Today, rent is due for millions of renters throughout California, many of whom will not be able to pay due to loss of income caused by the pandemic. We have seen the adoption of eviction moratoria throughout the country, a necessary measure to keep renters safe and in their homes. However, stopping evictions can only help us for so long. As we look towards how to recover from this worldwide emergency, we still need to focus on the now by trying to find a way to keep renters in their homes.
One of this country’s failures after the Great Recession was that we did not do nearly enough to help people stay in their homes. The result was predictable: a dramatic rise in housing insecurity during the years following the crisis with unprecedented homelessness as an entirely preventable result. Today, we have an opportunity to give a different answer to that same question while we try to limit infections of this deadly disease. Will we do what it takes to keep people in their homes, or will we allow thousands more to be forced to live on the street?
Many state and local governments have taken a needed first step to protect renters with widespread adoption of eviction moratoria, albeit with a few notable exceptions. However, these moratoria do not deal with the unavoidable fact that many renters are presently unable to pay rent due to loss of income. We have seen some discussion of this issue already by local, state and federal politicians. A temporary rent cancellation has been proposed by activists, city councilors, policy wonks, and even introduced as federal legislation by Rep. Ilhan Omar.
In an attempt to search for solutions for this looming catastrophe, we have been and will continue to research the various legal issues constraining actions by California’s state and local governments. On today, May 1st, the day when millions of Californians have their rent due, we publish this writeup in the hope that it will help move the search for solutions forward before it is too late.
Contracts Clause in An Emergency
Under normal circumstances, the Contracts Clause of the US Constitution would prohibit most state or local regulations from altering the rights of parties to existing contracts. In peacetime, this prohibition would probably prohibit any cancellation of rent obligations by tenants with existing leases. The courts have established an exception to this prohibition, however, that apply in times of emergency. We’ve seen many examples of courts upholding state and local regulations of existing contracts in order to address emergencies.
The Contracts Clause is one of the broad clauses that requires construction, meaning it cannot be applied as a strict ban on all modifications to contracts when other sovereign interests such as the public welfare and the state’s economic interests are in tension. Here, we find ample support from examples arising during yet another massive economic collapse: the Great Depression. In 1934, the State of Minnesota passed a law which granted mortgage holders, many of whom were farmers, extra time to recover their homes from foreclosure sales already in progress.
In the examples we have available, the courts have found time and time again that broad and general economic problems are unquestionably a significant and legitimate purpose that can support new regulations of existing contracts in times of emergency. Faced with an unprecedented avalanche of people losing their homes due to a worldwide loss of income, the US Supreme Court found that “the states retain adequate power to protect the public health against the maintenance of nuisances despite insistence upon existing contracts.” This same logic should apply with equal force today, to uphold measures to keep renter families in their homes.
Takings of Private Property and Compensation
The Fifth Amendment’s takings clause provides that the government must compensate property owners if it commandeers their property for public use. This includes requiring compensation for regulations that have the effect of depriving individuals of their property. Applying this limitation to rent obligations owed by a tenant to their landlord requires us to determine whether these obligations are property that requires compensation if taken, and whether such a taking would be justified as needed to address the emergency at hand.
Courts have been generally reluctant to find that compensation is required when a government regulation exacts a purely monetary impact on a property owner. Impacts on landlords from cancelling back rent could be characterized as purely monetary. The US Supreme Court has indicated that temporary deprivation of value from one’s property does not generally lead to compensation. When combined with the existing eviction moratoria, rent cancellation could be characterized as an uncompensated ‘physical invasion’ onto property, which would lead to a compensation requirement. Finally, government takings of vested contractual rights may require compensation in some limited circumstances. This is generally only when the government actually takes the contractual right for public purposes, however, not when government regulation interferes with contractual obligations between two private parties. To put another way, modifying private contracts through regulation requires less scrutiny than if the government commandeers a contractual right for public purposes.
In contrast, governments could potentially seek to avoid paying compensation by arguing that the measures were “emergency takings”, similar to the above discussion of the Contracts Clause. Perhaps unsurprisingly, there is not a large body of law relating to emergencies, and especially not for worldwide economy-crashing pandemics. Examples of emergency takings where courts have entirely let the government off the hook for compensation are limited. However, In at least one instance, a court has not required compensation when property was destroyed to prevent the spread of an infectious disease. This case involved a taking of property by the US government during wartime, similar to most of the other emergency takings cases. We have very limited examples of cases outside of wartime where takings have not resulted in compensation though some have described our response to this pandemic as similar to a war in the scale of response and number of casualties.
While there is little precedent to predict how courts would decide a takings challenge to an emergency rent cancellation, it is at least possible and perhaps likely that the government would need to partially compensate landlords for the loss in rental income, if not completely. Takings claims can be unpredictable, given the shifting ways that courts have historically viewed government interference with private property, especially given our current Supreme Court’s propensity towards protection of private property. In dealing with the current crises, compensation for landlords losing rent is probably justified both to avoid legal risks and in order to minimize the economic impacts of rent relief policies. Relief from mortgage obligations is already being considered, and should be a part of broader compensation for landlords if rent cancellation is enacted. Perhaps due to these considerations, this would explain why Rep. Ilhan Omar’s proposal for rent relief on the federal level includes a program for compensation of landlords. State and local measures may want to include compensation programs as well, at least to avoid costly takings litigation once the crises abates.
Costa-Hawkins and Rent Cancellation
Here in California, the Costa-Hawkins Act requires that local governments allow residential landlords to “establish initial and all subsequent rental rates” on their rental units, unless covered by an enumerated exception. This ability to establish rent when a new tenant moves in is generally known as “vacancy decontrol.” Some advocates have already argued that Costa-Hawkins is limited to ensuring this initial control of rents, and that rent cancellation would be permitted under the law. This point is at least debatable; landlords are arguably not being allowed to ‘establish’ rents if rents are cancelled altogether. This limit would only apply for local governments, however. The California legislature and perhaps the Governor under already existing emergency powers could enact a suspension of Costa-Hawkins as a temporary measure to address the pandemic. Local governments may also be able to take more narrow measures that fall short of prohibiting landlords from establishing rents, such as temporarily withholding or limiting the legal remedies available for unpaid rent accrued during the emergency (i.e. no evictions, but landlords may still recover back rent). This mechanism is already present in many local eviction moratoria such as Oakland’s, and these measures could incentivize landlords to work collaboratively with tenants on solutions.
Declaring a rent holiday, either at the state or local level, would obviously raise a number of legal risks for state and local governments, but these risks are not insurmountable nor should they be. The most significant challenge would be that the government may need to eventually compensate landlords for any losses, given that budgets are being tightened at the state and local level. For local governments, these measures could also be ruled a violation of Costa-Hawkins, although this still leaves a path forward with state action. A solution from the federal government would be the best and most effective option. Hopefully this solution will be advanced. If not, we need to think creatively on how to solve this issue at the state and local level. It cannot reasonably, ethically, or morally be our public policy to standby and allow a wave of easily preventable evictions once the emergency is lifted. Taking a course of inaction could easily plunge us into an even worse emergency, where we have many more people without adequate shelter and are fighting off another wave of the pandemic without a shelter in which they can shelter-in-place. We need to keep people in their homes, and we must start working now to find a way to do this.