to all tenants in the two buildings notifying them of the Board action and thus suggesting that the increased rentals need not be paid. On December 19, 1975, plaintiffs filed the instant suit against the City of Newark.
This lawsuit involves the validity of the effect of the HUD regulations, 24 C.F.R. §§ 403.1 et seq. (1976), which permit the Secretary to preempt local rent controls as they apply to § 207 unsubsidized, insured housing projects upon a determination that a local rent control board's delay or decision "jeopardizes the Department's economic interest in a project."
The validity of the regulations must be tested by a three-fold inquiry: (1) Are the rules within the delegated authority? (2) Are the rules reasonable? (3) Were the rules issued pursuant to proper procedures? See Kenneth Culp Davis, Administrative Law Treatise, § 5.05 (1958). No attack has been made on the procedure by which the regulations were promulgated. If reasonable and within the delegated power, the regulations are valid.
The reasonableness of the rent control preemption regulations is plain. Congress has enacted a comprehensive statutory scheme designed to implement its general policy objectives in the housing field. Among these objectives is the creation of additional dwelling units in order to alleviate the housing shortage and to make available housing which the public can afford. Central to the Congressional scheme, and underlying the § 207 program, is the determination that these goals should be achieved through utilization of the financial resources of the public sector. Section 207 mortgage insurance is designed to implement that Congressional determination.
Federal mortgage insurance, however, creates a direct governmental interest in the financial well-being of the projects insured. In addition to this clear financial interest, HUD also has an interest in insuring the fulfillment of the goals of the National Housing Act. Accordingly, HUD seeks to insure that it can attract private capital for and private involvement in the provision of housing units. It has determined that it can do so by protecting the private mortgagee from the mortgagor's default and by insuring the private mortgagor a fair rate of return on his investment. The regulations here at issue reflect the agency's determination that, under some circumstances, local rent control laws have interfered with the landlord's revenues in such a way that his ability to meet his mortgage payments is jeopardized.
Under the regulations, upon deeming it necessary, HUD may preempt local rent control and itself exercise exclusive jurisdiction over the regulation of rents. In light of the structure of the § 207 housing program, it simply cannot be said that the establishment of rental levels and the preemption of local rent control ordinances when they conflict with the rentals established is an unreasonable means of maintaining the economic viability of § 207 projects, of protecting the economic interests of the government, and of encouraging subsequent private investment.
These regulations are within the Secretary's statutory authority. Title 42 U.S.C. § 3535(d) provides that the Secretary of HUD may make such rules and regulations as may be necessary to carry out her functions, powers, and duties. Among these is the duty to make regulations which are necessary to carry out the provisions of the Mortgage Insurance Act. See Title 42 U.S.C. §§ 3531 et seq.; Title 12 U.S.C. § 1715b. The Mortgage Insurance Act, in turn, itself empowers the Secretary to insure mortgages and to regulate or restrict mortgagors with respect to rents or sales, charges, capital structure, rate of return, and method of operation to such extent and in such manner as to provide reasonable rentals to tenants and a reasonable rate of return on the investment. Title 12 U.S.C. § 1713(b)(2). (Italics not in original).
Despite the explicit language of the statute, the defendants urge that the statutory grant of authority to the Secretary does not encompass the power to make rules which preempt otherwise valid state or local laws. On this precise issue, the legislative history is not enlightening. Although the Court cannot lightly infer a Congressional intent to clothe an administrative agency with the power to alter the delicate state-federal balance by preempting ordinances enacted pursuant to the state's police power, the unambiguous language of the statute and the expressed purposes of the Act compel the conclusion that the regulations here at issue are properly within the rulemaking authority granted to the Secretary.
See Glasco v. Hills, 412 F. Supp. 615 (D.N.J.1976); Druker v. Boston, 410 F. Supp. 1314 (D.Mass.1976); City of Boston v. Carla Hills, 420 F. Supp. 1291 (D.Mass.1976); Edgemere at Somerset v. Johnson, 143 N.J.Super. 222, 362 A.2d 1250 (Dist.Ct., Somerset Cty., 1976).
Having found the regulations valid, the Court must consider their effect in the context of this case. This issue need not detain the Court long. It is well-established that a regulation by a department of government addressed to and adapted to the enforcement of an Act of Congress, the administration of which is confided to such department, has the force and effect of law. Morton v. Ruiz, 415 U.S. 199, 235, 94 S. Ct. 1055, 39 L. Ed. 2d 270 (1974); Service v. Dulles, 354 U.S. 363, 388, 77 S. Ct. 1152, 1 L. Ed. 2d 1403 (1957). Article VI, Clause 2 of the Constitution of the United States provides:
This Constitution, and the Laws of the United States which shall be made in Pursuance thereof . . . shall be the supreme Law of the Land . . . any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.
The Court's determination that the regulations are valid coupled with the operation of the Supremacy Clause inexorably lead to the conclusion that the Newark Rent Control ordinance must yield.
The tenant-intervenors argue, however, that the Secretary's decision to preempt, absent notice to the tenants of the projects and an opportunity for them to be heard, violates the procedural due process protections guaranteed by the Fifth Amendment.
For more than a century, the central meaning of procedural due process has been clear: "Parties whose rights are to be affected are entitled to be heard; and in order that they may enjoy that right they must first be notified." Baldwin v. Hale, 68 U.S. (1 Wall.) 223, 233, 17 L. Ed. 531 (1863); Fuentes v. Shevin, 407 U.S. 67, 80, 92 S. Ct. 1983, 32 L. Ed. 2d 556 (1972). But resolution of the issue whether the tenants herein have been denied due process requires consideration of several factors. First, is there sufficient governmental involvement to bring the case within the due process clause of the Fifth Amendment? Second, do the tenants have a constitutionally protected liberty or property interest? Third, if the tenants do have a constitutionally protected interest, what procedural safeguards are required to protect it? See Goldberg v. Kelly, 397 U.S. 254, 90 S. Ct. 1011, 25 L. Ed. 2d 287 (1970).
It cannot be gainsaid that the action of the Secretary in issuing a preemption certificate is governmental action. It is precisely the federal government's authority, insured by the Supremacy Clause of the Constitution, which permits the preemption of the otherwise valid and applicable local rent control law.
It is equally clear that the tenants have a constitutionally protected "property" interest in the protections afforded to them by the Newark Rent Control ordinance. See Goldberg v. Kelly, 397 U.S. 254, 90 S. Ct. 1011, 25 L. Ed. 2d 287 (1970). Although the range of constitutionally protected property rights is not yet clear, the United States Supreme Court, in Board of Regents v. Roth, 408 U.S. 564, 577, 92 S. Ct. 2701, 2709, 33 L. Ed. 2d 548 (1972), has delineated certain attributes of property interests.
To have a property interest in a benefit, a person clearly must have more than an abstract need or desire for it. He must have more than a unilateral expectation of it. He must, instead, have a legitimate claim of entitlement to it. It is a purpose of the ancient institution of property to protect those claims upon which people rely in their daily lives, reliance that must not be arbitrarily undermined . . . . Property interests, of course, are not created by the Constitution. Rather, they are created and their dimensions are defined by existing rules or understandings that stem from an independent source such as state law -- rules or understandings that secure certain benefits and that support claims of entitlement to those benefits.
(Emphasis added). Although the constitutionality of this particular ordinance has not been tested, it seems plain that the Newark rent control ordinance is a valid exercise in municipal lawmaking. See Inganamort v. Borough of Fort Lee, 62 N.J. 521, 303 A.2d 298 (1973). It creates a legitimate claim of entitlement in a very basic and most important area of human concern and consequently, a property interest protected by the Fifth Amendment's
guarantee of procedural due process.
Once a constitutionally protected interest is recognized, the law recognizes that some procedural protection is required. A balancing of interests, however, must be undertaken to determine precisely what procedure is due. The Court must therefore weigh the importance of the interests jeopardized, and the appropriateness of the requested procedure in protecting those interests, against the costs of requiring the procedure. See Morrissey v. Brewer, 408 U.S. 471, 481-90, 92 S. Ct. 2593, 33 L. Ed. 2d 484 (1972); Bell v. Burson, 402 U.S. 535, 539-42, 91 S. Ct. 1586, 29 L. Ed. 2d 90 (1971); Goldberg v. Kelly, 397 U.S. 254, 263-71, 90 S. Ct. 1011, 25 L. Ed. 2d 287 (1970); Note, Procedural Due Process in Government Subsidized Housing, 86 Harv.L.Rev. 880, 891 (1973).
The interest of these tenants in procedural safeguards is substantial. They seek to retain decent housing at a price they can afford to pay. They seek the benefit of laws passed by their local government for their benefit and for the express reason that there is a housing emergency in Newark. Under the HUD regulations, tenants are completely without bargaining power. They must either pay the increases or move. Thus, they also seek to insure that any rent increases imposed are truly justified by all the relevant data. They seek to insure, before the procedural protections embodied in the Newark rent control ordinance are totally eliminated by HUD, that such a step is actually necessary to protect the interests of the federal government.
The decision to preempt, though purportedly based on the sole criterion that HUD's economic interest in a project is being jeopardized, is obviously a decision to set rental levels higher. Rent determination for § 207 housing projects is based in significant part upon various technical factors, but also on concepts of "reasonable rentals" for tenants and "reasonable return on the investment" for the landlord.
It is difficult to comprehend why such determinations should be made on ex parte presentations by landlords, especially when the decision necessarily depends on the quality of the housing provided as against market conditions in the area. In fixing rents the agency must also consider whether increased expenses have occurred and whether unnecessary expenses have been minimized, for the agency will only entertain rent increase applications when justified by expenses "over which owners have no effective control."
The basic interests of both landlords and tenants are affected by the resolution of these questions as to which tenants and landlords are likely to have widely different perspectives. These are matters, experience tells us, which are best decided, and perhaps can only be fairly decided, after hearing from both sides. Tenants are in an excellent position to contribute facts relevant to the various considerations which by law must enter into the rent determination decision. In the instant case, for example, the intervenors contend that an audit report by the HUD Regional Inspector General for Audit indicates that the landlords improperly expended project funds.
Of course, the government's interest in its ability to decide promptly to preempt or not is also substantial. The government has a direct financial interest in protecting its position as mortgage insurer or mortgagee. The government has an additional interest in preserving the flexibility of the mortgage insurance program, for if the program becomes encumbered with bureaucratic obstacles, private investment in the area may be deterred.
However, this Court finds that these government interests are not sufficient to outweigh entirely the need -- and helpfulness -- of permitting tenants a limited right of intervention. There is no apparent need to completely stifle any right of theirs to be heard. While a full-dress hearing may not be necessary, for the potential for lengthy delay if such a hearing precedes a preemption decision is great, considering the number of tenants involved,
the government may not simply extinguish local rent control laws and itself impose rent increases on tenants on nothing more than the ex parte application of a landlord who is indebted to the government. We have moved beyond that time when government will assist landlords in imposing unilateral and ex parte rental charges.
Under these circumstances, some notice and opportunity to be heard must be given to tenants before the government subjects them to rents unlawful under a local ordinance. The Court therefore holds that due process requires that tenants be given (1) notice before the filing of an application under 24 C.F.R. § 403.6 for a rent increase, (2) a reasonable opportunity to inspect materials sent to HUD in support of the application, (3) a reasonable opportunity to submit written comments to HUD, and (4) a written statement from HUD setting forth the reasons for the decision with respect to preemption.
The Court recognizes that circumstances will vary from case to case. Accordingly, it will defer in the first instance to HUD's administrative expertise. The agency will be afforded an opportunity to formulate specific procedures, including appropriate time schedules, consistent with this opinion. For the reasons expressed, the Court grants partial summary judgment to the plaintiffs on the issue of preemption, but remands for further administrative proceedings in which tenants will be afforded the procedural due process rights which the Court has determined are their due.