HomeMy WebLinkAboutSS3 - Conflict of Interest Regulations for RentersCITY OF NEWPORT BEACH
CITY COUNCIL STAFF REPORT
Agenda Item No. SS3
January 12, 2010
TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: David R. Hunt, City Attorney
ext. 3131, dhunt(a)NewportBeachCA.cpov
SUBJECT: CONSIDERATION OF ISSUES RE POSSIBLE CONFLICT OF
INTEREST REGULATIONS REGARDING THE "RENTER CONFLICT
ISSUE"
ISSUE:
Does the law prohibit public officials who hold a rental interest in real property from being
involved in a decision that arises from a matter in close proximity to that rental interest, and
if not, can and should the City regulate such a situation?
RECOMMENDATION:
Review the report and give direction as you deem appropriate. Generally, however, we
recommend that the City not add to the relatively complex area of law governing conflicts
of interests in that doing so can create a trap for the unwary. Instead, reliance on the
extensive state statutory, regulatory and decisional law can be considered to adequately
regulate the issue.
DISCUSSION:
We have been asked to brief the Council on the issue of whether a rental interest in real
property can give rise to a disqualifying interest under state law, and if not, to address
whether the Council can regulate the area.
1. State Law.
As identified in the memorandum from Deputy City Attorney Catherine Wolcott appended
as Attachment "A," a month -to -month tenancy does not give rise to a 'financial interest"
that disqualifies a public official from being involved in a decision. On the other hand, a
"leasehold interest" with a value in excess of $2,000 can create such a financial interest
when "directly involved" in a decision. "Leasehold interests" are generally interest in real
property of a year or more.
CONSIDERATION OF ISSUES RE POSSIBLE CONFLICT OF INTEREST
REGULATIONS REGARDING THE "RENTER CONFLICT ISSUE"
January 12, 2010
Page 2
In addition, however, the state courts have recognized limited circumstances where there
can be a "common law' conflict of interest arising from specific, unique facts even where
there is not a "financial interest' recognized under the statutory or regulatory law. Such a
situation is analyzed on a case -by -case, fact specific basis.
2. Power for the City to Regulate.
The City can regulate the issue of conflict of interests independent of state law where it
does not enact less strict standards than state law. Thus, it is within the power of the City
Council to adopt regulations that require a City "public official" to be disqualified if that
official has a month -to -month tenancy within the proximity of a matter that is subject to a
decision that the official is being asked to make. Should the Council wish to proceed with
such a regulation, please so instruct the Office of the City Attorney to return with
suggestions of how to fashion such a regulation.
We, however, recommend that the City not add further regulations to this area of law. The
Political Reform Act ( "PRA ") and its implementing regulations have hundreds of provisions
carefully crafted to address the issue of financial interests. The Fair Political Practice
Commission ( "FPPC ") is charged with the enforcement of the PRA, and there are severe
criminal sanctions for violating it. The case law interpreting these laws is very extensive.
Since these issues are regulated on a statewide basis we can use other persons' actions
and the FPPC's decisions to give clarity to this complex area of this law. Adding further
regulations that are unique to the City of Newport Beach increases the administrative
burden of interpreting and enforcing those unique regulations. In addition, they can create
a trap for the unwary. Most public officials look to the state law. If our regulations are
more restrictive, then individuals could be lulled into .complacency by state law and be
called up short by unique City regulations.
Moreover, unique situations are governed by state decisional law dealing with "common
laud' conflicts of interest. Thus, where there are situations that give rise to conflicts
sufficient to subvert the process, those situations will likely raise common law conflict of
interest issues and they could, under appropriate circumstances, require a public official to
disqualify him or herself.
Environmental Review
This issue is not a project as defined in the California Environmental Quality Act (CEQA)
Implementing Guidelines.
Public Notice
Notice has been given consistent with the Ralph M. Brown Act. No other public notice
is required by this item.
CONSIDERATION OF ISSUES RE POSSIBLE CONFLICT OF INTEREST
REGULATIONS REGARDING THE "RENTER CONFLICT ISSUE"
January 12, 2010
Page 3
Alternatives
You have the authority to direct our office to prepare regulations that govern the "renter
conflict' issue. Alternatively, you can direct us to take no further action, deciding to rely
on state law as regulating the field. If you decide you wish for us to develop unique City
regulations, we will return shortly with a list of questions to be addressed by the Council
so we can proceed with drafting such regulations.
CONCLUSION
State law deals with the issue of "financial interests" and the conflicts they create, and
also deals with unique, fact specific circumstances that give rise to other conflicts. We
recommend not adding to this law, but you have the authority to do so, and we will
proceed with any direction you provide.
Prepared and Submitted by:
OFFICE OF THE CITY ATTORNEY
-y-
David R. Hunt —�
City Attorney
Attachment 1: Memorandum from Catherine Wolcott to David R. Hunt,
dated January 5, 2010
IA09- 00716J Council Study Session - 111212010 - re Renter Conflict Issue
ATTACHMENT 1
Memorandum from Catherine Wolcott to David R. Hunt
dated January 5, 2010
CITY OF NEWPORT BEACH
CITY ATTORNEYS OFFICE
DATE : January 5, 2010
TO David R. Hunt, City Attorney
FROM: Catherine Wolcott,
Matter:
Deputy City Attor 7ey
Political Reform Act: Conflict of Interest
Regulations; [A09- 00716]
RE Conflict of Interest — Rental Property
Question Presented: Should a member of a City Council, board or commission recuse
him or herself from participating in a government decision if he or she holds a leasehold
interest in property located within 500 feet of the property that is the subject of the
decision?
Short Answer: The Political Reform Act ( "PRA ") and California Code of Regulations
( "CCR ") provide an analytical framework for determining whether a conflict exists based
upon a financial interest. These laws expressly exclude month -to -month tenancies from
the definition of a "financial interest" that will be the basis of a disqualifying conflict of
interest. On the other hand, in specific, unique circumstances, case law indicates that,
even when a conflict of interest does not exist for PRA purposes, a common law conflict
of interest may exist. This issue requires a fact specific determination.
Discussion:
I. State Statutory Law and Regulations.
California Government Code section 87103 states that a public official has a financial
interest in a government decision when it is reasonably foreseeable that the decision will
have a material financial effect (distinguishable from its effect on the public generally) on,
among other things, any real property in which the public official has a direct or indirect
interest worth two thousand dollars ($2,000.00) or more. The Government Code does not
limit "interests in real property" to ownership interests. Government Code section 82033's
definition of "interest in real property" includes "any leasehold interest' ... located in the
jurisdiction ... if the fair market value of the interest is two thousand dollars ($2,000) or
more."
a. Month -to -Month Tenancies do not Give Rise to Disqualifying Financial
Interests.
' Typically the term "leasehold" contemplates an interest that is one "of years," usually a year or more.
Conflict of Interest — Rental Property
January 5, 2010
Page: 2
The CCR gives more specific guidance for government officials who are lessees of
property within the jurisdiction. The CCR, however, expressly states that a "leasehold
interest" "shall not include the interest of a tenant in a periodic tenancy of one month or
less." (CCR § 18233.) Therefore, officials' interests in month -to -month tenancies are not
considered "financial interests" for PRA purposes?
b. Other Leasehold Interests Must Be Individually Analyzed.
As to other "leasehold interests" CCR section 18700 includes a framework for analyzing
whether an official's economic interest creates a disqualifying conflict of interest under the
PRA. To determine whether a disqualifying conflict of interest exists, CCR section
18700's analysis includes:
• Identifying the public official's economic interest;
• Determining whether that interest is directly or indirectly involved in the
governmental decision;
• Determining whether any financial effect on the interest will be material; and
• Determining whether it is reasonably foreseeable that the decision will have a
material financial effect on the official's economic interests.
If it is not reasonably foreseeable that there will be a material financial effect on any of the
public official's economic interests, he or she does not have a conflict of interest for PRA
purposes.( CCR section 18700(b)(6).)
Specifically, CCR section 18703.2 (Economic Interest Defined: Real Property) provides
that, for purposes of disqualification under Government Code sections 87100 and 87103,
a public official has an economic interest in any real property in which the official's interest
is worth two thousand dollars ($2,000.00) or more. That financial interest in real property
is directly involved in a governmental decision if the real property is located within 500
feet of the property that is the subject of a governmental decision. (CCR § 18704(a)(1).)
The financial effect of a governmental decision that directly involves an official's leasehold
interest is presumed to be material. However, that presumption of materiality may be
rebutted by showing that it is not reasonably foreseeable that the decision will have an
effect on the termination date of the lease, the amount of rent paid by the lessee, the
value of the lessee's right to sublease, the legally allowable use of the real property by the
lessee, or the use and enjoyment of the leased real property by the lessee. (CCR §
18705.2(a)(2).)
The financial effect of a governmental decision that indirectly involves an official's
leasehold interest, i.e. one that is more than 500 feet from the affected properties, is
presumed to be immaterial. This presumption can, however, be rebutted with evidence of
material financial effect by a showing of specific facts listed in CCR section 18705.2(b)(2).
2 However, a common law conflict of interest may still exist even when the official's tenancy is month -to-
month. (See discussion of Clark v. City of Hermosa Beach (1996) 48 Cal.App.4"' 1152, in Section 2,
below.)
Conflict of Interest — Rental Property
January 5, 2010
Page: 3
Even if it is reasonably foreseeable that a governmental decision will have a material
effect on an official's leasehold interest, the public official will not have a disqualifying
interest if he or she can establish that the decision will affect his or her economic interest
in the same way it will affect the public generally. (CCR § 18707.)
2. State Case Law.
State common law as developed by court opinions has developed an independent body
of law dealing with conflicts of interest that are not identified under the PRA. "While the
Political Reform Act focuses on financial conflicts of interest, the common law extends to
noneconomic conflicts of interest." (48 Cal.App.4th at 1171, f. 18, citing 64
Ops.Cal.Atty.Gen. (1981) 795,797 and 70 Ops.Cal.Atty.Gen. (1987)45, 47.)
In Clark v. City of Hermosa Beach, (1996) 48 Cal.App.4"' 1152, the court considered
whether a city council member violated the PRA or otherwise deprived landowners of a
fair hearing when he participated in a decision on a use permit for a project that
potentially affected the view from his rental apartment. The court found that the city
council member had not violated the PRA because the council member occupied his
apartment under a month -to -month lease. "That act generally prohibits public officials
from participating in matters where they have a financial interest in the outcome. No such
interest existed here because the PRA excludes any financial interest in real property
leased by an official on a monthly basis." (48 Cal.App.4' at 1173, f. 19 (italics in
original).)
However, the court determined that the project applicant had been denied a fair hearing
because, under the state common law, the council member who lived near the project
had a conflict of interest in voting on the project. "Because (the council member) lived
one block inland of the Clarks, he stood to benefit personally by voting against the Clark's
project. It is irrelevant that (the council member) did not own his residence; an interest in
preserving his ocean view was of such importance to him that it could have influenced his
judgment." (48 Cal.App.4"' at 1172.) As the council member in question had actively and
publicly opposed the project on the basis of the impact it might have on his views prior to
his election to the city council, it was not difficult for the project applicant to demonstrate
his interest in preserving the views from his residence.
The Clark case is just one example of decisional law addressing conflicts outside of the
context of the PRA.
Recommendation: Consistent with Council Policy A -16, a Newport Beach public official
subject to the conflict of interest provisions of the PRA, who holds a leasehold interest in
property, should consult with the Office of the City Attorney or the FPPC before
participating in a governmental decision that may affect that property.
[A09-00716] DRH from CW re Renter Conflict Question