II. Disposition of a Major Question in the Shadows
In Alabama Ass’n of Realtors v. DHHS, six U.S. Supreme Court Justices (operating within the Court’s “shadow docket”) vacated a stay issued by the U.S. District Court for the District of Columbia of that court’s judgment invalidating the CDC’s nationwide eviction mor-atorium. The skeptical Court noted that “the CDC has imposed a nation-wide moratorium on evictions in reliance on a decades-old statute that authorizes it to implement measures like fumigation and pest extermination” and asserted that “[i]t strains credulity to believe that this statute grants the CDC the sweeping authority that it asserts.”
The CDC imposed an eviction moratorium in July 2020, after the expiration of a 120-day congressional “moratorium for properties that participated in federal assistance programs or were subject to federally backed loans,” which was part of the Coronavirus Aid, Relief, and Economic Security Act enacted in late March 2020. The agency’s moratorium, which “went further than its statutory predecessor, covering all residential properties nationwide and imposing criminal penalties on violators,” was scheduled to expire at the end of the year. Congress came to the rescue again, extending the agency moratorium for one more month. The political realities shifted dramatically during that one month, as, when Joe Biden assumed the presidency, bi-partisan support for additional COVID-19 relief measures dissolved. The CDC reacted to the congressional impasse by extending its moratorium three more times, and the third extension expired at the end of July 2021.
Realtors and rental property managers from Alabama and Georgia, attempting to enjoin the CDC moratorium, benefited from a summary judgment ruling in the U.S. District Court for the District of Columbia. However, the court stayed its ruling pending appeal to the D.C. Circuit, which upheld the stay. On June 29, 2021, the Supreme Court declined to vacate the stay. While four Justices (Thomas, Alito, Gorsuch, and Barrett) voted to grant the application, Justice Kavanaugh’s was the deciding vote, despite his belief that the CDC “exceeded its existing statutory authority by issuing a nationwide eviction moratorium.” He offered his reasons for inaction—“Because the CDC plans to end the moratorium in only a few weeks, on July 31, and because those few weeks will allow for additional and more orderly distribution of the congression-ally appropriated rental assistance funds.”
A month later, following pressure on the President from fellow Democrats, the CDC issued a new moratorium that was limited to areas hard-hit by the virus. This time the district court declined to vacate the stay, stating that it was bound by the earlier circuit court ruling. The circuit court also allowed the stay to remain in place, and this time a majority of the Supreme Court sided with the plaintiffs.
The six Justices voting to vacate the stay offered this skeptical version of the CDC’s purported rationale:
The Government contends that the first sentence of § 361(a) [of the Public Health Service Act, 42 U.S.C. § 264(a)] gives the CDC broad authority to take whatever measures it deems necessary to control the spread of COVID-19, including issuing the mora-torium. But the second sentence informs the grant of authority by illustrating the kinds of measures that could be necessary: inspection, fumigation, disinfection, sanitation, pest exterm-ination, and destruction of contaminated animals and articles. These measures directly relate to preventing the interstate spread of disease by identifying, isolating, and destroying the disease itself. The CDC’s moratorium, on the other hand, relates to interstate infection far more indirectly: If evictions occur, some subset of tenants might move from one State to another, and some subset of that group might do so while infected with COVID-19. This downstream connection between eviction and the interstate spread of disease is markedly different from the direct targeting of disease that characterizes the measures identified in the statute. Reading both sentences together, rather than the first in isolation, it is a stretch to maintain that § 361(a) gives the CDC the authority to impose this eviction moratorium.
Then, in dictum, the Court speculated that “[e]ven if the text were ambiguous, the sheer scope of the CDC’s claimed authority under § 361(a) would counsel against the Government’s interpretation.” Moreover, the Court noted that “[t]he moratorium intrudes into an area that is the particular domain of state law: the landlord-tenant relationship.”
Alabama Ass’n of Realtors is an example of the Court’s controversial “shadow docket,” as the Justices passed on oral argument and the other formalities of a full review. The per curiam opinion summed up its position on the weakness of the government’s case thus: “The applicants not only have a substantial likelihood of success on the merits—it is difficult to imagine them losing.” To those familiar with the pre-dominant pattern of judicial deference to federal agency actions, this statement would seem problematic. However, the opinion explained, “We expect Congress to speak clearly when authorizing an agency to exercise powers of ‘vast “economic and political significance.”’” One year later, in West Virginia v. EPA, the majority, in striking down power plant emissions regulations, would rely on this same quoted language, in the process articulating a controversial doctrine that puts at risk a large number of significant and controversial federal regulations: “Under this body of law, known as the major questions doctrine, given both separation of powers principles and a practical understanding of legislative intent, the agency must point to ‘clear congressional authorization’ for the authority it claims.”
The so-called major questions doctrine has attracted the attention of a number of astute commentators. For example, Professor (and former Administrator of the White House Office of Information and Regulatory Affairs) Cass Sunstein has observed that the “strong version” of the doctrine “is rooted in the nondelegation doctrine, which requires Congress to offer an ‘intelligible principle’ by which to limit agency discretion.” Application of the strong version would mean the following:
in the face of ambiguity, courts would forbid agencies from making their preferred policy choices unless Congress has given them explicit authorization to do so—at least in cases in which agencies seek (as they often do) to exercise significant new authority. Perhaps a general movement toward the strong version of the major questions doctrine should be celebrated as a way of cabining agency power and serving some of the purposes of the nondelegation doctrine. Or perhaps such a movement should be lamented as a way of forbidding agencies from interpreting ambiguous language in a way that takes advantage of their accountability and expertise. However one evaluates the strong version, there is no doubt that it would have significant consequences.
In a recent essay, Professor Nathan Richardson, after reviewing Alabama Ass’n of Realtors and other recent examples of the doctrine, offers this warning: “[I]t licenses judicial policymaking while professing to protect Congress and the people from agency overreach. The impacts on democratic accountability and the effectiveness of administrative government are likely to be profoundly negative.”
A serious problem with using the major questions doctrine in the middle of a national or global emergency is that the practical effect of the doctrine is to re-delegate the power to determine the best course of action to protect the public health and welfare from federal agencies, which were established to enable expert-based regulation, to federal judges and their support staffs who are required to have no training, special knowledge, or expertise in any field other than law. The problem is compounded by the disturbing politicization of science during the pandemic (or in the midst of climate change) when it becomes more difficult, for example, for a Democratic President to secure the necessary, minimal Republican support for pandemic responses such as eviction moratorium than was true for the President’s Republican predecessor.
One potential “fix” for the shift in governmental responsibility from federal agencies to federal courts enshrined by the application of the major questions doctrine is for Congress simply to clarify that it agrees with the challenged measures taken by the agency. However, even if the hyper-partisanship of the past two decades could be avoided, there is still the problem of convening Congress to pass the law seconding the agency action in the middle of a national (indeed global) emergency. When one considers that in such conditions it is difficult, if not impossible, for a quorum of Congress to convene, the judicially dominant governance dynamic embodied in the major questions doctrine makes even less sense and poses the potential of exacerbating already very serious harms to the public.
It would make much more sense (and be much more protective of public health and the general welfare) if courts used the doctrine to highlight issues that the judiciary thinks should have been addressed by those responsible for promulgating statutes authorizing administrative actions. Informed by the warning issued by a judicial opinion, members of Congress could then decide (when they are able to convene safely) whether to repeal the questionable regulation or to refrain from acting. If the Court insists on building on its dicta, thereby doubling down on this questionable disinterment of the nondelegation doctrine (a doctrine that was condemned to relative obscurity after the judicial excesses during the Great Depression), at a minimum the justices should modify the doctrine by eliminating what is in effect a judicial veto of agency action. Instead of voiding the agency action, à la Chevron step one, the Court should provide Congress with a reasonable period of time—two years, for example—to pass legislation affirming that the court’s supposition that the agency has acted beyond its legislative authority. If, however, Congress fails to act during that period (or if Congress should take the opportunity to expressly authorize the agency action), then the agency action will survive.
By removing the stay in Alabama Ass’n of Realtors, the Court majority indicated that the profound threats to human health and life posed by unrestricted evictions, especially in areas of high population density, were outweighed by the landlords’ loss of their power to terminate tenancies. This was the case even though (1) the eviction ban language made clear that the tenants would still have the legal obligation to pay rent, (2) billions of dollars had been allocated to the states to be distributed to for rent relief, and (3) many landlords had already benefited from federal pandemic response funding. By exercising a judicial veto of a health-based regulation on the basis of a controversial doctrine with a questionable provenance, without taking the time to consider full briefing and oral argument, the conservative wing of the nation’s highest tribunal has set a precedent that will confirm the belief by many observers that the current Court has failed to, as its chief justice promised during his confirmation hearing in 2005, “call balls and strikes, and not to pitch or bat.”
III. Applying Common-Law Principles to an Uncommon Event
Real estate attorneys will not be surprised to hear that courts have been asked to consider the application of common-law doctrines regarding force majeure clauses, frustration of purpose, and impossibility of performance in the context of COVID-19 emergency orders issued by governors throughout the nation. To date, the holdings of state high courts are neither surprising nor revolutionary.
In AGW Sono Partners, LLC v. Downtown Soho, LLC, the Supreme Court of Connecticut rejected frustration of purpose and impossibility of performance defenses raised by a restaurant tenant that failed to pay full rent during periods of pandemic restrictions. Downtown Soho signed a ten-year lease agreement with TR Sono in December 2018, opening a restaurant and bar in South Norwalk. The lease went into effect on the following January 1, with rent payments to commence on July 1, 2019. Also in December 2018, Edin Ahmetaj, the managing member of Downtown Soho, “executed a guarantee agreement pursuant to which he personally guaranteed all of Downtown Soho’s obligations under the lease agreement.” AGW Sono Partners purchased the leased premises, along with five other properties, from TR Sono in December 2019, assuming the landlord’s rights and obligations under the lease and guarantee.
The tenants-defendants (Downtown Soho and Ahmetaj) quickly fell behind in their obligations, failing to make the full January, February, and March 2020 rental payments on time. The plaintiff-landlord (AGW) sent the defendants a default notice on March 11, 2020 (one day before Connecticut Governor Lamont issued an executive order declaring an emergency because of COVID-19), five days before the governor issued a follow-up order that “closed bars and restaurants to in person business from that day through April 30, 2020.” Subsequent executive orders extended the ban, then permitted outdoor dining, then permitted indoor dining at half capacity.
After closing the restaurant until May 27, 2020, the defendants reopened the following day for outdoor dining and then added indoor dining during the summer. Social distancing requirements and the requirement that only customers who purchased food could consume alcoholic beverages spelled financial losses for the tenants. Unwilling to forgive the rent for March through May, the plaintiff served the tenants with a notice to quit with a demand to vacate the property and followed up with a summary process action. The tenants vacated by September 11, 2020, after which the landlords found a new tenant that signed a ten-year lease in December 2020 (with rent payments to commence six months later). The plaintiff then filed an action in state court for damages alleging a breach of the lease agreement, unjust enrichment because the tenants occupied the premises without paying rent, and a breach of the guarantee agreement. The tenants responded by raising two special defenses—impossibility of performance and frustration of purpose—and “claimed that the executive orders rendered the lease agreement illegal as a matter of law.” After a one-day trial, the court determined that the lease and guarantee agreements were breached, rejected the two defenses, found unjust enrichment, and awarded over $200,000 in damages (the court stopped the accrual of damages with the execution of the new rental agreement in December 2020). Both parties appealed to the state supreme court.
Citing federal and state lower and intermediate appellate court decisions from outside Connecticut involving COVID-19 restrictions, the unanimous supreme court also rejected the two special defenses. First, the court concluded the following:
the doctrine of impossibility or impracticability did not excuse the defendants from their obligations to the plaintiff under the lease agreement. First, and most significant, as the trial court found, even under the most restrictive executive orders, use of the premi-ses for restaurant purposes was not rendered factually impossible insofar as restaurants were permitted to provide curbside or takeout service, and the lease agreement did not prohibit curbside or takeout service. Although the COVID-19 restrictions had undoubtedly serious economic consequences for the viability of the bistro—in particular, the initial closure for indoor dining, followed by the loss of bar business and a reopening for indoor dining only with a drastic reduction in capacity—they did not, by themselves, make performance under the lease agreement impossible or commercially impracticable as a matter of law. Instead, they simply raised the cost of performance for the defendants in a manner that rendered it perhaps highly burdensome, but not factually impossible . . . .
In addition, the state supreme court noted the absence of a force majeure clause as well as other elements of the restaurant’s lease agreement:
[T]he language of the lease agreement suggests that events of the magnitude of the COVID-19 pandemic were not entirely unfore-seeable. The lease agreement lacks a force majeure clause that would govern the parties’ mutual obligations in the event of a crisis situation beyond their control, and, to the extent that the lease agreement provides for any forgiveness of obligation in a crisis situation (thus suggesting that they are foreseeable), it excuses only the plaintiff’s obligations—under § 25 of the lease agreement governing “unavoidable delay” occasioned by a variety of circumstances, including fire or “governmental [preemption] in connection with a national emergency . . . .” Finally, § 4(d) of the lease agreement squarely tasks the defendants with the obligation of complying with all governmental “laws, orders and regulations . . . .” Accordingly, we conclude that the trial court correctly determined that the defendants did not establish the special defense of impossibility by a preponderance of the evidence.
The court was equally unimpressed with the defendants’ second special defense, citing two of the cases on which the court previously relied:
[W]e conclude that the purpose of the lease agreement was not frustrated by the pandemic restrictions imposed by the executive orders, even those that barred indoor dining entirely. The language of the lease agreement was not limited to a certain type of dining and—in contrast to the more restrictive language contained in the sister state cases on which the defendants rely—did not preclude the takeout and subsequent outdoor dining that the defendants sought to provide. Put differently, the lease terms did not by themselves render the lease agreement valueless in light of the executive orders.
The Connecticut high court distinguished the instant tenants’ situation from that faced by a restaurant tenant in a Massachusetts trial court case, based on the specific language of the two leases.
The justices closed with this observation regarding the limitations of traditional doctrines to address the severe economic harm caused by a global pandemic:
[T]he COVID-19 public health emergency has had devastating economic effects in many industries, particularly those that rely on the public, such as the restaurant and hospitality industry. This case, which is a contract dispute between private parties, demon-strates the difficulty of using existing legal doctrines to shield parties from the economic damage caused by the pandemic, insofar as the zero sum nature of litigation renders it a process that is particularly ill-suited to resolving these difficult questions of public and economic policy in an equitable manner that will leave something remaining on the “other side” as we attempt to identify a “new normal” while entering the third year of this pandemic. We therefore are left to rely on the political branches of our federal and state governments to identify and implement economic relief in an equitable manner, so as to [sic] will enable all of our state’s businesses and citizens to thrive in the wake of COVID-19.
Going forward, attorneys drafting commercial and residential leases will have to keep in mind these doctrinal limitations, making sure that specific pandemic- and emergency-related language is included in leases. This language should detail how the parties will carry or share the burdens of government restrictions designed to protect public health and safety from now-conceivable harms.
In 55 Oak St. LLC v. RDR Enterprises, Inc., the Supreme Judicial Court of Maine rejected a commercial tenant’s force majeure defense to the landlord’s efforts to terminate the lease. The following clause was included in the five-year lease for a bed-and-breakfast called the Thistle Inn, executed on April 1, 2017, between 55 Oak Street (landlord-plaintiff) and RDR Enterprises (defendant-tenant):
Force Majeure. Neither party hereto will be liable for any failure to comply or delay in complying with its obligations hereunder if such failure or delay is, including but not limited to, due to acts of God, inability to obtain labor, strikes, lockouts, lack of materials, governmental restrictions, enemy actions, civil commotion, fire, unavoidable casualty or other similar causes beyond such party’s reasonable control (all of which events are herein referred to as “Force Majeure Events”). It is expressly agreed that neither party will be obliged to settle any strike to avoid a Force Majeure Event from continuing.
In compliance with Maine Governor Janet Mills’s COVID-19 executive orders barring indoor dining through the end of May 2020, RDR closed the Thistle Inn on March 18 and “largely stopped paying rent to Oak Street for the restaurant portion of the Thistle Inn.”
Even after a new executive order permitted limited indoor dining (subject to social-distancing requirements), RDR chose “‘not to open the Thistle Inn for indoor dining because it believed that such a partial reopening would be a poor financial decision and would not “create longevity for [its] business.” In late June 2020, the plaintiff informed the defendant that it was in “‘terminable default’ of the lease agreement because of its failure to pay rent.” A “notice of default and termination” followed on August 20, seeking rental payments for four months. The defendant’s failures to pay rent and vacate the premises resulted in a forcible entry and detainer action that the plaintiff filed on October 14, 2020. Following state law, the defendant deposited the unpaid rent with the state trial court.
The lower court, relying on the force majeure clause quoted above and citing a bankruptcy court ruling from Illinois, fully excused the defend-ant’s failure to pay rent between March 18 and May 31 (during the ban), and discounted the rent by 40 percent after that date, “based on its finding that RDR Enterprises would have been able to operate the Thistle Inn at approximately 40 percent capacity under the indoor dining restrictions.” After an intermediate appellate court affirmed the ruling of the trial court (including denying possession to the landlord), the landlord appealed to the state high court.
The unanimous Supreme Judicial Court of Maine, like the trial court, excused the rent during the total ban, but rejected the partial excuse rationale for the period beginning June 1, finding it “contrary to the unambiguous terms of the lease.” The court provided the following reasoning:
[B]ecause the unambiguous language of the clause (1) contains no indication that it can apply to partially excuse a party’s nonperfor-mance and (2) does not excuse a party’s nonperformance based on governmental restrictions that limit the party’s ability to make a profit, rather than preventing the party from carrying out the use contemplated by the contract.
The court continued:
The clause does not include any language incorporating the concept of “partial” force majeure or partial rent payments based on a force majeure event. To the contrary, the clause provides that protection from default for nonperformance only applies if “such” nonperformance was due to a force majeure event. This language indicates that either nonperformance is excused by the force majeure clause or it is not excused—it provides no support for the District Court’s conclusion that some, but not all, of RDR Enterprises’ nonperformance was excused by the partial shutdown.
The state high court also found:
RDR Enterprises’ decision was not compelled by the pandemic or governmental restrictions: instead, as noted by the trial court, it was an economic decision based on concerns about the financial feasibility of a partial opening. Nothing in the language of the clause indicates that events affecting economic viability constitute force majeure events. Such an interpretation would go against the weight of force majeure law because, as a general matter, events causing economic hardship, such as market downturns, do not constitute force majeure events unless specifically designated in the contract.
Expressing appreciation for the trial court’s “laudable goal of reaching a Solomonic resolution in light of the difficult realities of the COVID-19 pandemic,” the state justices expressed “hope that, going forward, parties will compromise in situations like these instead of resorting to litigation.” In a footnote, the high court identified the Illinois bankruptcy case as “an outlier [that] has not been followed elsewhere.” Again, going forward, the onus will be on tenants to craft acceptable lease language to cover total as well as partial restrictions on commercial activities.
Law firm web pages and other internet sites provide updated force majeure language in reaction to the COVID-19 pandemic and the government restrictions imposed by local, state, and federal officials. For example, Bloomberg Law has provided a set of alternative pandemic-related Force Majeure clauses that at least provide a starting point for negotiations. One example reads:
[Section x] Force Majeure. Neither Party will be liable for any failure or delay in performing an obligation under this Agreement that is due to any of the following causes (which causes are hereinafter referred to as “Force Majeure”), to the extent beyond its reasonable control: acts of God, accident, riots, war, terrorist act, epidemic, pandemic (including the Covid-19 pandemic), quarantine, civil commotion, breakdown of commun-ication facilities, breakdown of web host, breakdown of internet service provider, natural catastrophes, governmental acts or omissions, changes in laws or regulations, national strikes, fire, explosion, or generalized lack of availability of raw materials or energy.
For the avoidance of doubt, Force Majeure shall not include (a) financial distress nor the inability of either party to make a profit or avoid a financial loss, (b) changes in market prices or conditions, or (c) a party’s financial inability to perform its obligations hereunder.
Of course, should tenants (or landlords) seek to have the clause work only to benefit one party to the lease, this will be factored in as part of the rent-setting decision.
IV. Constitutional Law: A Backward Look at the Contracts and Takings Clauses
The widespread and far-reaching government restrictions imposed during the pre-vaccine phase of the COVID-19 pandemic have generated more than their fair share of federal constitutional challenges as well. The Supreme Court’s expansion of regulatory and physical occupation takings, and hints by some justices that the hibernating Contracts Clause should be awakened have generated recovery theories for landlords that have been overwhelmingly, but not universally, rejected by federal appellate courts.
The U.S. Court of Appeals for the Third Circuit, in Johnson v. Governor of New Jersey, held that an appeal, brought by residential landlords—alleging that an executive order that permitted tenants to apply their security deposits to past-due rental payments violated the Contracts Clause—was moot. On May 18, 2020, New Jersey Governor Phil Murphy issued a pandemic-related executive order that “required Landlords, upon written request from a tenant, to apply a tenant’s security deposit ‘towards rent payments due or to become due from the tenant during the Public Health Emergency established in Executive Order No. 103 (2020) or up to 60 days after the Public Health Emergency terminates.’” Landlords subject to the order sued tenants who had signed a lease that “expressly prohibit[ed] the use of a security deposit for payment of rent” in small claims court and settled for an amount that was $200 shy of the costs of repairing damage to the leased property. The landlords then sued the governor, and after losing their state-law claims in state court, brought federal constitutional claims to the U.S. District Court. The court dismissed the claims on March 22, 2021, and the landlords brought their Contracts Clause claim to the Third Circuit. In June 2021, Governor Murphy “ended the public health emergency” and “signed legislation providing that most of the COVID-related executive orders he issued, including EO 128, ‘shall expire’ within thirty days.”
The three-judge panel agreed with the governor that the appeal was moot. The court first rejected the landlords’ claim “that collateral estop-pel benefits prevent this case from being moot.” The court then noted. “Generally, we do not dismiss a case as moot if the defendant voluntarily ceases allegedly improper behavior but can return to it at any time.” However, quoting a Third Circuit opinion in a pandemic-related case from 2021, the panel clarified that “when, as here, executive orders ‘expired by their own terms and not as a response to the litigation,’ the voluntary cessation exception does not apply.”
The appellate court also identified (and then rejected) an alternative argument based on a suspicious chronology: “When a claimed injury occurs and ends quickly before the litigation process is completed, we can continue to exercise jurisdiction under the ‘capable of repetition yet evading review’ doctrine.” However, despite the fact that the governor withdrew the restriction while the landlords’ appeal was pending, this was not enough:
Landlords did not carry their burden to show the Governor of New Jersey is likely to reenact a substantially similar executive order. For the alleged harm to recur, the Governor would have to promulgate another order mandating landlords credit tenants’ security deposits toward their rent payments. . . .
And even though the Governor retains the ability to reinstate the order, Landlords have not shown a demonstrated probability that he will enact another order to address “the economic fallout of COVID-19 and to reduce a wave of evictions that might exacerbate the spread of the virus.” So this case does not survive mootness as capable of repetition yet evading review.
There was nothing fishy about the timing after all: “Landlords did not moot the claims by their own actions, and neither did the Governor for the purpose of gamesmanship.” Now that significant state restrictions on landlords have expired nationwide, it remains to be seen whether a more conservatively inclined panel, as in the case described next (Heights Apartments), will follow this panel’s lead on the question of mootness.
In Heights Apartments, LLC v. Walz, departing from the conclu-sions of dozens of COVID-19-related federal cases, the Eighth Circuit allowed a challenge brought by a residential landlord to Minnesota pandemic restrictions—alleging violations of the Takings and Contracts Clauses—to proceed. On March 23, 2020, Minnesota Governor Tim Walz signed the first of several executive orders implementing an eviction moratorium. A few days after the first order became effective, Heights (the landlord-plaintiff) closed on three residential rental properties in the state. In September 2020, Heights sued the governor, state attorney general, and others, “alleg[ing] the EOs unlawfully prevented it from excluding tenants who breached their leases, intruded on its ability to manage its private property, and interfered indefinitely with its collection of rents.” The federal district court dismissed the complaint, and, after the parties had filed their briefs for appeal, the state legislature replaced the executive orders with a new moratorium under which “residential tenants in Minnesota enjoy protection from eviction for nonpayment of rent until June 1, 2022, so long as they have pending applications for rental assistance.” Walz and the other defendants moved for partial dismissal of the appeal, which Heights opposed. The Eighth Circuit granted the partial dismissal of the claims for injunctive relief but decided to consider the damages claims.
The court rejected constitutional claims based on the First Amend-ment’s Petition Clause and the Fourteenth Amendment’s (substantive) Due Process Clause. The claims under the Contracts and Takings Clauses were a different matter. First, the court explained that it would determine whether a state has impermissibly interfered with a contract by applying a two-prong test:
(1) whether the state law substantially impairs a contractual relationship, which takes into consideration “the extent to which the law undermines the contractual bargain, interferes with a party’s reasonable expectations, and prevents the party from safeguarding or reinstating his rights”; and (2) if the first prong is met, “whether the state law is drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose.’”
The plaintiff satisfied the first prong because the court agreed with Heights’ assertion that “the ownership of property subject to a lease involves a number of incidents and rights, which include not only the landlord’s right to receive rent but also the ‘right to exclude’ others from the real estate.” Citing the Supreme Court’s opinion in 2021’s Cedar Point Nursery v. Hassid, the court explained: “The right to exclude is not a creature of statute and is instead fundamental and inherent in the ownership of real property.”
The court then illustrated how landlords can suffer special depri-vations of the right to exclude:
It is axiomatic that a landlord’s bargain of receiving rent in exchange for a tenant’s possession of the property is greatly diminished if the landlord’s right to exclude the tenant is minimal or non-existent. The same is true if other terms of the lease cannot be enforced. Heights alleged that one non-paying tenant operated a car and boat repair shop on its premises in violation of city ordinances, yet Heights contends it had no means to enforce compliance due to the EOs. Other allegations include instances where non-paying tenants permitted unauthorized persons to live in the units, threw raucous parties, and engaged in other behavior such that rent-paying tenants in adjacent units moved to evade nuisance. Although these and other alleged violations of the leases (even those unrelated to non-payment of rent) were sufficient to constitute a breach and warranted eviction, termination of the lease, or nonrenewal of the lease, those remedies unavailable because of the EOs. In sum, Heights alleged that the EOs precluded it from exercising its right to exclude others and regain possession of its premises. Assuming the veracity of the well-pleaded factual allegations, as we must, Heights has plausibly pleaded that the EOs substantially impaired its contractual bargain with its tenants.
The court then pointed out that “[n]otwithstanding the regulations in the residential housing industry, nothing in Minnesota law or Supreme Court precedent would have made the extent and reach of the EOs foreseeable to Heights.”
The court believed that the plaintiff met the second prong for a Contracts Clause challenge as well because the state had not demonstrated that its restrictions were “reasonably tailored”:
A cognizable Contract Clause claim requires a showing of a substantial impairment in a contractual relationship that is not reasonably tailored to advance a significant and legitimate public purpose. Given the breadth and impact of the EOs on landlords’ rights, as alleged by Heights, the complaint contains sufficient facts to meet the plausibility requirement for the second prong of its Contract Clause claim—that is, the EOs were not reasonably tailored because they imposed broad restrictions requiring landlords to house tenants engaging in material breaches of the lease—some of which undermined efforts to combat the virus—that had nothing to do with the nonpayment of rent. Assuming the verity of the allegations, as we must at the dismissal stage, Heights’ well-pleaded allegations state a plausible claim for relief.
There is one major problem with the court’s Contracts Clause analysis: it departs from decades of relative indifference to the Clause by the U.S. Supreme Court.
That period of inaction was initiated in 1934 by the Court’s majority opinion in Home Building & Loan Ass’n v. Blaisdell, in which Chief Justice Hughes (a far cry from a radical leftist) famously wrote, “While emergency does not create power, emergency may furnish the occasion for the exercise of power.” The Blaisdell Court upheld Minnesota’s temporary foreclosure moratorium legislation, relying in part on cases in which the Court had upheld rent control and other emergency restrictions on landlords during and after World War I. These words from Hughes’ opinion seem particularly apt in our current pandemic reality:
Not only is the constitutional provision qualified by the measure of control which the State retains over remedial processes, but the State also continues to possess authority to safeguard the vital interests of its people. It does not matter that legislation appropriate to that end “has the result of modifying or abrogating contracts already in effect.” Not only are existing laws read into contracts in order to fix obligations as between the parties, but the reservation of essential attributes of sovereign power is also read into contracts as a postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worth while,—a government which retains adequate authority to secure the peace and good order of society. This principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court.
The Heights Apartments court spent one paragraph attempting to distinguish Blaisdell and the rent-control decisions preceding it. Because the Eighth Circuit decision is such an outlier among COVID-19 restriction cases, and because Blaisdell and its legacy of Contracts Clause passivity are significant barriers, one paragraph is not nearly enough.
The court’s two-part Takings Clause analysis is equally problematic and atypical because the court somehow allowed the plaintiff’s per se physical taking and non-regulatory taking claims to proceed. First, the court rejected the defendants’ argument that Yee v. City of Escondido, a 1992 Supreme Court decision in which the Justices rejected a physical takings challenge to a rent-control ordinance, was controlling precedent. The Heights Apartments court offered a distinction without much, if any, difference: “The landlords in Yee sought to exclude future or incoming tenants rather than existing tenants. Here, the EOs forbade the nonrenewal and termination of ongoing leases, even after they had been materially violated, unless the tenants seriously endangered the safety of others or damaged property significantly.”
The Heights Apartments court relied instead on Cedar Point Nursery, a case involving not landlords and tenants, but agricultural employers and union organizers. Because the landlord argued that “the EOs ‘turned every lease in Minnesota into an indefinite lease, terminable only at the option of the tenant,’” the court concluded that it had “sufficiently alleged that the Walz Defendants deprived Heights of its right to exclude existing tenants without compensation.” These “well-pleaded allegations” were somehow deemed “sufficient to give rise to a plausible per se physical takings claim under Cedar Point Nursery.”
The court was equally impressed by the landlord’s second takings argument, although the court noted that “[w]hile both types of takings claims may not ultimately survive, at this stage of the proceedings, our review is limited to plausibility, not claim resolution.” After character-izing as “immaterial” the fact that Heights purchased its properties after the moratorium was announced, the appeals court then listed the three Penn Central factors courts use in partial regulatory takings cases: “In determining whether a property use restriction is a ‘taking’ under the Fifth Amendment, we balance three factors: (1) the ‘economic impact of the regulation on the claimant’; (2) ‘the extent to which the regulation has interfered with distinct investment-backed expectations;’ and (3) the ‘character of the governmental action.’” Restrictions on the receipt of rent and on the management of its leased properties satisfied the first category, and the second box could be checked because, despite the timing of the purchase and the seriousness of the pandemic, apparently “no landlord could have reasonably expected regulations of the duration and extent present in the EOs.
The court acknowledged that “[m]ore dispute surrounds the third factor—the nature of the regulation.” However, in a glaring omission, the Heights Apartments court omitted the following sentence from Penn Central that directly follows the three factors: “A ‘taking’ may more readily be found when the interference with property can be characterized as a physical invasion by government, than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” The Eighth Circuit panel underplayed the severity of the crisis faced by the state and, despite a wide range of severe and costly restrictions placed on all non-essential businesses, focused on the deprivations experienced by one relatively small class of citizens—residential landlords:
As Heights alleged, the EOs affected more than the collection of rent from tenants. “Property rights in a physical thing have been described as the rights ‘to possess, use and dispose of it.’” By imposing restrictions on property rights, “the government does not simply take a single ‘strand’ from the ‘bundle’ of property rights: it chops through the bundle, taking a slice of every strand.” As an alternative to the physical takings claim, Heights has sufficiently alleged that the EOs may constitute a compensable, non-categorical regulatory taking. Among the damages, Heights alleged it was deprived of its expected return on investment in the form of rental income. These alleged damages are sufficient to plausibly give rise to a Fifth Amendment takings claim.
A reader unfamiliar with Supreme Court jurisprudence would get the impression that the odds of winning physical and regulatory takings cases are quite good, an impression that is disproven by the track record of property owners at all levels of federal and state courts.
Over the objections of four judges, the Eighth Circuit denied an en banc rehearing. Circuit Judge Colloton identified five problems with the panel’s decision to allow the Takings and Contracts Clause claims to proceed:
- “First, the panel decision has broad implications for the authority of chief executives, legislatures, and state judiciaries to act in cases of emergency.”
- “Second, the panel decision on the Takings Clause misreads the most analogous decision of the Supreme Court on the matter of per se takings.”
- “Third, the panel decision’s analysis of regulatory takings runs counter to governing precedent and the decisions of other federal courts during the pandemic.”
- “Fourth, the panel decision on the Contracts Clause is an outlier among federal courts: it conflicts with a recent decision of the Ninth Circuit and decisions of every federal district court to consider the issue.”
- “Fifth, a subsidiary (though potentially dispositive) concern is the panel’s treatment of whether there is a cause of action at all under 42 U.S.C. § 1983 for an alleged violation of the Contracts Clause.”
Should the plaintiffs in Heights Apartments emerge from the district court victorious, perhaps the Supreme Court will be asked to resolve the circuit split illustrated by cases such as the following from the Ninth Circuit.
In a “mainstream” ruling in Apartment Ass’n of Los Angeles County v. City of Los Angeles, the Ninth Circuit affirmed the trial court’s denial of injunctive relief sought by landlords who claimed that the city’s eviction moratorium violated the Contracts Clause. On March 31, 2020, the City of Los Angeles passed an ordinance restricting residential landlords. This measure was followed by further restrictions on May 12, 2020. “Most significantly, [the city’s eviction moratorium] substantially alter[ed] the grounds that landlords may invoke against tenants in eviction actions (known in California as ‘unlawful detainer’ actions).” The Apartment Association of Greater Los Angeles (“AAGLA”), a trade association of Los Angeles County landlords and rental unit managers, sued city officials alleging violations of the Contracts and Takings Clauses, as well as the Tenth and Fourteenth Amendments. Among the alleged harms claimed by association members were “loss of rental income, inability to perform background checks on unauthorized occupants, and being forced to use retirement savings to cover expenses on the properties.” Because the plaintiff was unable to demonstrate likelihood of success on the merits of its constitutional claims, the federal district court denied injunctive relief. On appeal to the Ninth Circuit, the AAGLA pursued only the Contracts Clause claim.
The unanimous three-judge panel began by contrasting the first 150 years of Supreme Court Contracts Clause jurisprudence with the majority’s deferential position in Home Building & Loan Ass’n v. Blaisdell, the 1934 ruling that “marked the beginning of the Supreme Court significantly curtailing the Contracts Clause’s prohibitive force. As a result, the relevant cases today primarily consist of Blaisdell and its progeny, which set forth a very different conception of the Contracts Clause than in earlier cases.” The Apartment Ass’n court, like the Eighth Circuit panel in Heights Apartments (the previous case discussed), recited and applied the two-part test from Sveen v. Melin. This time, however, the plaintiff got a failing grade: “We need not decide whether the eviction moratorium is a substantial impairment of contractual relations because even assuming it is, given the challenges that COVID-19 presents, the moratorium’s provisions constitute an ‘appropriate and reasonable way to advance a significant and legitimate public purpose.’”
Because Los Angeles “fairly ties the moratorium to its stated goal of preventing displacement from homes, which the City reasonably explains can exacerbate the public health-related problems stemming from the COVID-19 pandemic,” and because “each of the provisions of the eviction moratorium that AAGLA challenges may be viewed as reasonable attempts to address that valid public purpose,” the court felt “compelled to conclude that the City’s enactments pass constitutional muster under the Contracts Clause.”
The court also disagreed with AAGLA’s attempt to distinguish Blaisdell (in which borrowers were required to make some payments to their lenders):
In claiming that any eviction moratorium is constitutional only if rent is contemporaneously paid, AAGLA relies most heavily on Blaisdell. But Blaisdell shows why AAGLA’s attempt to divine a bright-line “reasonable rent” rule is unpersuasive. Blaisdell identified several factors that supported the state law’s constitu-tionality. As the Court later explained, these included that the law contained a declaration of emergency, “protect[ed] a basic societal interest,” was “appropriately tailored,” and imposed “reasonable” conditions “limited to the duration of the emergency.” Nothing in Blaisdell suggests that a “reasonable rent” requirement was dispositive.
The court also pointed to other rental-related relief measures enacted during the pandemic, which would soften the blow felt by landlords:
Further weakening AAGLA’s challenge is the fact that the eviction moratorium is but one aspect of a broader remedial framework applicable to landlords during the pandemic. In response to AAGLA’s concerns, appellees fairly argue that the City’s creation of an Emergency Rental Assistance Program supports the eviction moratorium’s reasonableness. That Program initially made available about $103 million (of which $100 million was funded by the federal government) to provide up to $2,000 in rent payments per eligible household, though only tenants were able (but were not required) to apply for such assistance. Subsequently, federal and state funds allowed the City to expand that program by an additional $235.5 million.
Moreover, “other government agencies, including within the City, have given landlords flexibility in meeting their obligations, such as payment plans for utilities and penalty waivers for property taxes.”
The court closed by citing other pandemic-related cases in which federal district courts rejected similar Contracts Clause claims. Faithfully applying the “forgiving standard of modern Contracts Clause analysis,” the panel concluded that “the district court did not err in denying AAGLA’s request for preliminary injunctive relief.” Like the Third Circuit panel in Johnson, the Ninth Circuit panel in Apartment Ass’n simply followed longstanding precedents that provided no clear path for relief for the landlords challenging emergency measures during a global pandemic. The contrast with their counterparts in the Eighth Circuit in Heights Apartments is glaring and problematic.
V. Some Concluding on Following Precedent
The lessons learned from the early state high court and federal appellate court decisions considering the constitutionality of federal, state, and local eviction moratoria, and evaluating tenants’ attempts to avoid lease obligations based on common-law theories are that, so long as courts follow established precedents, government officials have little to fear from disgruntled landlords who attempt to push the Takings and Contracts Clause envelope, and landlords can rely on lease language and established doctrines in disputes with tenants who cite pandemic restrictions to excuse the nonpayment of rent. In the state cases discussed above, the courts carefully identified and followed precedents on frustration of purpose, impossibility of performance, and force majeure clauses. Judges on Third Circuit and Ninth Circuit panels, mimicking their state counterparts, adhered to decades-old precedents in which the Supreme Court and courts following their lead refused to strictly construe the words of the Contracts and Takings Clauses in order to satisfy the needs of landlords who, despite ample protections and financial support programs, felt victimized by gov-ernment restrictions imposed under unprecedented emergency conditions. Established doctrines in these areas survived the COVID-19 challenge, as has been the situation in a long line of cases involving a wide range of local and national emergencies.
In contrast, the Eighth Circuit panel in Heights Apartments and the U.S. Supreme Court majority in Alabama Ass’n of Realtors sided with landlords, in the process eliding or attempting to distinguish significant, decades-old rulings that strongly favored the government parties. Not surprisingly, today’s crop of conservative judges are increasingly dismiss-ive of precedent and open to questioning the motives and methods of government regulators of private property.
At this point it is crucial and fair to ask whether the justices comprising the reconstituted conservative bloc on the Supreme Court are being consistent when they apply a framework for determining whether to respect or to abandon longstanding precedents with which they disagree. As noted in Section IV of this Article, Supreme Court rulings upholding rent control and other restrictions on landlords claiming that their fundamental property rights had been violated date back to the years immediately following World War I. The refusal to characterize rent control as an unconstitutional taking was affirmed by the justices more than thirty years ago. On the Contracts Clause front, the Court’s refusal to find a constitutional violation for Minnesota’s foreclosure moratorium during the nation’s deep financial emergency is nearing its ninetieth anniversary. The wholesale rejection of the nondelegation doctrine was part of the unmistakable shift toward deference to federal lawmakers in Congress and in federal agencies beginning in the late 1930s. The compromise embodied in Chevron deference was struck in 1984. How did the panel in Heights Apartments and the majority in Alabama Ass’n of Realtors know that it was time to reconsider venerable rulings such as these? How does any Supreme Court know when it is time to depart from the rule of stare decisis?
Five of the six justices who ruled in the landlords’ favor in Alabama Ass’n of Realtors recently supplied an answer to this critical and outcome-determinative question in what is already the most controversial ruling of the century—Dobbs v. Jackson Women’s Health Organization. Justice Alito’s opinion for the Court (joined by Justices Barrett, Gorsuch, Kavanaugh, and Thomas) asserted that “overruling a precedent is a serious matter. It is not a step that should be taken lightly.” The majority identified five factors that “weigh[ed] strongly in favor of overruling Roe [v. Wade] and [Planned Parenthood v.] Casey: the nature of their error, the quality of their reasoning, the ‘workability’ of the rules they imposed on the country, their disruptive effect on other areas of the law, and the absence of concrete reliance.” The Supreme Court in Alabama Ass’n of Realtors, as in other non-deferential decisions over the last few years, has failed to explain why the well-aged and consistently cited cases rejecting the nondelegation doctrine and applying Chevron deference warrant replacement by the “major questions doctrine.” Similarly, the Heights Apartments court failed to explain why they felt comfortable rejecting Block, Blaisdell, Yee, and their progeny when the Roberts Court had not yet subjected any of these decisions to a Dobbs-style, multi-factor inquiry and then concluded that these were no longer precedents to be followed.
Indeed, it is not controversial to assert that, should the Supreme Court employ the five Dobbs factors noted in the paragraph above, not one of the key precedents elided by the Court and by judges following their lead would be vulnerable. The Blaisdell decision is probably the most controversial of this group of cases, yet even if we concede that Chief Justice Hughes made an error in his interpretation of the meaning of the Contracts Clause, the opinion has long been celebrated and has not posed “workability” issues, the ruling regarding emergencies and rights under the Contracts Clause has not disrupted other legal areas, and the case has been relied upon for decades with relatively little objection outside a few voices in the academy.
The COVID-19 pandemic, and the government’s response to the crisis, exposed many weak spots in our legal system. We will never know the role judicial skepticism regarding the extent of the danger and the risks posed by vaccines (like judicial skepticism regarding the origins and extent of climate change) played in decisions invalidating government restrictions. We can anticipate additional decisions in the landlord-tenant rule over the next couple of years. Only time will tell whether deference to regulators or skepticism about their motives and methods will predominate in the end. Unfortunately, should the pendulum swing toward non-deference, and particularly if damages claims are successful, government officials will be hesitant to fulfill their duty to protect the public health and safety when the next widespread emergency occurs.
