Action Apartment Ass'n v. Santa Monica Rent Control Board

The City of Santa Monica requires landlords of residential rental property to place tenants’ security deposits in interest-bearing accounts at federally insured financial institutions. Since January 1, 1999, the city has required landlords to pay tenants 3 percent interest per year on security deposits.

A group of landlords filed this action, alleging that, due to market conditions, financial institutions are paying less than 3 percent on security deposits, and, as a result, landlords must make up the difference with their own funds. The landlords contend that this type of exaction constitutes a taking of private property without just compensation (Cal. Const., art. I, § 19; U.S. Const., 5th Amend.).

The trial court dismissed the action on demurrer. We conclude that the complaint sufficiently pleads a takings claim because the 3 percent interest requirement does not substantially advance a legitimate state interest and has an adverse impact on landlords. We therefore reverse.

I

Background

In 1979, the City of Santa Monica adopted a rent control charter amendment—the Rent Control Law (Santa Monica Charter, §§ 1800-1820)—and created a rent control board (Board) to…