New York State Ruling: Source of Income Law is Unconstitutional

Contributed by the National Apartment Association

New York State Ruling: Source of Income Law is Unconstitutional

The State of New York has now filed a motion to appeal the ruling

In a win for the rental housing industry, a New York state court has ruled that the state’s source of income law is unconstitutional. In the case, People of the State of New York v. Commons West, LLC. et. al., Commons West, LLC (Commons West) and other entities were sued by the Office of the Attorney General (OAG) after investigating the housing provider’s business practices. Participation in the U.S. Department of Housing and Urban Development’s (HUD) Housing Choice Voucher (HCV) program is voluntary, but New York State deemed the actions of Commons West, not accepting Section 8 as a rental payment, as an unlawful discriminatory practice and against New York’s source of income anti-discrimination law.

Key Arguments

The OAG argued that the state’s source of income anti-discrimination law does not mandate participation in the HCV program, but prohibits housing providers from denying applicants based on their source of income, including payments from the HCV program. Commons West argued that housing providers were compelled to participate in the HCV program by accepting rental payments, and as a result, impermissibly requires housing providers to waive their rights under the Fourth Amendment of the US Constitution (which protects against unreasonable searches and seizures).

The housing provider’s constitutional argument that the statute compels housing providers to waive their constitutional rights was a matter of first impression for the court. Case law in the state has shown that Section 8 does not preempt state laws that provide additional protection for residents as highlighted in the court’s analysis. In this case, the court rejected the argument of the state, noting that housing providers cannot accept an HCV as payment for rent unless they agree to participate in the HCV program.

 Participation in the program requires that the housing provider enter a Housing Assistance Payment (HAP) contract with a Public Housing Agency (PHA). Among the terms that the housing provider would need to agree to is the requirement that the housing provider consent to inspection of the leased unit and premises at times that the PHA determines necessary and provide “full and free access to the contract unit and the premises” to the PHA, HUD and the Comptroller General of the United States.

In an analysis of case law in New York, courts have previously ruled that laws that authorize inspections of residential rental properties without the consent of the owner or a valid search warrant violate the Fourth Amendment (Sokolov v. Village of Freeport). Case law in New York has also stood for the proposition that a property owner cannot be indirectly compelled to consent to a search. Since the housing provider is unable to accept an HCV payment without signing up to participate in the program and agreeing to a warrantless search in the HAP contract by the contract’s terms, the court ruled that it is a violation of the housing provider’s Fourth Amendment rights against unreasonable searches and seizures.

Additionally, Commons West argued that the state’s source of income anti-discrimination statute is unconstitutional under the Fourth Amendment because it compels housing providers to consent to warrantless searches of their records. Related to an expectation of privacy, the state argued that there is no violation of the Fourth Amendment regarding the inspection of housing provider’s records when entering a HAP contract because there is no reasonable expectation of privacy in the housing provider’s business records, and that they provide consent when they sign up for the contract.

The Commons West court also rejected the state’s argument that the housing provider provides consent for a review of its business records when entering the HAP contract and has no reasonable expectation of privacy. The HAP contract requires that a housing provider provide “full and free access [ . . . ]  to all accounts and other records of the owner that are relevant to the HAP contract.”  There is no reasonable expectation of privacy in records maintained by closely regulated industries, particularly records that are specifically prepared in compliance with regulatory requirements. The exception to the reasonable expectation of privacy in business records applies to businesses in industries with a history of government oversight such that no reasonable expectation of privacy could exist. 

The court’s analysis includes examples of fields subject to government oversight that include mining, liquor sales, firearms dealing, and explicitly notes that case show has shown that renting residential apartments is not a closely related industry. The state did not present evidence to the court that identified any law or regulation that would require the housing provider to maintain specific business records other than Section 8. Since renting residential apartment units is not a closely regulated industry, the housing provider does have a reasonable expectation of privacy in its business records and cannot be compelled to consent to warrantless searches of its business records in violation of the Fourth Amendment.

What’s Next

New York State has filed a notice to appeal this ruling, likely setting up the case to be heard ultimately by the state’s highest court, the New York Court of Appeals. Whether the case makes it to the New York Court of Appeals would likely depend on the ruling from the Appellate Division of the Supreme Court of the State of New York (the intermediate court). The National Apartment Association’s Legal Affairs team will continue to monitor this case. For more information, go to www.NAAHQ.org.