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Overlook Terrace Management Corp. v. Rent Control Board of Town of West New York

Decided: November 10, 1976.


For reversal -- Chief Justice Hughes, Justices Mountain, Sullivan, Clifford and Schreiber and Judge Conford. For affirmance -- Justice Pashman. The opinion of the court was delivered by Schreiber, J. Pashman, J. (dissenting).


This appeal projects the issue of whether a municipal rent control ordinance may restrict rental increases approved and ordered by the New Jersey Housing Finance Agency, a state agency "exercising public and essential governmental functions", N.J.S.A. 55:14J-4(a), for dwelling units in a housing project which is financed, supervised and regulated by that Agency.

The plaintiff Overlook Terrace Management Corp., as the managing agent for Overlook Terrace Corp. (Overlook), a limited dividend housing corporation organized under N.J.S.A. 55:16-1 et seq. and owner of a 600 unit apartment complex in the Town of West New York, challenged in a complaint in lieu of prerogative writ a rent control ordinance adopted by the Town. The Town and the Rent Control Board, which had been vested with administration of the ordinance, were made parties defendant. The Overlook Tenants Association, an organization composed of resident tenants in the apartment complex, and four individual

tenants, intervened in the proceedings as defendants and the New Jersey Housing Finance Agency (Agency) intervened as a plaintiff.

The defendants' motions for summary judgment were granted. The plaintiffs appealed and the Appellate Division affirmed. We granted the plaintiff's and plaintiff-intervenor's petitions for certification. 69 N.J. 76 (1975). We reverse.

In 1968 the Agency, acting pursuant to the New Jersey Housing Finance Agency Law of 1967, loaned $12,674,156 to Overlook to construct a 600 unit moderate-income housing project in West New York. The loan was evidenced by a note and secured by a mortgage. At the mortgage closing, the parties entered into a regulatory agreement. The agreement required Overlook to insert in its leases a covenant that the tenant's family income and other eligibility requirements were to be "substantial and material obligations" of the tenancy. Overlook was required to limit admissions to the project "solely to families of moderate income, as defined by the New Jersey Housing Finance Agency Law of 1967, as amended". Priority for admission was to be granted in the following order: (1) families displaced from the development site, (2) families displaced by urban renewal or highway projects, (3) families in substandard housing, (4) the elderly, and (5) others who met the financial eligibility requirements. If the family income limitations fixed by the Agency were exceeded, the tenancy would be terminated or a rent surcharge imposed. Charges for dwelling accommodations and services were to be in accordance with a rental schedule approved by the Agency.

Without Agency approval Overlook could not convey or encumber the property, assign the rents, or pay out any funds except from surplus cash. Surplus cash were those funds remaining after payment of all expenditures for maintenance to keep the premises in good repair and condition and sums due the Agency on the note and mortgage, and setting aside reserve funds for replacements and other

purposes. Surplus cash could be paid annually to the owners in an amount not to exceed 8% on the equity investment, that being the difference between the principal amount of the mortgage and the total project cost as determined by the Agency. No other compensation or payments were to be made to any officers, directors or stockholders. The premises were to be maintained in good repair and condition. Books and records were to be kept in accordance with the Agency's requirements. A complete annual financial report prepared per the Agency's prescriptions was to be submitted yearly.

Lastly, the agreement provided that the Agency and the Public Housing and Development Authority of the State of New Jersey "shall exercise joint control over the establishment of family income limitations, maximum rental charges applicable to the project and the selection of families who will occupy the Project."

The Agency had adopted standard procedures embodied in a booklet which provided for methods to comply with the requirements of the regulatory agreement and which were binding on the project owner. The manual provided that the leases had to be on forms approved by the Agency, which stated that the rent could be increased by order of the Agency. The maximum gross family incomes were delineated as well as a schedule of surcharges if that income exceeded those maxima. Such surcharges were to be paid to the municipality if it had granted a tax exemption and, if not, then to the Agency for its Housing Finance Fund. N.J.S.A. 55:14J-10(b). Insurance requirements, repairs, replacements, and special service needs were detailed.

The manual also stated that no rental increases could be obtained without HFA approval. To that end, an application had to be filed with the Agency. The information to be furnished included the number of units and rooms, capitalization of the project, assessed valuation of land and improvements, reasons for the increase, a three-year

projection of operations on an actual and cash flow basis, a three-year projection of operations pro forma on an accrual and cash flow basis, and a schedule of future replacement requirements and statistical backup data for each projection. If the Agency found on preliminary examination that the application warranted consideration, each tenant was to be notified of the filing and the right to a hearing on the proposed increase. The agency has published proposed procedural rules governing rent increases, 7 N.J.R. 304 (July 10, 1975), which have not been formally adopted although the Agency has in fact been operating in accordance with them.*fn1 These rules adopt substantially the same provisions of the manual with respect to the contents of the application and notice to the tenants. The rules recognize the tenant's right to demand a hearing.

In 1974 Overlook submitted an application to the Agency for a rent increase. On June 28, 1974 the Agency ordered a rent increase of $10.50 per room. This increase, to be effective August 1, 1974, equated to a 15% to 25% rental rise for the tenants. It was due exclusively to greater costs related directly to fuel oil, gas, electricity, capital improvements and labor. The Agency found that there was a mandatory need for the increase "to assure [your] tenants all of the essential services" and that if it was not forthcoming, the effect would be to interfere with the monies available for maintenance, to eliminate any return on the equity, and ultimately to impair Overlook's ability to meet its mortgage payments. This in return would endanger the Agency's capability of satisfying obligations on its bonds and notes. The Agency pointed out that the last rent increase of $1.00 per room which had been made one and one-half years ago "was related to the early prevailing inflationary trend."

The Town of West New York Rent Control Board insisted that it had exclusive control over any rental increases and indicated Overlook would be prosecuted for violating the ordinance by virtue of the proposed increase. Overlook then instituted these proceedings.

At the conclusion of the argument on the summary judgment motion the trial court in an oral opinion found that no expression existed in the New Jersey Housing Finance Agency Law, N.J.S.A. 55:14J-1 et seq., which reflected an intent to preempt the field of rent control in publicly financed projects, that the Agency Law was never intended as a rent control statute, and that the municipality's setting rental figures below the limits fixed by the Agency did not conflict with the state Agency's operations. The Appellate Division in an unreported opinion affirmed for the same reasons.

The principal provisions of the West New York rent control ordinance may be summarized as follows: (1) a base rental for housing in residential dwellings was established as of March 1, 1973; (2) no rental increases were allowable thereafter except as permitted by the Rent Control Board under conditions stated in the ordinance; (3) increases were restricted to changes in the Consumer Price Index, with a maximum lid of five percent in any one year; (4) any rental increase which did not conform with the ordinance or regulations promulgated thereunder was void; (5) the landlord was permitted to seek a tax surcharge because of an increase in municipal property taxes; (6) the Rent Control Board was authorized to permit rent increases to enable a landlord to meet his mortgage payments and maintenance; (7) the Board could authorize rental increases "for major capital improvements or services" limited to 10% in any one year; (8) if services or maintenance declined the Rent Control Board could decrease the rent; (9) the Rent Control Board was authorized to promulgate rules and regulations and to hold hearings to perform its delegated

obligations; and (10) the total of all combined rent increases was limited to 15% in any one year.

The power of municipal government to enact rent control ordinances is no longer open to question. Inganamort, et al. v. Bor. of Fort Lee, et al., 62 N.J. 521 (1973). In Brunetti v. Borough of New Milford, 68 N.J. 576 (1975), Troy Hills Village v. Parsippany-Troy Hills Tp. Council, 68 N.J. 604 (1975) and Hutton Pk. Gardens v. Hutton Lafayette Apts. Co., 68 N.J. 543 (1975), the constitutionality of several comparable municipal rent control ordinances was upheld, but Justice Pashman in writing for the majority in those cases pointed out that price controls which did not yield the owner a fair return were confiscatory and illegal. He added:

To that end there was spelled out in Troy Hills Village, supra, 68 N.J. at 628-630, standards and criteria of a fair return in a rent control context.

The New Jersey Housing Finance Agency Law of 1967 was adopted to alleviate the need for adequate housing of families of moderate income "at a rental level within their means." N.J.S.A. 55:14J-2.*fn2 The statute declared that the building industry could meet that need only if a public agency were created to encourage the investment of private capital and stimulate construction of dwelling units through the use of public financing and public loans.

Under the act, which is administered by the Agency, after the municipality by formal resolution recites the need for

such a project, funds are to be advanced to qualified sponsors for construction of housing projects. N.J.S.A. 55:14J-6(a) and (b). These could not exceed 90% of the total project cost (100% if the sponsor is a corporation organized not for profit) and the interest rate is to be established at the lowest level consistent with the Agency's cost of operation. N.J.S.A. 55:14J-9(a)(2) and (3). Rents are to be limited to those established by the Agency. N.J.S.A. 55:14J-9(a)(5). In a mortgage foreclosure proceeding the court is "authorized to make an order increasing the rental." N.J.S.A. 55:14J-13. The sponsor's return is restricted to no more than 8% per annum on its investment. N.J.S.A. 55:14J-9(a)(6). Tax exemptions granted by the municipality have to remain effective for the entire period of the loan. N.J.S.A. 55:14J-9(a)(8).

As a loan condition the Agency has the power to enforce, by court action if necessary, the rental schedules and tenant income limits imposed by the Agency. N.J.S.A. 55:14J-9(b)(5). If a sponsor violates any provision of its agreement with the Agency or of the act, or the Agency determines that repayment of a loan is in jeopardy, the Agency is authorized to remove all directors and officers and replace them with persons of its own choosing. N.J.S.A. 55:14J-9(b)(6).

Prospective tenants are limited to moderate income families whose gross income does not exceed six times the annual rental or seven times if there are three or more dependents. N.J.S.A. 55:14J-10(a). The maximum family income cannot exceed $15,000, although this figure is subject to Agency adjustment. N.J.S.A. 55:14J-10(a). The Agency is required to make periodic examinations of the family income and to terminate the tenancy if the income exceeds the maximum by 25%. N.J.S.A. 55:14J-10(b). Under some circumstances the tenant is permitted to continue to reside in the ...

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