws in particular, economists have developed special methodsof inquiry. One involves housing stock models and the other flow models whichuse hedonic price analysis Rosen (1974), Kain and Quigley (1970), Barnett (1979)and Quigley (1979). Hedonic price analysis also has been applied to estimate theeffects of certain landlord-tenant laws Hirsch (1981), Hirsch and Law (1979),Rydell et al. (1981), and Marks (1984)
Hedonic price analysis looks at housing as a complex commodity composedof a host of housing services flowing from the existing housing stock with thenumber of housing service units determining its quality. The housing servicesof a dwelling include location, heat, air conditioning, size, appointments, etc.,each valued and consumed by residents. Although the flow of housing servicesis not well-defined and its quantity hard to ascertain and to price, the monthlyrent can be considered the product of the number of housing-service units timesthe unit's price. The hedonic price approach supposes that the various housingcharacteristics of a dwelling have distinguishable values to residents. Thus, thehedonic housing price function estimates the marginal market prices consumersare willing to pay for each housing characteristic. Information from this functioncan be used to combine any set of measured characteristics into aone-dimensional measure of the value of the total flow of housing services fromdwellings in a specific housing market. This approach has major beneficialapplications to the analysis of landlord-tenant laws. It allows looking at rent asthe product of the number of housing service units and the price of a unit,providing useful insight into the effect, for example, of a rent control law. Thus,even if rent control succeeds in reducing rent, hedonic housing price analysispermits the estimation of the percentage associated with lower housing serviceunit prices as well as that associated with the reduced number of housingservice units. The latter testifies to the extent to which housing quality hasdiminished as a result of rent control Rydell et al. (1981). In a similar manner, withthe help of hedonic price methods, it becomes possible to determine what, if any,effect a habitability law has had on housing quality and the price of housingservice units Hirsch and Hirsch(1975).
2. Perfectly competitive static flow models which assume the existence of anunobservable homogeneous commodity, i.e., housing services Muth (1983) andOlsen (1988). Rental housing has a variety of housing characteristics, each ofwhich has quantitative and qualitative dimensions. This characteristics approachof Rosen (1974) involves a model of demand, supply, and competitive marketequilibrium. Each housing unit has a vector of n objectively measurablecharacteristics. A bundle of such characteristics constitutes a housing unitwhich has a price in the housing market. In a competitive market, such bundlesand their prices indicate the implicit prices of characteristics, defined as hedonicprices. Multiple regression analysis can estimate these hedonic prices. Many ofthese models assume a group of households and firms to be confined to therental market, ownership housing to be a substitute for rental housing with theprice of ownership housing given, and rather static circumstances which do notidentify how quality changes come about, i.e., whether through maintenance,rehabilitation, conversion, etc. Arnott (1995)
4. Imperfectly competitive flow models which recognize imperfections due tolocation, heterogeneity of housing units, neighborhood effects, search costsand imperfections in capital markets. Two major classes of such models exist.One is a monopolistically competitive model derived from search-based matchingmodels Diamond (1984). Tenants' tastes guide the search for rentals. In animperfect market, searchers finding the exact housing unit they desire can endup paying a rent above that commanded by rather similar rental units. Shouldlandlords recognize this fact, they could charge a price above marginal cost. Yet,should there be free entry and exit, profits would decline, possibly to zero, andvacancies result.
A second class of models can be referred to as contract models where marketimperfections result from asymmetric information Hubert (1990). For example,there can be reliable and unreliable tenants, whose identity landlords discoveronly after occupancy has commenced. Unreliable tenants will move frequentlyand, in the absence of widespread information about their behavior, imposeheavy costs on landlords.
5. Political-economic models theorize about the probability of a jurisdictionenacting landlord-tenant laws Fallis (1988). Such models take cognizance of thefact that landlord-tenant relations are significantly affected by the relative size,wealth, and political activity of the two groups to a bargain. Landlords in manycommunities tend to be richer but fewer in number than are tenants. But inaddition to tenants, there are also homeowners. Whether their economic interestis more attuned to tenants or landlords is not altogether clear Arnott (1995). Amodel by Epple (1994) explicitly recognizes that a community has permanent andtemporary residents, each with different interests. Neither group, however,knows the size of the other. Yet, homeowners are not incorporated into themodel.
In many countries governments have enacted laws that regulate the rentslandlords may charge residential tenants for their property and services. Theavowed purpose has been to protect tenants from unwarranted rent increases,particularly if they might force them to vacate the premises. Most of thesecontrols were enacted in times of severe housing shortages, mainly duringwartime and periods of hyperinflation. The relation between rent control andinflation has been explored by St. John (1996).
Rent freezes were imposed on many American and European cities duringWorld War II. Some, including New York, retained these controls long into thepost-war period. For example, in the United Kingdom, rent control was enactedby Parliament shortly after the outbreak of World War II Hirsch (1981) andTurner (1988). The Rent and Mortgage Interest Restrictions Act of 1939 appliedto rent controls as well as to security of tenure. Rents were fixed at September1939 levels. Also a number of major cities in developing countries have firstgeneration types of rent controls, although they differ in detail and enforcementMalpezzi (1993).
During run-away inflation of the 1970s, many local jurisdictions in the UnitedStates imposed rent control, including about 100 municipalities in the State ofNew Jersey alone. In California, when real estate prices skyrocketed in the late1970s and the electorate passed a revenue limitation measure (Proposition 13),the measure's sponsors promised to reduce rents. When rents were not lowered,a number of local jurisdictions (including the cities of Los Angeles, SanFrancisco, Oakland, Berkeley, and Santa Monica, and the County of LosAngeles) adopted rent control ordinances. Also, about one third of cities inCalifornia had rent control ordinances in effect on mobile home parks. Moreoverin the mid-'70s all Canadian provinces introduced rent control, though only fourhave retained them Arnott (1995). In 1995, residential housing under rent controlis estimated to fall between 10-15% Arnott (1995).
In the United States, rent control has typically been justified by localgovernment entities as an exercise of their police power. In the 1920s, the UnitedStates Supreme Court held that the use of state police power to enact rentalcontrols was consistent with the due process clauses of the Fifth andFourteenth Amendments of the United States Constitution only if utilized inresponse to a housing "emergency." Block v. Hirsch (1921). In recent years,however, for some courts a crisis or extremely exigent circumstances are nolonger required to justify rent control. For example, the California Supreme Court,in Birkenfeld v. City of Berkeley (1976, p. 129), declared that it "is now settledCalifornia law that legislation regulating prices or otherwise restrictingcontractual or property rights is within the police power if its operativeprovisions are reasonably related to the accomplishments of a legitimategovernmental purpose." Thus, in the United States, the court's inquiry in rentcontrol cases is generally whether the ordinance reasonably relates to alegitimate purpose. The more important question of whether the measure will, infact, achieve its stated objective of controlling rents is typically not reviewed bythe courts. This is the traditional dichotomy between procedural andsubstantive due process, and it is this approach that ignores the value ofeconomic analysis. The fact that rent controls may actually make a housingproblem worse often appears irrelevant to a court's view of a rent controlordinance. As long as the enacting body could reasonably conclude that themeasure is related to a legitimate purpose, the measure is likely to be upheld,even if it is counterproductive Palos Verdes Shores Mobile Estates, Ltd. v. Cityof Los Angeles (1983). American courts have two further concerns. In order notto be confiscatory on its face, a rent control ordinance must permit theregulatory board to grant across-the-board increases based upon classificationenumerated by the board or statute. Alternatively, the rent control ordinancemust institute a unit-by-unit procedure that will operate without what the courtconsiders to be an unreasonable delay. There is also a constitutionalrequirement for a "just and reasonable" return, a difficult concept. A requirementof recent vintage and to be discussed below is the "nexus" test.
Arnott recognizes, and our review confirms, that there are few empiricalstudies of first generation rent control in Europe at least in the English-languageliterature Arnott (1995, p. 102). Moreover, there are relatively few contributionsthat pertain to countries other than the United States. Exceptions are somepapers on Canada Arnott and Johnston (1981), Marks (1984), Smith andTomlinson (1981), and Fallis and Smith (1985); Germany Börsch-Supan (1986);Hong Kong Cheung (1975, 1979); Israel Werczberger (1988);Anas and Cho(1988); and United Kingdom Coleman (1988) and Ogus (1994) .
First-generation or hard rent control laws, that involve a virtual rent freeze, haveusually been subjected to what Arnott (1995) refers to "Textbook Analysis."This analysis makes use of the first model discussed earlier, i.e., a perfectlycompetitive static stock model. It focuses on rent and availability of rentalhousing. When, for example, inflation raises the cost of providing rentalhousing, controls prevent landlords from passing on cost increases to tenants.Using a housing stock model in, Figure 1 the two axes are rent (R) and numberof dwellings (Q). Before the imposition of rent control on apartments, atequilibrium, the number of dwelling units was Q1 and the market-clearing rentwas R1. As a result of, for example, increases in the price of input factors(whether repair and maintenance costs, utilities, or property taxes), the supplyfunction shifts to the left (S2). Without a change in demand, a new equilibriumwould be reached at Q2 and R2. Rent control would prohibit landlords fromcharging the rent that they would otherwise have sought; that is, their rent willbe below R2. In the most extreme case where no rent increase is permitted,landlords would supply Q1 - Q3 fewer dwellings than would be demanded in theshort run. In the long run, rent control is likely to have a chilling effect oninvestors and therefore curtail the supply of housing. Thus, cumulative declinesin low-cost dwellings could be anticipated, accompanied by housing shortages.
Empirical estimates of the long-run price elasticity of rental housing supplyrelated to land prices in large U.S. metropolitan areas suggest it to be about +0.20Hirsch (1981). Thus, a 10% increase in the price of land per year would tend toincrease rents by 6.5%. If no rent increases were permitted, supply would bereduced by 2.4% of low-cost housing units, and if only half of that increase werepermitted, the shortage would be 1.2%.
The magnitude of the likely rental housing shortage can be estimated withthe aid of income elasticities for low-cost rentals. An econometric studyestimated it to be about +0.98 for 1974-75. Hirsch (1981, p. 293). In anuncontrolled rental market, in the presence of an annual per capita incomeincrease of 8%, for example, and on the assumption that the short-run supply oflow-cost housing does not increase, annual rent increases of about 8.0% couldbe expected. If rent control were to be imposed and were to permit no increasewhatsoever, an 8.0% shortage of low-cost rental units would develop. If, on theother hand, rent increases were held to half the expected 8.0%, or 4.0% perannum, a shortage of about 4.0% would result. These shortages would becumulative as long as income increases over time.
The textbook analysis has been effectively summarized by Arnott (1995).Accordingly, when rents are capped below market-clearing levels, tenants inrent-controlled apartments benefit. The longer the occupancy, the greater thebenefit. The below-market rents induce excess demand for housing and in turna mismatch of apartments to households; reduced mobility of tenants andtherefore the labor force; and grey- or black-market phenomena, e.g., "keymoney". Furthermore, landlords incur lower returns on their investment and acorresponding decline in property values. They tend to reduce repair andmaintenance, convert to non-controlled land uses and desist from addingapartments.
If the main concern is with rent control's effect on housing quality, a housingflow model, using hedonic housing price functions, is appropriate. A theoreticalmodel by Frankena (1975) (the second type discussed earlier) separates theeffect of rent control on the number of housing service units from that on theunit's price. Frankena does so by examining the effect of rent control as a ceilingon rent (or, equivalently, revenue) per dwelling as opposed to a ceiling on priceper housing service unit. His model leads to a kinked supply curve when rentcontrol takes the form of a revenue constraint, as shown in Figure 2. Thehorizontal axis measures housing service units. Equilibrium price and quantityoccur at p0 and q0, respectively, in the absence of controls. If rent control limitsrevenue per dwelling to price-quantity combinations along the rectangularhyperbola ASSR2, then the effective supply curve will become SASSR2. In thisdiagram, equilibrium occurs at a lower quality level (q1), but at a higher price perhousing service unit (p1). Increased demand, then, will lead to even moredeterioration of quality.
It was projected that, after rent control had been in effect in Los Angeles forfour years, the rents of controlled dwellings would be about 4% lower than theywould have been if rent control had not been in force. Likewise, after four years,the price of rental housing services was estimated to be 3.2% lower than it wouldhave been without rent control, and the quantity of rental housing service unitswas 1.5% lower Rydell, et al. (1981, p. VI).
The long-term effect of rent control on rental housing quality was estimatedby Mengle (1983). His study of eight large cities estimated that the presence ofrent control was associated in 1974 with a 7.4% decrease in housing quality,while three years later it was associated with a 13.9% decrease. For indigentblack tenants, the deterioration was 18.6% in 1974 and 26.6% in 1977. Thedeterioration was particularly serious for indigent aged tenants. Thus, in 1979 inthe presence of rent control, the housing quality of all tenants had declined by14.5%, of aged tenants 60 years and over by 17.3%, and of indigent tenants 60years and over by 23.0%.
Tenant gains and landlord losses that result from rent control have beencompared by Rydell, et al. (1991, p. 618). Gains are defined as net rent reductionsafter deterioration minus loss in consumer surplus due to reduced housing andrent control fees levied on tenants. Losses are the decrease in revenue due torent reductions and decline in housing stock plus landlords' rent control fees,minus reduced maintenance expenditures. The paper makes use of theMarshallian consumer surplus concept and assumes a constant elasticityaggregate demand function with an 0.7 price elasticity. It concludes that thepresent value of landlord losses exceeds the present value of tenant gains,pointing to two reasons -- 1) housing benefit losses to tenants due to qualitydeclines outstrip landlords' savings from under-maintenance and 2) burden ofrent control fees.
In order to estimate the overall effect of rent control, a rent capitalizationframework can be used. In it, the expected future flow of revenues from rentalproperties determines their values, which, in turn, depend on supply anddemand conditions and their modification by a changing legal environmentHirsch (1987b). An econometric study of nine middle sized cities in Los AngelesCountry, California estimated that rent control was associated with an annualizeddecline in property values of between 7.3% and 11.9%, ceteris paribus. Theeffect of rent control was also examined by Albon and Stafford (1990).
The third model, i.e., a perfectly competitive flow model with dynamicfeatures and explicit quality differentiation, also has been applied to asecond-generation rent control analysis. In its simple form it has dynamicfeatures, allows for quality differentiation and articulates specific provisions ofrent control laws. A more complicated model by Sweeney (1974) has beendiscussed before. It has been expanded to allow for rent control leading todemolition of existing buildings, followed by construction of new ones Arnott,et al. (1983).
where P is the sales price of a mobile home or its assessed valuation; U is theflow of housing services derived from the home; V is the price per constantquality unit of pad services; W is the price per constant quality unit ofalternative housing, mainly apartments; and C is the cost of transporting andinstalling the mobile home Hirsch (1988). The price of a mobile home unit isassumed to be inversely related to (C), the costs of transporting the home andinstalling it in a park. A home already located in a mobile home park should berelatively more expensive than a comparable one in a showroom, since for theformer the costs of transportation and installation are absent.
Two econometric studies have applied the capitalization model to estimatethe effect of rent control on the value of mobile homes. One covers the State ofCalifornia in 1984-86, where about 39% of all mobile homes were in rent controlcommunities. Sales prices were on average about $8,800 or 32% higher incommunities which had imposed rent control on mobile home park rents Hirschand Hirsch (1988). A second econometric study pertains to a particular mobilehome park in Ocean City, California in 1987-92. It found that during 1986-92, salesprices of mobile homes under rent control were $3,531 higher than those inuncontrolled markets Hirsch (1995).
The issue of equity has been argued from two different points of view. One viewholds that in a search for equity, macroeconomic instruments must be reliedupon. It recognizes that while some equity in housing consumption is important,governments can pursue an income distribution policy which can make housingpolicies inefficient and even inequitable Kain (1974), Aaron and Furstenberg(1971).
The second view distinguishes between general and specific egalitarianism,i.e., the general fairness of the income distribution, and concern that all citizenshave a minimum amount of essential commodities, including housing Tobin(1970). Specific egalitarianism requires an interest in the level of housing servicesaccruing to indigents, minorities and the aged, even if an optimal incomedistribution were to prevail. An evaluation of equity aspects of landlord-tenantlaws clearly is based on the specific egalitarian view, without necessarilydetermining an optimal housing service level.
The long-term effects of rent control of apartments in Santa Monica, CA arewell-documented in a California Court of Appeal ruling Santa Monica BeachLtd. v. The Superior Court of Los Angeles County (1996, p. 2155-56). Thefollowing ten year effects of rent control were found the City's stock of rentalhousing units declined by nearly 5 percent and ... low-income rental units [by]12 percent ... notwithstanding that, during the same period, the rental housing
The leading case, adopting the position that mobile home rent controlconstitutes a permanent physical occupation and is, therefore, a taking is Hallv. City of Santa Barbara (1986). Owners of a mobile home park challenged amobile home park rent control ordinance by arguing that the ordinancetransferred to each tenant a possessory interest in the land on which their mobilehome was located. They claimed that the transfer was reflected in the facts thatthe prices for mobile homes in the park had shot up dramatically after theordinance was enacted, and that many homes in the park were selling for abovetheir bluebook value. A federal Court of Appeal citing, Loretto v. TeleprompterManhattan CATV Corp. (1982), for the proposition that a permanent physicaloccupation of property is a government action of such a unique character thatit is a taking without regard to the other factors that a court might ordinarilyexamine, concluded that the ordinance interfered with the park owner's propertyrights as described in Loretto and therefore constituted a physical taking.Specifically, the court found that the ordinance directs the landlord to givetenants a lease, a recognized estate in land, lasting indefinitely. Moreover, thelandlords' residual rights in the property are largely at the mercy of his tenants:he loses practically all right to decide who occupies the property, and on whatterms. If a tenant moves, the tenant alone decides who will be his successor byselecting the buyer for his rental unit; the landlord has no say as to who will liveon the property, now or in the future.
Moreover, the court is concerned that the ordinance has "eviscerated" theproperty rights of the park owners, stating :...as the Santa Barbara ordinance isalleged to operate, landlords are left with the right to collect rents while tenantshave practically all other rights in the property they occupy. As we read theSupreme Court's pronouncements, this oversteps the boundaries of mereregulation and shades into permanent occupation of the property for whichcompensation is due. Hall v. City of Santa Barbara (1986, p. 2,4).
While it did not adopt the California courts' approach, the U.S. SupremeCourt specifically rejected the Hall approach in Yee v. City of Escondido (1992),holding that a mobile home rent control ordinance without a vacancy decontrolprovision did not effect a physical taking. The Court held unanimously that aphysical taking can occur only when the government requires that thelandowner submit to a physical occupation of his or her land. Yet the Escondidoordinance did not impose such a requirement, because a park owner couldchoose to evict all tenants and change the use of his or her land. It merelyestablished the terms of the landlord-tenant relationship for those landownerswho chose to devote their property to mobile home parks.
Even as it rejected the argument that the Escondido mobile home rent controlordinance effected a physical taking, the Yee Court may have opened the doorto challenges to mobile home rent control ordinances as regulatory takings. TheCourt implicitly invited such challenges by noting that the plaintiffs' argumentwas "perhaps within the scope of our regulatory taking cases" Yee (1992, p. 165).The Court also stated that rent controls "are analyzed by engaging in the'essentially ad hoc, factual inquiries' necessary to determine whether aregulatory taking has occurred" Yee (1992, p. 166). Also, commenting on theplaintiffs' argument that the Escondido ordinance transferred wealth fromlandlords to incumbent mobile home owners, the Court stated that:
This effect might have some bearing on whether the ordinance causes aregulatory taking, as it may shed some light on whether there is a sufficientnexus between the effect of the ordinance and the objectives it is supposed toadvance. See Nollan v. California Coastal Commission, supra, at 834-835, 97L.Ed.2d 677, 107 S.Ct. 3141. But it has nothing to do with whether the ordinancecauses a physical taking. Yee (1992, p. 167)
As the Yee Court suggested with its citation of Nollan v. California CoastalCommission (1987). a challenge to a mobile home rent control ordinance as aregulatory taking could be based on the fifth of the five Takings Clause factors:whether the ordinance substantially advances a legitimate state interest. As isset forth in Nollan, this test requires more than just a rational basis for thestate's action. For the action to pass constitutional muster, there must also be anessential nexus between the stated ends of the state action and the meansemployed. An argument that mobile home rent control is a regulatory takingcould be based on the absence of a substantial nexus between mobile home rentcontrol and the objectives it is supposed to advance. For example, if theobjective of rent control is to alleviate a housing shortage and economic theorysuggests, and empirical evidence confirms, such an outcome to be unlikely, aregulatory taking would have occurred.
In a more recent decision, the U.S. Supreme Court appears to have added afurther requirement to the nexus test. In Dolan v. City of Tigard (1994) the Courtadded a "rough proportionality requirement". It held that the city's exactions forflood control purposes and a pedestrian bicycle path were unconstitutional.Although both were legitimate public purposes, and there was a significantnexus between these ends and the exactions required by the city, the degree ofthe required exactions was disproportionate to the impact that the planned landdevelopment would have on problems addressed by the exactions. In short, itfailed the "rough proportionality" test. There is still the question to what extentDolan is applicable beyond the context of exactions required for permit approval,e.g., rent control.
Particularly the first type of decontrol would allow market forces to correctthe disequilibrium created by rent control. The result would be particularlyfavorable under divided property ownership, e.g., when tenant sells mobile homeor condominium Hirsch and Hirsch (1988).
In the presence of vacancy decontrol, landlords have a strong incentive tocreate circumstances conducive to tenants vacating their premises. Tocounteract these tendencies, jurisdictions often enact just-cause eviction laws,which enumerate the specific causes which allow eviction. Causes includeamong others, failure to pay rent, disorderly conduct, willful damage to premises,etc. New Jersey Stat. (1974) Some states have attempted to apply such lawssolely to senior citizens California Assembly A.B.1202 (1974).
The effect of a just-cause eviction law is to increase the security of tenancy.The demand function for apartments with just-cause eviction guarantees ishigher, i.e., further to the right, than that without such guarantees, ceterisparibus. Thus, the law by protecting tenants enhances their utility. But whilejust-cause eviction laws increase the welfare of tenants, they also impose costson landlords. Specifically, such laws reduce landlords' rights and therebyflexibility, and place greater risk upon them. Moreover, legal costs are likely toincrease. As a consequence, the rental housing supply function shifts to the leftin the presence of just-cause eviction laws, ceteris paribus.
In 1826, the doctrine of constructive eviction was first recognized in theUnited States Dyett v. Pendleton (1826). Grounds for constructive eviction,which permitted the tenant to surrender possession and vacate premises, werethe covenant of habitability and the covenant of quiet enjoyment. The covenantof habitability required the premises to be delivered in tenantable fit or suitablecondition. Concerned that the only relief for tenants was to vacate the premises,some state statutes and court decisions in the post-World War II periodmodified the doctrine of constructive eviction. In so doing, the doctrine ofcaveat emptor was reinterpreted in relation to the rights and obligations oflandlords and tenants. In light of the complexity of rental housing and theinequality of bargaining power in present-day society, a move towards thedoctrine of caveat venditor occurred. As a result, an implied warranty ofhabitability in urban rental leases evolved Markovits (1976) and Schwallie (1990).
In the mid-1970s two parallel developments occurred in the United Kingdomand the United States. In 1975 the Law Commission (Law Com. No. 67) handedto the Lord High Chancellor its proposed Codification of the Law of Landlordand Tenant. He in turn laid this Report on Obligations of Landlords andTenants before Parliament Law Commissioners (1975). The Report proposes interalia that particular obligations of landlords and tenants be divided into twoclasses -- mandatory obligations that cannot be varied or excluded, and variableobligations that can be varied or excluded by agreement of the parties. Theimportant mandatory obligations included the tenant's right to exclusivepossession of the premises and their quiet enjoyment; the tenant's mandatoryobligation was to pay rent, to protect the premises and to disclose his identity;as well as the landlord's obligations to disclose his identity.
In 1976, the American Law Institute adopted Restatement of the Law:Property 2d -- Landlord and Tenant American Law Institute (1976). Accordingto the document's section on habitability, a court could hold that a landlord hadbreached a covenant of habitability even though he had an agreement with atenant on a month-to-month basis that clearly indicated that both landlord andtenant were fully aware of housing code violation. Remedies available to tenantinclude rescission, damages, rent abatement and rent withholding. Moreover,tenants are protected against retaliatory eviction.
The United Kingdom has various laws providing for compulsoryimprovements and repair. For example, the Housing Act of 1974 in Part VIIIprovides powers to compel landlords to provide a bathroom and other standardamenities on request from a tenant Hadden (1978). This requirement, which hadexisted since 1964, was intended by the 1974 Act to include repairs associatedwith the provision of standard amenities, and also to permit local authorities toact without a formal request from a tenant. In response to representation from atenant, local authorities inform the owner and then inspect the premises andfinally prepare a schedule of work and an estimate of costs. Under certaincircumstances steps are initiated by the local authority as a result ofhouse-to-house inspection. At any time within six weeks, the owner may appealto the county court on the ground that the notice is invalid, for example that theexpense involved is unreasonable or that the standard of repairs required isunreasonable in relation to the age, character and locality of the house. Once thenotice has become operative, the owner has a further six months to decidewhether or not to serve a purchase notice on the local authority. If no action ofany kind has been taken by the owner on the expiration of the six month period,the local authority may then serve a formal reminder asking whether the ownerintends to carry out the work. Should this not produce a satisfactory response,the local authority may then serve further notice stating that it intends to carryout the work in default and, after a further 21 days, may do so. Alternatively, itmay wait until the full 12 months have expired and then act in default, though itmust still give the owner 21 days notice of its intention to do so. In eitherinstance, the cost of the work may then be recovered from the owner, subject tofurther provision of an appeal against the amount claimed.
In connection with the complexity of today's dwellings which affectseverybody, including the richest tenants, Judge Skelley Wright has stated inJavins v. First National Realty Corporation (1970, p. 1073):
By 1972 about half the states in the United States had a habitability law.Moreover, a number of local jurisdictions enacted such laws. An example is theCity of Los Angeles with its Habitability Enforcement Program Los Angeles CityOrdinance 171074 (1996).
In the early 1970s, this issue began to be researched, first by applyingeconomic theory and later by carrying out econometric studies. Ackerman (1971,p. 1093) reasoned that "when code enforcement is seriously pursued, marketforces will generally prevent landlords from passing on their increased coststhrough rent increases." In opposition to this position, Komesar (1973, p. 475,1187) argued that in many housing markets landlords were unlikely to be able topass on their cost increases. An econometric study attempted to empiricallyestimate the effects of various habitability laws not only on cost but also ondemand functions of rental housing Hirsch et al. (1975). In this manner anunderstanding of the welfare-effects of such laws became possible.
Some econometric studies have attempted to estimate the welfare effects ofrepair-and-deduct, rent-withholding, and receivership laws, respectively Hirsch,et al. (1975). The econometric analysis uses hedonic price methods, and includeshabitability laws among the explanatory variables in the rental housing demandand supply equations. The extent to which the demand and supply functionsshift upward in the presence of a particular habitability law can be estimated, andso can the resulting change in consumer's surplus. If such laws are enforced andlead to improved repair and maintenance, the tenants' well-being will beenhanced and the demand function will shift upward.
On the supply side, habitability laws can affect maintenance and repairdecisions, and, as a result, they can increase landlords' costs. In consequence,they can make the supply function shift upward. Welfare conclusions can bederived by comparing the magnitude of the vertical shifts of these demand andsupply functions. Using a hedonic price approach, an econometric study foundthat, of the three types of habitability laws, in 1974-75 only receivership had astatistically significant effect on both the demanders and suppliers of low-costrental housing in 34 large metropolitan areas with more than 1/4 of the UnitedStates population. Receivership laws were found to be associated with astatistically significant increase in rental expenditures incurred by indigenttenants, which, however, was not matched by benefits. Costs exceeded benefitsby a factor of three and the consumer's surplus declined by more than 10%Hirsch (1981, p. 272). Thus, although habitability laws were designed to improvethe welfare of indigent tenants, in the sample studied, they had failed to do so.Receivership laws may even have been counterproductive.
Why are habitability laws inconsequential or even counterproductive? Onereason is that these regulations are not accompanied by an increase in theindigents' purchasing power which should have permitted them to pay forimproved housing. Without income transfers, habitability laws can becounterproductive Schwallie (1990, p. 525) recently concluded that the impliedwarranty of habitability and habitability laws incorporating this warranty haveoften failed indigent tenants. The main reason is that "the warranty ofhabitability results in scarcer, more expensive housing for the poor. Moreover,the quality of low-rent housing is a consequence of inadequate demand due tothe low incomes of renters..." The effects of making the implied warranty ofhabitability compulsory on repairs, maintenance and safety and on equity havebeen discussed by Singer (1993, pp. 756-759).
In the United States, one such program are Sections 501 and 504 of theHousing and Urban Development Act of 1970, often referred to as ahousing-allowance program. Under it, tenants who meet an income test are paida rent subsidy as long as they do not live in substandard housing. The rentsubsidy amounts to the difference between the rent payments and 25% of thetenant's income. Such an earmarked subsidy is very different from a generalwelfare payment that can be used by recipients for whatever purpose theychoose. Whenever the income elasticity of rental housing is smaller than one,and there exists evidence that this is the case for indigents, an earmarkedsubsidy is to be preferred F. de Leeuw (1971). As tenants receive such a rentsubsidy, their housing demand function shifts to the right. Depending on thedemand and supply elasticities and the nature of the demand function shift (i.e.,whether it is parallel or not), part, all, or none of the subsidy will be shifted tolandlords in the form of rent changes.
There is some empirical evidence regarding the effectiveness of habitabilitylaws in reducing substandard housing. An econometric study of the relationbetween habitability laws and two different measurements of dilapidation in theUnited States in 1960-75 produced the following results -- Among the differenthabitability laws receivership laws have the greatest effect on housing quality.In their presence, renter-occupied dilapidated and deteriorating housing unitsdeclined on average 12.4% Hirsch and Law (1979). The laws' effect was evenmore pronounced if substandard housing is defined as housing lacking some orall plumbing facilities. By this measure, substandard housing declined anaverage of 17.0%.
One group of states permits a tenant a tort cause of action against thelandlord for removal of the tenant without resort to judicial process, if theremoval is against the will of the tenant. A second group expressly bars any useof self-held by the landlord, permitting the tenant a cause of action for the mereact of entry by the landlord in an attempt to remove the tenant. An example isCalifornia Jordan v. Talbot (1961).
Analysis of the economic effects of anti-speedy eviction laws can be similarto that of habitability laws. Both types of speedy eviction impose burdens ontenants while benefiting landlords; laws modifying or negating them shouldresult in upward shifts of the rental housing demand and supply functions. If thevertical shift of the demand function in the presence of anti-speedy eviction lawsexceeds that of the supply function, and the difference is statistically significant,welfare is enhanced, and vice versa. An econometric study of black indigenttenants indicates that laws reining in landlords' use of self-help measures maybe socially desirable. Hirsch (1983).
Since the end of the Civil War in the United States, a number of affirmativesteps have been taken to combat discrimination. In terms of housing activities,Section 1982 of the Civil Rights Act of 1866 together with its interpretation bythe U.S. Supreme Court in Jones v. Alfred H. Mayer Co. (1968) was first. Nextcame the Fair Housing Act of 1968 and Fair Housing Amendments Act of 1988.
Racial housing discrimination appears to exist in many countries with raciallydiverse populations Page (1995). In many Western countries, especially theUnited States, such discrimination has been on the decline. Economists havebeen interested in the reasons responsible for housing discrimination and howanti-discrimination laws affect them, and welfare effects of anti-discriminationlaws.
A number of theories have been advanced to explain the existence of rentalhousing discrimination and the resulting segregation by race. They include theaversion theory Muth (1970), racial prejudice theory Becker (1957) and Bailey(1959), and amenity theory Yinger (1976).
In the United States until recently little attention was paid to housingdiscrimination of age groups. Even as late as 1971, the U.S. Supreme Court inGraham v. Richardson (1971) included among "suspect" categories requiringstrict scrutiny only race, national origin and alienage. Recently, state legislaturesand courts, as well as local governments, have shown concern about housingdiscrimination against families with children. By 1981 nine states and the Districtof Columbia had enacted laws dealing with age discrimination in housing, andmany courts began to interpret discrimination laws to cover age. For example, theCalifornia Supreme Court, in Marina Point, Ltd. v. Wolfson (1982) interpreted theCalifornia Civil Rights Act as preventing housing discrimination againstchildren. The court also found that the strongest basis for this position restedupon California's Unruh Civil Rights Act (1982) which provides that "[a]llpersons ... are entitled to ... full and equal accommodations in all businessestablishments." California courts have interpreted the phrase "businessestablishments" to include housing.
Comprehensive federal legislation only arrived with enactment of the FairHousing Amendments Act of 1988. It prohibits landlords to refuse to rent orshow a house or apartment to a family with children younger than 18, or torequire such a family to pay higher rent, impose restrictions or create unfairbarriers not required of someone without children. However, under somecircumstances, families with children can be excluded, e.g., in "housing for olderpersons". There are two classes of such housing: 1) "62 or over housing", if alltenants in the housing complex are 62 years or older, and 2) "55 or overhousing", if at least 80% of all units in the complex have at least one occupant55 years or older and there exist significant facilities and services to meet theneeds of older people.
Major concerns have been voiced concerning the facilities and servicesrequirement of "55 or over housing", mainly its vagueness California SenateSelect Committee on Mobile Homes (1989). Fear has been expressed about thepotential for litigation and cost of providing appropriate facilities and servicesfor senior citizens, particularly since approximately 60% of the more than 5,000mobile home parks in California in 1988 had adult-only restrictions CaliforniaSenate ... (1989, p. 13).
Arguments in opposition to anti-age discrimination laws were advanced, forexample, in Flowers v. John Burham & Co (1971) where a California appellatecourt determined that, because of children's "independence, mischievousness,boisterousness and rowdyism," age discrimination within housing was notarbitrary discrimination. Also, the dissent in Marina Point Ltd. v. Wolfson (1982)argued that regulations regarding children are reasonable and rationally relatedto the services performed by the landlord when it has been determined that theapartment complex has been constructed for all-adult housing and its facilitiesare ill-adapted for use by children. Thus, landlords are faced with two costsassociated with the Wolfson decision: Not only will landlords be prohibited tochoose tenants on the basis of whether or not they have children, but they willalso be forced to incur expenses to alter their premises to accommodate children.
Many countries have a host of landlord-tenant laws and there exists anextensive legal, economic and law and economics literature on the subject. Byfar the greatest interest has been shown in rent control. Until recently virtuallyall appraisals of its effects on society were negative, perhaps for two reasons --economists' misgivings about any form of price control and excessive focus onfirst generation, hard rent controls analyzed by perfectly competitive, staticeconomic housing models. A few voices have recently been heard claiming thatanalyses of second generation controls which recognize the imperfection ofhousing markets are much less conclusive. Arnott (1995, p. 118) concludes, "thecase against second-generation rent control is so weak that economists shouldat least soften their opposition to them." However, Arnott concedes that "[E]venif the optimal rent control package would be beneficial, the actual ... packagethrown up by the political process may be harmful Arnott (1995, p. 109).
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