Apartment owners prevail in COVID-19 test

In a recent test of the judicial strength of apartment owners' arguments against state-wide COVID-19 mandates, the owners came out on top in a federal case arising in Minnesota. In Heights Apartments, LLC v. Walz, 30 F.4th 720 (8th Cir. 2020), an apartment owner challenged a state-wide eviction moratorium and won - at least at the pleading stage.

As have executives in many jurisdictions in attempting to deal with the impacts of the recent pandemic, the Governor of Minnesota issued a moratorium on residential evictions and extended it for an indeterminate time. The owner of three residential properties sued, claiming violations of the Contract Clause, the First Amendment, the Fifth Amendment, and the Fourteenth Amendment. Although the district court granted the Governor's motion to dismiss, the 8th Circuit reversed as to the Contract Clause and the Takings Clause of the Fifth Amendment.

The property owner alleged that the executive orders 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 rent. The owner had a number of hurdles to overcome and was aided by a number of recent Supreme Court decisions favorable to the owner's position.

The first problem facing the owner was that it had closed escrow on the purchase of these properties after the executive orders were issued. That, urged the state, was the owner's fault for buying into an already regulated field. Wrong, said the appellate court, relying on the Supreme Court's decision in Palazzolo v. Rhode Island, 533 U.S. 606 (2001), which had rejected the idea that a property owner who sues after a regulation is adopted cannot challenge it. That would be, the Supreme Court said, like putting an "expiration date" on the Takings Clause, something the Court was not willing to do.

The appellate court also found guidance in recent Supreme Court decisions dealing directly with the COVID-19 problem. In Chrysafis v. Marks, 141 S. Ct. 2482 (2021), the Supreme Court enjoined part of New York's emergency COVID-19 regulations as lacking in due process because they allowed tenants essentially to become "judges in their own case" by simply declaring that they were unable to pay. And in Alabama Assn. of Realtors v. Dept. of Health & Hum. Servs., 141 S. Ct. 2485 (2021) the Supreme Court held that the Centers for Disease Control and Prevention (CDC) lacked the authority to declare a nationwide moratorium on evictions. From there, it was essentially downhill. Although the court rejected the First Amendment and due process challenges, it had little trouble finding the Contract Clause and Takings Clause issues viable.

The Contract Clause analysis was interesting because such challenges have traditionally faced upstream battles. Here, however, the court pulled together all of the Supreme Court's Contract Clause cases and concluded that such a claim was valid. As the case was brought under the Civil Rights Act, 42 U.S.C. § 1983, the court first noted that there was a split of authority among its sister circuits, with the 4th and 6th Circuits holding that one could not charge a Contracts Clause violation under section 1983, while the 9th Circuit held that one could do so. The 8th Circuit sided with the 9th and proceeded to analyze the issue.

Acknowledging that the Contracts Clause was no longer the "[d]raconian provision that its words might seem to imply," quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 240 (1978), the court concluded that "interference with a crucial contractual right may constitute a substantial impairment." Here, the court was aided by another recent Supreme Court decision, Cedar Point Nursery v. Hassid, 11 S. Ct. 2063 (2021). There, striking down a California regulation allowing union organizers to trespass on farms while seeking to enroll new members, the Supreme Court held that the right to exclude was one of the most fundamental aspects of property. Thus, precluding landlords from evicting tenants was a "substantial impairment" within the Constitution's meaning because it precluded the owner "from exercising its right to exclude others and regain possession of its premises."

Even in cases of emergency, states are "not vested with unlimited police power to modify contracts," said the court, quoting U.S. Trust Co. v. New Jersey, 432 U.S. 1, 21 (1977) and Justice Kavanaugh's more recent comment that judicial deference, even during an emergency, "does not mean wholesale judicial abdication." Roman Cath. Diocese of Brooklyn v. Cuomo, 141 S. Ct. 63 74 (2020).

In the process, the 8th Circuit concluded that "[w]e find unpersuasive the 9th Circuit's decision in Apartment Ass'n of Los Angeles County v. City of Los Angeles, 10 F.4th 905, 908-09, 913 (9th Cir. 2021) which concluded that the eviction moratorium there was "likely 'reasonable' and 'appropriate'" under the Contract Clause, [primarily] because ... that case pre-dated the Supreme Court's decision in Ala. Ass'n of Realtors, 141 S.Ct. at 2490."

Moving to the Takings Clause, the court concluded that the property owner had properly stated claims for both physical and regulatory takings. Although it could not eventually recover on both, it had properly alleged facts to satisfy its pleading burden.

As to the physical taking, the court returned to the Supreme Court's recent Cedar Point decision, concluding that the regulation had resulted in a permanent physical occupation and, indeed, had "turned every lease in Minnesota into an indefinite lease, terminable only at the option of the tenant."

As to the regulatory taking claim, the court referred to the analysis in Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104 (1978) and its heavy emphasis on the regulation's economic impact on the property owner. Here, the impact was severe because it precluded the owner from receiving rent from its property and from managing its property according to the terms of its leases. The court also had the Supreme Court's recent decision in Alabama Assn. of Realtors to rely on, where the Court struck down the CDC's moratorium on the ground that the CDC's moratorium subjected landlords to "irreparable harm by depriving them of rent payments with no guarantee of eventual recovery."

It looks like the landlord/tenant COVID-19 cases are far from over. Major issues remain to be decided.