Proposed Rent Suspension Laws in New York, Other Potential Relief for New York Landlords and Possible Constitutional Challenges

Sign up for our Coronavirus roundup email.
Visit our Coronavirus resource page.

As discussed in our prior update (which you can read here), the New York Legislature is considering a pair of bills that would waive rent payments for a period of 90-days for those residential tenants that have lost their jobs or small business commercial tenants that have suffered financial hardship (for example, due to closure) during the current COVID-19 crisis.  The bills would also waive mortgage payments for landlords that face “financial hardship”[1] as a result of being deprived rent payments during the proposed rent suspension, up to the amount of the lost rent.  The bills, one in the New York Senate and an identical bill in the New York Assembly, are still in committee, but have garnered significant support from members of the legislature and other voices, such as members of the New York City Council.

If the bills are enacted into law, the statute could face constitutional challenges in the courts.  As currently drafted, the bills are unlikely to be susceptible to a challenge based upon the Takings Clause of the U.S. Constitution because the rent and/or mortgage monies that would be waived pursuant to the bills would not be paid to the government, and thus the funds would not have been taken “for public use.”[2]  Accordingly, constitutional challenges to the bills, if enacted, are more likely to be based upon the Contracts Clause[3] and/or the Due Process Clause[4] of the U.S. Constitution.

These clauses, generally, prevent state legislatures from impairing rights in existing contracts through new legislation.  Despite these constitutional restrictions, however, state legislatures “retain the power to safeguard the vital interests of their people,” and therefore retain the ability to abrogate preexisting contractual obligations in certain circumstances.[5]  In determining whether the legislature has exceeded its authority, courts consider whether the subject impairment is “substantial” and, if so, whether the impairment “serves a legitimate public purpose such as remedying a general social or economic problem” and whether “the means chosen to accomplish this purpose [were] reasonable and necessary.”[6]

Courts typically defer to the legislature’s determination regarding the necessity for, and reasonableness of, legislation that impairs existing contracts.[7]  For example, courts seem to avoid considering “the relative wisdom of the statute” and whether there were “means and methods that would [have been] much more effective” to achieve the legislature’s goal.^[8]  But the deference is by no means a blanket position, and courts have frequently struck down legislation, including New York legislation, where the legislature failed to demonstrate that the statute in question was “reasonable and necessary” to achieve the goal asserted.[9] 

For example, the Court of Appeals struck down a statute that, in order to offset a state budget shortfall, would have deferred payment of a portion of certain state employees’ salaries until their employment was terminated.[10]  The Court held that the statute was not reasonable and necessary for the legislature’s purpose given the impact on affected employees and the “menu of alternatives” available to address the budget shortfall.[11]  However, the Court based its decision in part on the fact that there was no emergency, and that the pay deferral could, in theory, last for decades, depending upon when the employee’s service was terminated.[12]  The Court contrasted that law with temporary legislative restrictions on employee pay upheld by the Court in the late 1970s in connection with New York City’s fiscal crisis, which were to last only for a year or the duration of the emergency.[13]

The Court’s holding regarding temporary emergency legislation reflects the well-established principle, set forth by the United States Supreme Court, that where there is a “public emergency,” and where the “relief afforded was temporary and conditional,” the legislative impairment of contractual obligations should typically be upheld by the courts.[14]  Relying on this principle, the New York Court of Appeals upheld a World War II-era emergency law that temporarily set a cap on commercial rents, and held that landlords with leases that pre-dated the emergency law could not collect rent in excess of the new statutory maximum.[15]  Courts in New York and elsewhere upheld similar restrictions on rent and certain mortgage fees during the fiscal crises of the 1970s.[16]

In the case of the rent suspension legislation, it is likely beyond dispute that the bills are the result of an unprecedented public emergency, and the contractual impairment would be both temporary and conditional: a 90-day suspension of rent payments and certain mortgage payments, and even then only under certain specific circumstances.  Accordingly, it may be difficult for challengers of the bills, if enacted, to prevail in a constitutional challenge.

However, opponents of the bills may be able to bolster an eventual constitutional challenge by asserting that the legislation is not “reasonable and necessary,” even in the context of a public emergency, because the legislature’s goal could be accomplished without the attendant burdens on landlords.  As described in our prior update, the bills currently provide only for mortgage relief for landlords affected by the rent suspension, but would not help landlords burdened by significant property taxes, insurance payments, utilities, and other expenses associated with property ownership.  Landlords may thus liken this situation to the Court of Appeals’ decision regarding deferred salary payments: the impact on landlords is significant and there is a “menu of alternatives” that could provide relief to tenants and mortgagees without forcing landlords to shoulder substantial, non-mortgage expenses at a time when they would not be receiving rent.

If the rent suspension bills do become law, there may be other forms of relief for affected landlords, however.  The sponsor of the rent suspension bill in the New York Assembly, Yuh-Line Niou, has publicly announced that she is introducing a bill “to set up a disaster relief fund” for “small landlords who don’t have mortgages[,] but have huge property taxes and utility bills etc.”[17]  Moreover, the recently-enacted federal CARES Act may make certain landlords eligible for loans sponsored by the Small Business Administration, which can be used for payroll, employer group health, interest on mortgage obligations, rent, utilities, and interest on other debt incurred before February 15, 2020, as described in greater detail in Seyfarth’s analysis here.  These separate forms of relief could reduce the negative impacts on landlords of any rent suspension law, and could also be taken into consideration by courts considering whether the rent suspension law is constitutional.

It is still unclear whether the rent suspension bills will be enacted into law at this point and, if so, how the likely challenges to the constitutionality of the law will fare in the courts.  The real estate industry and others will be watching further developments closely.

 

[1] Presently, and they are still in committee, the bills do not define “financial hardship.”

[2] U.S. Const. 5th Am.; see e.g., 446 F. Supp. 2d 134, 151-53 (W.D.N.Y. 2005).

[3] U.S. Const. Art. I, Section 10, cl. 1.

[4] U.S. Const., 5th Am. and 14th Am.

[5] 162 A.D.3d 1169, 1176 (3d Dep’t 2018).

[6] Id.; see also, e.g., 79 N.Y.2d 39, 46 (1992); 446 F. Supp. 2d at 143 (citing 141 F.3d 46, 52 (2d Cir. 1998)).

[7] E.g., 79 N.Y.2d at 46; 162 A.D.3d at 1176.

[8] 162 A.D.3d at 1178.

[9] See 79 N.Y.2d at 46-48; 44 N.Y.2d 302, 313-14 (1978); 11 A.D.3d 22, 24-30 (3d Dep’t 2004).

[10] 79 N.Y.2d at 43-44. 

[11] Id. at 47.

[12] Id. at 47.

[13] Id.

[14] 290 U.S. 398, 440-42 (1934).

[15] 294 N.Y. 571 (1945). 

[16] 79 Misc. 2d 852 (N.Y. Dist. Ct. 1974); 366 Mass. 203 (1974); see also 44 N.Y.2d 101 (1978).

[17] https://twitter.com/yuhline/status/1245075349265879042.