This is an appeal by a landlord from so much of an order of a rent control board as limits a rent increase to 40% and from a separate rent abatement order. Plaintiff contends the failure to grant a greater rent increase has unconstitutionally denied it a fair return; that the board's actions both in the imposition of a 40% rent increase limitation and the rent abatement are not authorized by the rent control ordinance; that the board's actions are unsupported by the evidence and, thus, arbitrary and capricious; and, finally, that the failure to provide a prompt administrative remedy has rendered the ordinance unconstitutional in its operation as to plaintiff.
Plaintiff is the owner of a 46-unit residential apartment house in Bayonne. On June 12, 1980 plaintiff filed an application for a fair net operating income (FNOI) increase with the Bayonne Rent Leveling Board (board). The filing of this application was apparently the denouement of a jurisdictional controversy which had been going on between plaintiff and the board for over two years. Apparently, the mortgage on plaintiff's property was insured by the U.S. Department of Housing and Urban Development (HUD) and, therefore, the control of rents by Bayonne was subject to preemption.
I. The Rent Increase
The Bayonne rent control ordinance provides two alternative methods whereby a landlord may obtain a rent increase. The first is an increase tied to the consumer price index (CPI) but not to exceed 5.5%. The second is an increase based on an FNOI formula which permits the landlord to achieve a net operating income equal to 40% of his gross annual income.
The applicable provisions read as follows:
To these provisions must be added the constitutional imperative that the landlord obtain a fair return. "Every rent control ordinance must be deemed to intend, and will be so read, to permit property owners to apply to the local administrative
As Justice Pashman noted in Troy Hills v. Parsippany-Troy Hills Tp., 68 N.J. 604, 621 (1975), no particular formula need be followed to meet the fair return requirement. At least three different approaches have been used to determine the existence of a fair return: return on fair value, return on investment and the ratio of operating profits to gross income. See Helmsley v. Fort Lee, 78 N.J. 200, 210-211 (1978). Bayonne adopts the third approach, which it refers to as the FNOI formula. Bayonne Ordinance § 23-6.2.2. See discussion Helmsley, supra, at 212, n. 5, 216-223. That this is Bayonne's test of the existence of the minimum constitutional just and reasonable return is made clear by the provision that the FNOI formula may be used "if the landlord believes he is not receiving a fair return on his investment." Bayonne Ordinance § 23-6.2. Apart from this, there is no other provision in the ordinance for a fair return. "Fair return" or "fair rate of return" are neither defined nor otherwise provided for.
The board contends that the word "may" appearing in § 23-6.2.2 renders the 40% income level provided therein permissive; that the language, "the board may approve a rent increase which enables the landlord to achieve a net operating income equivalent to 40 percent of gross annual income," grants the board discretion to determine any FNOI as long as it does not exceed 40%. Such an interpretation cannot stand. If 40% is not the fair net operating income, the minimum constitutional
A legislative enactment bears the presumption of constitutionality; given a choice, a court will not adopt a construction which will invalidate the law. Clifton v. Passaic Cty. Bd. of Tax., 28 N.J. 411, 422 (1958). Writing in the Law Division, Judge (now Justice) Pashman made an oft-cited and approved statement: "The cardinal principle of statutory construction must be to save and not to destroy. The duty of the court is to strain if necessary to save the act, not to nullify it." N.J. Sports & Expo. Auth. v. McCrane, 119 N.J.Super. 457, 476 (Law Div. 1971), aff'd 61 N.J. 1 (1972), app. dism. 409 U.S. 943, 93 S.Ct. 270, 34 L.Ed.2d 215 (1972).
Thus, I conclude that § 23-6.2.2 requires the board to grant FNOI applicants a rent increase which yields a net operating income of 40% of the gross annual income upon a showing by a landlord that the ratio is less than that. It being undisputed that plaintiff is not receiving such a net operating income, it shall be entitled to receive a rent increase sufficient to raise its net operating income (as defined by the ordinance) to an amount equal to 40% of the gross annual income.
The 40% Limit on Increase of Rentals
As noted, the board contends that the ordinance contains a 40% ceiling on rent increases — that, irrespective of the FNOI formula, the board is powerless to grant a rent increase in excess of 40%. The board concedes that the only reference to
Ordinances, like statutes, should be accorded their plain meaning. See Service Armament Co. v. Hyland, 70 N.J. 550, 556 (1976). The duty of the court is to construe and apply the ordinance as enacted — not to presume an intention other than that expressed in the legislative language. See In re Jamesburg High School Closing, 83 N.J. 540, 548 (1980).
A reading of § 23-6.2.2 makes clear that it contains no such ceiling provision. The 40% in that section relates to the relationship between expense and gross receipts, not to the ratio between old and new rents. A reading of the entire ordinance shows the propriety of the board's concession that no other 40% references appear.
Although the Bayonne ordinance contains no rent increase ceiling, it should be noted that if an arbitrary ceiling such as is urged here did exist, it would be overridden by the constitutional imperative.
The Need for Remand
In reviewing the action of the rent control board the court is limited to an examination of the record below. Kempner v. Edison Tp., 54 N.J.Super. 408, 417 (App.Div. 1959); see Green Acres of Verona, Inc. v. Verona, 146 N.J.Super. 468, 470 (App.Div. 1977). In this re-examination the court ought not to substitute its discretion for that of the local board, nor does it have the power to do so. Kramer v. Sea Girt Bd. of Adj., 45 N.J. 268, 296 (1965); Ward v. Scott, 16 N.J. 16, 23 (1954). Apart from judicial restraint, the action of the rent control board is presumptively valid and the burden is on the parties to show otherwise. Brandt v. Mt. Holly Tp. Bd. of Adj., 16 N.J.Super. 113, 117 (App.Div. 1951). This can only be done by showing that the action taken by the board was arbitrary, capricious and unreasonable. Kramer v. Sea Girt Bd. of Adj., supra, 45 N.J. at 296; Ward v. Scott, supra, 16 N.J. at 21.
While the actions of the rent control board are presumed to be correct and will withstand judicial interference in the absence of a showing that they are arbitrary, capricious and unreasonable, see In re Millburn Tp., 110 N.J.Super. 330, 335 (App.Div. 1970), the determination must be capable of standing judicial review. Application of Howard Savings Inst. of Newark, 32 N.J. 29, 52 (1960). It is not sufficient for the board merely to set forth its conclusions; it must articulate the basis for arriving at those ultimate conclusions and make the factual findings upon which that conclusion relies. Ibid.
Where the record below is insufficient to permit proper review, the appropriate action is to remand for a proper hearing. Kotlarich v. Ramsey, 51 N.J.Super. 520, 543 (App.Div. 1958); Yellow Cab Corp. v. Passaic, 124 N.J.Super. 570, 583 (Law Div. 1973). While no particular procedure is required of the rent control board, it must comport with due process. Yellow Cab Corp., at 581.
This decision to remand is taken with the greatest reluctance because of the long delay that has already been engendered in the landlord's quest for a fair return — for relief from a situation in which the chairman of the rent leveling board has concluded that even after the granted increase, plaintiff's operating costs exceed its income. Administrative delay can render a rent control scheme defective in its application. The amount of delay which constitutional rights can tolerate is fully discussed in Helmsley, supra, 78 N.J. at 223-230. In the instant case I find the delay has been engendered as much by the landlord as by the board — but prospectively the pace must be swift.
I have held that the landlord is entitled to a fair net operating income equal to 40% of the gross operating income and this shall be allowed in full.
I am sensitive to the fact that local boards are usually composed of laymen untutored in the law or the niceties of procedure — serving long hours without compensation as a matter of public service. To aid in the rapid final resolution of this matter, some general guidance is appropriate.
It appears the board is relying on its own accountant to furnish it with guidance with respect to the requested increase. While the use of such an expert is perfectly proper, he must be used in a manner which accords with due process. Using the report of the accountant as a basis for determination was error. Although no special form is required for an administrative hearing and the rules of evidence are not applicable, there must be some sense of due process — of fundamental fairness. See Yellow Cab, supra, 124 N.J. Super. at 570, 581. The parties are entitled to have the conclusions reached on evidence presented in a form which they can meet and rebut. Decisions cannot be reached without a basis. The parties have a
The landlord has claimed a management fee expense of 6%. Such fees are proper and, if reasonable, their disallowance would be error. See Mead v. Fort Lee, 170 N.J.Super. 167, 171 (App.Div. 1979). Reasonable legal fees, if actually paid, must similarly be allowed as a proper part of administrative and miscellaneous expenses.
The board shall make specific findings of fact and conclusions of law with respect to the operating expenses, gross annual income, calculation of FNOI and increase in rent, and deliver such findings to this court not later than May 19, 1982. The board may hold such additional hearings prior thereto as it deems necessary to fulfill the mandate of this court, provided the deadline is not thereby violated. Such hearings shall not include the repetition of evidence or testimony already received and shall be strictly limited to the ascertainment of the financial data required for the determinations the board is being ordered to make.
II. The Rebate
As already noted, at the time the board granted the landlord a 40% rent increase, it also ordered a rebate to each tenant of one month's rent based on an alleged invalid rent increase imposed
Plaintiff does not contest the power of the board to order a rent rebate. It contests only the manner in which this power was exercised. The right of the board, under appropriate circumstances, to consider and adjudicate rent rebates is undoubted. However, it must exercise this right in strict conformity with the ordinance. The ordinance requires a tenant complaint within 120 days of the invalid rent increase, and a hearing thereafter held, § 23-5.3. Due process requires the landlord receive notice and an opportunity to be heard. The board may not ignore the requirements of the ordinance nor act except in conformity with its mandates. See Doric Realty v. Union City Rent Leveling Bd., 182 N.J.Super. 486, 490 (Law Div. 1981). It cannot be doubted that the board's actions were motivated by notions of fairness and equity. However, the board's power arises from the rent control ordinance, and its terms must be complied with. This is what makes a government of law. The order granting rebates is set aside.