By Christopher M. Champine
The COVID-19 pandemic is testing landlord-tenant relationships in California like never before. With roughly 23.3 percent of the workforce unemployed at the time of this writing, tenants and buyers across California are struggling to make rent as they wait a return to work. State leadership took swift action on behalf of tenants at the outset of the pandemic, imposing a statewide moratorium on enforcing evictions that has been extended by city and county governments across the state. While protecting those at risk of being displaced is an undeniably worthy cause, additional protections could risk the financial security of rental property owners who rely on timely payments.
Proposed Tenant Protections
If passed, Assembly Bill 828 (AB 828 or the Bill) would allow tenants affected by the pandemic to cease paying rent for as long as the state of emergency remain in effect and secure a court-ordered 25 percent rent reduction for an additional 12 months. The landlord would be unable to seek reimbursement of any kind for lost and reduced rent. The Bill creates a presumption in favor of the tenant, placing a burden on the landlord to demonstrate the tenant’s default was not due to COVID-19, along with evidence of his or her own economic hardship. If it so chose, the court would then order the defendant tenant to remain in possession and the landlords to reduce rent by 25 percent for the next year. Landlords of 10 or more rental units would be presumed not to have suffered economic hardship.
Critics argue that allowing tenants to avoid rent altogether during the crisis, then subsequently forcing landowners to accept 25% less in rent substantially interferes with every existing rental lease agreement in California and amounts to a government taking that unfairly shifts the economic burden of COVID-19 onto landlords and lenders. Should the law be challenged, courts must determine whether AB 828’s rent provisions are merely an extension of rent control, which has been held as constitutional, or a government taking that leaves landlords without adequate legal remedy.
Due Process Concerns
AB 828 requires courts to presume economic hardship for tenants, but not landowners. The onus would be on the landlord to prove his or her own hardship, and that the tenant’s hardship is unrelated to COVID-19. Right or wrong, AB 828’s definition of “material economic hardship” skews the balance in favor of tenants and denies courts the ability to recognize real economic hardship for rental housing providers.
An argument may made that the Bill violates landlords’ substantive and procedural due process rights. The substance of the Bill, which forgives past due rent during the state of emergency and requires reducing rent for a 12-month period after the emergency, may skew too far in favor of tenants and unfairly prejudice landlords. Moreover, landlords may argue the Bill’s built-in presumptions prevent them from effectively demonstrating how they have been denied a fair and reasonable return.
Rent Control and Government Interference
Proponents of AB 828 may argue its rent forgiveness and reduction provisions are merely an extension of rent control ordinances long held constitutional. Conversely, landowners and lenders may challenge AB 828 under the Contracts Clause of the U.S. Constitution because the Bill effectively overwrites the terms of existing agreements.
State laws that “operate as a substantial impairment of a contractual relationship” and that are not “drawn in an ‘appropriate’ and ‘reasonable’ way to advance ‘a significant and legitimate public purpose’” violate the Contracts Clause. Sveen v. Melin, 138 S. Ct. 1815, 1821-22 (2018). Landowners and lenders may argue that denying all or part of their rental and mortgage payments — in addition to erasing the contractual bargain — goes beyond a reasonably necessary response to the pandemic and unfairly foists the financial impact of COVID-19 upon landowners and lenders.
In California, however, the constitutionality of rent control is generally settled law. Even where substantial impairment can be demonstrated, mandatory rent rollbacks are valid if they serve a significant and legitimate public purpose, such as the correction of a broad and general social or economic problem. Rue-Ell Enterprises, Inc. v. City of Berkeley, 147 Cal. App. 3d 81, 84–87 (1st Dist. 1983). Under California law, the protection of existing tenants from displacement is, by itself, a legitimate government interest. Santa Monica Beach, Ltd. v. Superior Court, 19 Cal. 4th 952, 971–972 (1999).
If AB 828 is challenged on these grounds, the court may need to weigh whether substantial impairment occurred, and the extent to which the rent forgiveness and reduction measures protect tenants from displacement in an appropriate and reasonable manner.
Ultimately, the question of whether AB 828 is enforceable will depend upon the features of the legislation challenged, the parties bringing suit, and other case-specific considerations. If enacted in its current form, however, AB 828 will face significant constitutional challenges.