Trepidation Around Proposal for Regulating Store Rents in NYC

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Jump to chapters:
Some say idea violates U.S. Constitution
Would helping stores hurt residents?
Three decades of debate
What’s best for business?
Standard practice in Britain

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It is no secret that retail lease rates are skyrocketing throughout the city and that it’s taking a toll on small businesses. On some streets in Brooklyn, commercial rents increased about 40 percent between June 2014 and 2015, while in 2014 the Bronx led the city with a 30 percent increase in court-ordered commercial evictions. A variety of solutions have been proposed to address the crisis, from zoning restrictions on chain stores to the provision of below-market commercial space in city-sponsored developments. Still others argue there’s only one real solution: establishing a right to lease renewal.

The long-sought Small Business Jobs Survival Act, which would establish such a right, has been kicking around City Council for three decades. Though it has the support of a diverse coalition, from the Small Business Congress to the Artists Affordability Project, it remains stalled in committee, its progress hampered by questions about the bill’s legality, economic concerns and the strong opposition of the real estate lobby.

The bill would give any tenant of a commercial space, whether they are a corner bodega, a chain pharmacy, a medical office or an arts nonprofit, the right to a 10-year lease, or a shorter lease with the tenant’s agreement. The landlord must renew that lease unless he or she has sufficient grounds to refuse, such as evidence that the tenant is regularly late with rent or because the owner wants to reoccupy their property.

When the lease comes up for renewal, the landlord and tenant would negotiate a new rent, or, if they couldn’t agree, present their cases to an independent arbitrator who would determine the rent based on over a dozen criteria, including comparable rents in the area, the landlords’ expenses, the nature of the tenant’s business, how much the business is bound to a particular location and other factors.

The law also gives tenants the “right of first refusal,” meaning that if the tenant doesn’t accept the arbitrator’s designated rent and the landlord proceeds to seek a new tenant, the existing tenant is given the option to stay in the space paying the rent amount proposed by the prospective new tenant. If the tenant decided to move or the business failed before the lease was up, laws already in effect would apply: The landlord could sue to recover any money owed, and the tenant could try to lessen their dues by helping the landlord find a new tenant.

Constitutional questions

Supporters of SBJSA say safeguarding small businesses from displacement would benefit entire low-income communities by protecting local jobs, preventing the extortion of immigrant business owners, and preserving affordable, culturally-appropriate services. Opponents argue the bill would interfere with the natural evolution of neighborhoods, discourage businesses from investing in their expansion and violate the constitution.

“The city’s dynamism, in part, is driven by its ever-changing population, building stock and mix of businesses. Understandably, some don’t like change,” said John Banks, the president of the Real Estate Board of New York (REBNY) in a statement sent to City Limits. “However, such feelings don’t justify unconstitutional legislation like the Small Business Jobs Survival Act.”

It is not unreasonable to question the bill’s legality. Its supporters admit that such a policy does not exist anywhere else in the United States, and in 1987 a similar bill in Berkeley, Calif., was found illegal by a federal court and overturned. Advocates, however, claim that an independent legal review of SBJSA conducted in 2010 showed the bill was legal and did not include the same fault as the Berkeley bill, which didn’t give owners the right to reclaim their property for their own use.

But some are not convinced. Though the bill is co-sponsored by 27 City Council members and the Public Advocate—more than enough needed to become law—continued doubts about the bill’s legality keep it from getting a hearing.

In June 2015, a year after Bronx Councilmember Annabel Palma reintroduced the bill, Speaker Melissa Mark-Viverito told The Villager that Council staff first needed to “do their due diligence” and look over the bill, after which it would receive a hearing. She added that there are some bills that “legally we don’t have the ability to implement as a city.”

One year later, there are no updates available from the legislative division and no hearing has been scheduled. Meanwhile, Councilmembers Jumaane Williams and Brad Lander—early supporters of the bill—have both withdrawn their sponsorship. Some sources, who spoke on background, told City Limits there were concerns because rent regulation is within the state’s, not the city’s, jurisdiction.

Advocates for the bill say neither City Council or REBNY has ever responded to the findings of the 2010 panel, which determined that there were no legal issues with the bill, and that the city did have the authority to rule on the matter.

“What are the legal issues?…Please tell us what they are,” says Ahmad El-Najjar, a representative of Take Back NYC, a coalition of small businesses and community advocates fighting for SBJSA. “No one has ever provided any document that actually cite what the actual legal issues are. Not one. It’s a talking point.”

Impact of residential rents?

Palma, meanwhile, says she is very frustrated with the delay.

“This bill has been around for decades and analyzed by various lawyers I know. It is perhaps the most scrutinized bill before the council. As a result, I believe this bill is legally sound,” she said in an e-mail to City Limits. “The Bronx is the last frontier in terms of development, and we have the opportunity to learn from the fast-paced economic and developmental changes that have occurred in Brooklyn and Queens.”

She added that because no members of the Small Business Committee have signed on in support of the bill, she is working to acquire a total of 34 sponsors, the number required to mandate a hearing.

In a statement sent to City Limits on Wednesday morning, City Hall offered a straightforward rejection of the bill.

“The administration recognizes the growing challenges small businesses face finding space they can afford, but has not supported commercial rent control. We are working to lower small businesses’ costs in other ways,” said Raul Contreras, assistant press secretary for the mayor. The administration is concerned that if commercial rents are decided through arbitration, landlords of mixed-use buildings might raise the rents of residential tenants to compensate for the profits they could not make from commercial tenants. Contreras listed a variety of other measures that the city is taking to reduce the burden on small businesses, including streamlining regulations, reducing fines and providing pro-bono legal services to help businesses negotiate their leases.

Advocates, however, insist the administration is mischaracterizing the bill in a way that raises irrelevant ideological questions.

“This is not rent control,” says El-Najjar. “It’s just the right to a fair lease negotiation. It should never be confused with rent control.” Addressing the administration’s concerns that landlords will jack up residential rents, El-Najjar says that mixed-use properties make up a small percentage of the residential market and that in such buildings landlords are already charging residential tenants as much as the market can bear or, if the apartments are rent-stabilized, charge as much as the Rent Guidelines Board will allow.

“I give [the administration] credit for framing this in a way that attempts to drive a wedge between commercial and residential tenants,” he says.

A long history of debate

While much of the country considers any kind of rent regulation unconstitutional, New York City has a long—if embattled—history of embracing residential rent regulation. The city’s equally long fight over commercial rent regulation is not as well known, though perhaps even more controversial. While some free-market adherents oppose any interference, those who support residential rent regulation but are leery of the commercial version note that it would effectively subsidize private businesses, which, unlike residents, stand to make a profit off an area’s increasing popularity.

New York did have actual commercial rent control once: In 1945, responding to the wartime emergency that had spurred skyrocketing rents and eviction rates, the New York State legislature enacted a law that limited when a commercial tenant could be evicted and instituted restrictions on rent increases. Landlords could not raise rents by more than 15 percent above 1943 or 1944 rent levels if it would lead to a profit of more than 8 percent. The law was challenged repeatedly in the courts, and ultimately the legislature allowed it to expire in 1963.

In the 1980s, as small business owners began to suffer from the city’s first wave of gentrification, some elected officials and advocates once again took up the discussion of commercial rent regulation, and the Koch administration established a commission to study the problem. A draft of SBJSA emerged from the commission’s work and immediately became the subject of heated debate. In 1988, it received its first and last City Council committee vote—rejected by a 4 to 3 count.

Both in 1988 and when SBJSA was reintroduced in 2008, City Council members and legislative staff asked questions about the bill’s legality. There were concerns that the bill violated the constitutions’ “contract” clause, which forbids the government from “impairing” contracts between private individuals. The bill overturned in Berkeley in 1987 was scrapped for violating that clause. There were further concerns that the bill would violate the “takings” clause, which forbids the government from taking private property without just compensation—a clause also regularly cited in legal arguments against residential rent control. Restricting a landlord’s ability to hike rents, the thinking goes, effectively snatches away some of the value embedded in their real-estate asset. City Council members also questioned whether the city had the authority to make such a regulation, but corporation counsel lawyers in 1988 and the City Counsel legislative division in 2009 both concluded that the city did, in fact, have jurisdiction.

An independent panel of lawyers, including the Urban Justice Center’s Edward Barbieri, former Justice of the NYS Supreme Court Karen Smith and others, convened in 2010 to examine these concerns. They found that the Berkeley law had been found in violation of the contracts clause because it did not give owners the right to retake their property, while SBJSA did. They argued that SBJSA did not constitute an “impairment” of a contract, only a procedure for the renewal of contracts.

Furthermore, they agreed that prior court decisions held that such a policy was not in violation of the takings clause because the landlord would always receive “fair compensation” in the form of the new rent amount. And, agreeing with the city’s own lawyers, they stated that City Council had “home rule”: Only the state could institute residential rent control, but the city had a right to regulate commercial contracts.

Bad for business?

Even if the bill is legally sound, there are some who believe it would bring disastrous consequences—not only for landlords, but for small businesses and communities as well.

“The SBSJA is incredibly disadvantageous to new and growing businesses, which are vital to the city’s growth and expansion,” argues James O’Neill, an associate of the real estate and business services organization CPEX Real Estate, in a March op-ed. Because existing businesses would have the right to 10-year leases, he argues, there would be limited available space for new entrepreneurs. Old businesses would have no incentive to improve their stores by reinvesting in growth and improvement because they’d have no ability to rent new space to expand. He also worries the legislation would deter the creation of healthy, thriving neighborhoods.

“As communities grow and change, businesses that are priced out of hot commercial strips move to the periphery of the neighborhood, bringing exciting new shops and services to these areas,” O’Neill continues. “In order to succeed in any aspect of life, people and businesses have to adapt to change, and it should not be the government’s role to foster stagnation.”

On the flip side, others have noted that the bill won’t stop neighborhood businesses from becoming less affordable to low-income residents: there’s nothing in the bill to prevent the people who operate the local bodega from shifting to a gourmet grocer. The profits that come from servicing an increasingly wealthy population would merely go to the business owner instead of the landlord.

Responding to these critiques, El-Najjar of Take Back NYC said he did not believe the bill would cause economic stagnation, because businesses would still need to be successful in order to pay their monthly rents. He recognized, however, that some might argue a landlord deserves a bigger share of the profit—that it’s unfair to make a landlord wait through a 10-year lease before raising rents.

“Maybe it’s not 10 years. Maybe it’s five years,” says El-Najjar. “These are the kind of pushbacks that would be amazing to get at a public hearing where people can bring up these things.”

A standard practice in the UK

While legislation akin to SBJSA may not exist in any other part of the United States, something quite similar exists in the United Kingdom. The Landlord and Tenant Act of 1954 established the right of tenants to renew their leases—what the English call “security of tenure”—with landlords able to regain their property in certain circumstances. As in SBJSA, a landlord and tenant can agree on the rent in their new lease or turn to an arbitrator or court to set a new rent.

There are three differences between the UK’s policy and SBJSA, and the first two might make the UK’s policy more flexible for landlords.

First, the British law allows landlords and tenants to agree on a contract in which the tenant signs away their right to lease renewal. For instance, property owners of highly desired spaces in popular shopping centers might only take on tenants who agree to give away their right to lease renewal. Second, there is no required length of the lease. Third, when the court decides on a new rent, it looks only at one factor, not a dozen: the comparable market rents in the surrounding area. This could be a disadvantage to the landlord, whose operating costs and mortgage costs would not be taken into account.

Tom Entwistle, a writer and landlord in the United Kingdom who provides advice to property owners through his site LandlordZONE, said that the law is widely accepted in England.

“I’m pretty sure at the time of introduction there would have been a big outcry from landlords but now it’s accepted as normal practice,” Entwistle wrote in an e-mail to City Limits. “Personally I’m against regulation whenever possible but in England both commercial and residential regulation is relatively light and gives a good balance in protecting both landlord and tenant.”

Responding to American concerns about the potential negative impacts of the bill, Entwistle said he didn’t see a risk of the policy discouraging business development because businesses will usually invest more in their improvement, not less, when they have stability. In addition, he said ultimately “who operates where in big cities comes down to economic forces” but that the bill does help protect small mom-and-pop stores that have “built up a valuable business over years in a locale and would suffer greatly if moved on.”

England is no socialist country, but their embrace of “security of tenure” is certainly a step that the United States has yet to make. Constitutional questions aside, the political hurtles to SBJSA passage seem nearly insurmountable. It’s not just that supporters would have to fight and win a battle with landlords big and small. It’s that advocates would need to change a lot of minds about what makes a healthy economy.

“That’s a pretty big step for New York City,” says James Parrott, an economist at the Fiscal Policy Institute who says he has no position on the bill. “The real-estate lobby and the city would see that as an enormous incursion as a right to charge what they feel the market can bear.”

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