Would California's Foreclosure Moratorium Be Enforceable?

By John Callan Jr., Terrance Evans, Kenneth Tze, Tanvi Shah and Christopher Champine
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Law360 (May 11, 2020, 6:00 PM EDT) --
John Callan
John Callan
Terrance Evans
Terrance Evans
Kenneth Tze
Kenneth Tze
Tanvi Shah
Tanvi Shah
Christopher Champine
Christopher Champine
If passed, California Assembly Bill 828 would prevent action to foreclose on a residential real property while a state or locally declared state of emergency related to COVID-19 is in effect, and for 15 days after the state of emergency has ended.

According to the text, this includes, but is not limited to, "causing or conducting the sale of the real property causing recordation of a notice of default." The bill would require a tax collector to suspend a sale and not attempt to sell tax-defaulted properties that would normally be subject to such action after five years or more of being in default.

Furthermore, A.B. 828 would prohibit a county recorder from recording a notice of default, a notice of sale or a trustee's deed during the state of emergency. Moreover, a court would not be able to accept a complaint in an action to foreclose, and no party would be able to file for a residential unlawful detainer action or execute a writ of possession during the state of emergency and for 15 days after its conclusion.

There are additional protections in place for the tenant:

  • A tenant in any residential unlawful detainer where the tenant remains in possession without the landlord's permission could notify the court of his or her desire to stipulate to the entry of an order.

  • The bill would require the court to notify the landlord and determine whether the tenant's inability to stay current on rent payments was due to COVID-19.

  • 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.

  • The court could then order the tenant to remain in possession and the landlord to reduce rent by 25% for the next year.

  • Landowners owning 10 or more rental units would be presumed not to have suffered material economic hardship from lost rent.

  • The tenant would be required to make monthly payments beginning in the next calendar month.

Interest Group Concerns

On April 6, the California Rental Housing Association issued a press release expressing concerns for small rental property owners who would face additional financial pressures if A.B. 828 passes. The press release followed a letter of opposition sent to assembly member Phil Ting addressing the same issues.

CalRHA argued that property owners depend on rental payments for expenses such as property maintenance, utilities, property taxes, mortgages and insurance. While acknowledging that the bill would assist renters, CalRHA urged the Legislature to "look at the economic challenges facing both rental housing providers and renters holistically." CalRHA further warned that A.B. 828 would "virtually eliminate any incentive for renters who need COVID-19 related financial assistance to work cooperatively with their housing providers on a negotiated rent reduction and/or payment plan."

The San Mateo County Association of Realtors echoed the same sentiments as CalRHA. They criticized the bill as unconstitutional, arguing that it:

  • Interferes with existing contracts;

  • Is unnecessary since state and local governments are already acting to assist renters who may have been affected by COVID-19;

  • "Only calls for a tenant to show 'increased costs for household necessities OR reduced household earnings,'" which does not amount to any real demonstration of hardship;

  • Adds more uncertainty to the rental housing market by discouraging investment in new housing construction; and

  • Creates additional costs for state and local governments when tax revenues will already be dramatically reduced.

Additionally, in a letter to Ting dated April 13, the California Apartment Association raised the following concerns regarding the potential impact of A.B. 828 on apartment owners:

  • A.B. 828 makes it more difficult for property owners to evict nuisance tenants that do not have a COVID-19 related financial hardship, since those tenants would be deemed to have answered the unlawful detainer complaint and denied all claims even if they never actually respond to the unlawful detainer complaint.

  • A.B. 828 places an unreasonably high burden on property owners with fewer than 10 units to demonstrate material economic hardship, and specifies that owners who used all of their savings or other assets to keep the building operational — and have no other discretionary funds — would not be considered to have experienced an economic hardship.

  • A.B. 828 unnecessarily requires property owners to return to court and pay additional court costs if a tenant does not comply with a court order to pay reduced rent.

  • A.B. 828 does not provide property owners ordered by a court to accept reduced rent with a proportionate reduction or deferment of property taxes, mortgage payments, insurance premiums or other expenses necessary to maintain the building.

Legal Analysis

Critics argue that A.B. 828 is unenforceable: allowing tenants to avoid rent altogether during the crisis and 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 landowners and lenders.

Should the law be challenged, courts must determine whether A.B. 828's rent provisions are merely an extension of rent control, which has been held constitutional, or a government taking that leaves landlords without an adequate legal remedy.

Economic Hardship and Due Process

A.B. 828 requires courts to presume the COVID-19 crisis caused economic hardship for the tenant, but not for the landowner. In post-emergency unlawful detainer proceedings, for example, the onus would be on the landowner to prove his or her own hardship, and that the tenant's hardship is not related to COVID-19.

Owners of 10 or more rental properties are presumed to have not suffered material economic hardship. Right or wrong, A.B. 828's proposed definition of material economic hardship appears to skew the balance in favor of tenants and denies courts the ability to recognize very real economic hardship for rental housing providers caused by lost rent.

Rental property owners may argue the law is unconstitutionally confiscatory. Making such an argument would require demonstrating the bill precludes any possibility of a fair and reasonable return on their investment and denies landowners due process. A rent control law does not constitute a taking merely because it reduces the value or rate of return on the landowner's investment.[1]

However, permanently depriving at least some landowners of their contractually expected rent, and depriving at least some lenders of the revenue stream that enables debt payments and the maintenance of their collateral, is an "interfere[nce] with distinct investment-backed expectations" unlike those presented in prior court challenges.[2] Rental property owners will undoubtedly suffer from losing rent if AB 828 is enacted. Whether losing rent precludes a "fair and reasonable" return in this case remains to be seen.         

A stronger argument may be that the bill violates landowners' 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 landowners. Moreover, landowners 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

Under California law and as a general rule, the owner of residential real property has the right to rent property or to leave it vacant, and if he or she decides to rent the property, the owner may charge any rent he or she wishes. The tenant has the option of paying the rent demanded by the landowner or not occupying the premises. However, in many instances, these principles have been restricted by government rent control policies.

Proponents of A.B. 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 A.B. 828 under the contracts clause of the U.S. Constitution. The bill effectively overwrites the terms of existing agreements and forces landowners and lenders to bear an outsized portion of the economic consequences of the COVID-19 pandemic.

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.[3]

Landowners and lenders may argue that denying all or part of their rental and mortgage payments — in addition to erasing the contractual bargain and interfering with their reasonable expectations under their rental and mortgage agreements — 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. Issues with rent control ordinances typically pertain more to compliance with statutory and due process requirements than to the fundamental constitutionality of the regulations under the takings or contracts clauses.

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.[4] Under California law, the protection of existing tenants from displacement is, by itself, a legitimate government interest.[5]

If A.B. 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.

Conclusion

Ultimately, the question of whether A.B. 828 is enforceable will depend upon the features of the legislation challenged, the parties bringing suit and other case-specific considerations. It is also worth noting that A.B. 828 has not been signed into law. The Legislature could amend the bill to attempt to avoid the issues identified here. If enacted in its current form, however, A.B. 828 will face significant legal challenges.



John Callan Jr. and Terrance Evans are partners, Kenneth Tze is special counsel, and Tanvi Shah and Christopher Champine are associates, at Duane Morris LLP.

The opinions expressed herein are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.


[1] Galland v. City of Clovis , 24 Cal. 4th 1003, 1026 (2001).

[2] Lingle v. Chevron USA Inc. , 544 U.S. 528, 539 (2005).

[3] Sveen v. Melin , 138 S. Ct. 1815, 1821-22 (2018).

[4] Rue-Ell Enterprises, Inc. v. City of Berkeley , 147 Cal. App. 3d 81, 84–87 (1st Dist. 1983).

[5] Santa Monica Beach, Ltd. v. Superior Court , 19 Cal. 4th 952, 971–972 (1999).

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