Recent Developments in Real Estate, COVID-19, and the Courts

Editor

Tim Farahnik

Partner, Seyfarth Shaw LLP
601 South Figueroa Street Suite 3300
Los Angeles, CA 90017-5793
(213) 270-9656 phone
[email protected]



Introduction

The ongoing coronavirus pandemic has impacted nearly every aspect of Americans’ lives since mid-March, and the virus’s disruption to the world of real estate has been especially large and widespread.  Governmental authorities at all levels and in all areas of the country began taking swift and decisive measures to respond to the emergency at hand, often requiring citizens to shelter at home and ordering non-essential businesses of all types to close their doors or otherwise substantially scale back their operations.  In order to protect the interests of people who had lost their jobs and the businesses who could not operate at full capacity, many jurisdictions also imposed temporary eviction and foreclosure moratoria to stay in effect during the pandemic.  The effects of these actions on the basic functioning of the real estate market has been dramatic.  Many businesses and people could not meet their rent and mortgage obligations.  Landlords could no longer, for the most part, evict their tenants for nonpayment of rent.  Ongoing real estate purchase and financing transactions were put on hold indefinitely.  The ability to hold foreclosure sales was made much more difficult.  Real estate attorneys very quickly needed to become experts on the doctrine of force majeure.

As with any disruptive force, the COVID-19 pandemic soon resulted in a wave of lawsuits by individuals, companies and organizations who were negatively impacted by it.  This article will take an in-depth look at several of the prominent lawsuits that have thus far been fought and decided in the wake of the pandemic, to see how courts from all around the nation have tried to find the right balance between the interests of various parties who have been affected by these unprecedented events.

Part I – State and Local Challenges

As authorities at each of the federal, state, county and local levels enacted a broad range of measures to combat the spread of COVID-19 in their communities and to mitigate the negative effects of lockdowns and business closures on their citizens, many of these governmental regulations specifically targeted the rights and obligations of owners and renters of real property.  Not surprisingly, several parties who were especially harmed by these emergency regulations and who felt that their rights were being violated sought help from the courts to protect their interests, challenging the constitutionality of these laws, ordinances and orders.  Part I of this article will examine several significant decisions handed down in lawsuits challenging state and local COVID-19 regulations.

Elmsford Apartment Associates, LLC v. Cuomo

In Elmsford Apartment Associates, LLC v. Cuomo, three residential landlords brought suit in the United States District Court in New York seeking an injunction against Executive Order No. 202.28 on the grounds that the Executive Order violated their rights under the Takings Clause, Contracts Clause, Due Process Clause and Petition Clause of the United States Constitution.[1]

On March 2, 2020, in response to the first reported cases of COVID-19 in New York state, the legislature passed Senate Bill S7919, giving Governor Andrew Cuomo the power to suspend statues or regulations and issue accompanying directives “necessary to cope with the disaster,” provided that such measures are “in the interest of the health or welfare of the public,” “reasonably necessary to aid the disaster effort,” and “provide for minimum deviation” from existing laws.[2]  On March 20, 2020, Governor Cuomo issued Executive Order 202.8, the first of several orders issued to temporarily prohibit evictions and foreclosures of residential and commercial tenants.  One such subsequent order, Executive Order 202.28 (“EO 202.28”), was issued on May 7, 2020, allowing any tenant to use its security deposit (and any interest accrued on the deposit) as payment for rent under such tenant’s lease, and also suspending landlords’ ability to commence eviction proceedings for nonpayment of rent.[3]  The plaintiffs in Elmsford brought suit to challenge the constitutional validity of EO 202.28.

The Elmsford court first dismissed the plaintiffs’ claim that the eviction moratorium constitutes a physical taking of their property.  Citing various precedent from both the U.S. Supreme Court and the Second Circuit, the court reasoned that “[g]overnment action that does not entail a physical occupation, but merely affects the use and value of private property, does not result in a physical taking of property,” and that “a state does not commit a physical taking when it restricts the circumstances in which tenants may be evicted.”[4]  Importantly, because the eviction moratorium is “temporary on its face, and does not disturb the landlords’ ability to vindicate their property rights”[5]  at a later time (since rent arrearages will continue to accrue during such period and landlords will be able to evict their tenants once the moratorium expires), EO 202.28 does not constitute a physical taking of the plaintiffs’ property.

The court then concluded that EO 202.28 also does not constitute a regulatory taking of the plaintiffs’ property.  Regulatory takings fall into two categories – categorical and non-categorical.  A categorical regulatory taking occurs only when no productive or economic use of a property is permitted.  Since the plaintiffs still enjoyed many economic benefits of ownership, the court easily concluded that EO 202.28 is not a categorical taking.  As for a non-categorical taking, the court employed the three-pronged test established in Penn Central Transportation Co. v. New York City, weighing: (i) the economic impact of the regulation, (ii) the extent to which the regulation interferes with investment-backed expectations, and (iii) the character of the governmental action.[6]

The court’s evaluation of the economic impact of EO 202.28 was somewhat inconclusive, stating that “[i]t is difficult to quantify the precise economic impact that the eviction moratorium and security deposit provisions have had on Plaintiffs’ property,”[7]  while also recognizing that the Order did not prevent the plaintiffs from making any economic use of their property.  With regard to the plaintiff’s investment-backed expectations, the court noted that the plaintiffs understood that residential real estate is a heavily regulated industry with a broad range of pre-existing laws and rules governing all manners of the landlord-tenant relationship.  As such, “[t]he Order’s temporary adjustment of those rules, which does nothing more than defer the ability of the landlord to collect (or obtain a judgment for) the full amount of the rent the tenant freely agreed to pay, does not disrupt the landlords’ investment-backed expectations.”[8]  Finally, with respect to the character of the government action, the court concluded that “state governments may, in times of emergency or otherwise, reallocate hardships between private parties, including landlords and their tenants, without violating the Takings Clause.”[9]  Based on these evaluations, the Elmsford court also dismissed the plaintiffs’ claims that EO 202.28 constitutes a taking of their property.

The court then turned to the plaintiffs’ Contract Clause claims.  While the U.S. Constitution does prohibit states from passing any law “impairing the Obligation of Contracts,”[10] the Contracts Clause’s prohibition “does not trump the police power of a state to protect the general welfare of its citizens, a power which is ‘paramount to any rights under contracts between individuals.’”[11]  Here the court employed another three-pronged test, this one established under Buffalo Teachers Federation v. Tobe, asking whether: (i) the contractual impairment is substantial, (ii) the law serves a legitimate public purpose, and (iii) the means chosen to accomplish this purpose are reasonable and necessary.[12]

The Elmsford court again noted that because residential real estate is a heavily regulated industry, it is foreseeable that the state may impose future regulations on the industry and these potential future regulations are therefore “priced into [any] contracts formed under the prior regulation,”[13] and that “the foreseeability of additional regulation allows states to interfere with both past and future contracts.”[14]  The court went on to reason that EO 202.28 also sufficiently safeguards the plaintiffs’ ability to realize the benefit of their bargain.  With regard to the security deposit provisions of EO 202.28, since “the Order does not displace the civil remedies always available to landlords seeking to recover the costs of repairs or unpaid rents still owed at the end of a lease term,”[15] the security deposit provisions therefore “do not prevent Plaintiffs from ‘safeguarding or reinstating [their rights]’ as soon as the Order expires.”[16]  As it relates to the eviction moratorium portion of EO 202.28, the court concluded that it merely postpones but does not eliminate a landlord’s ability to seek eviction as a remedy, and also does not eliminate a tenant’s obligations under their lease, such that “the landlord may obtain a judgment for unpaid rent if tenants fail to honor their obligations.”  For these reasons, the court also concluded that EO 202.28 does not violate the Contracts Clause.

Finally, the Elmsford court quickly rejected both the plaintiffs’ Due Process and Petition Clause claims.  On the Due Process claim, the court reasoned that the plaintiffs failed to demonstrate substantial impairment of their property rights, as a mere potential decrease in value of such property is not sufficient to prevail on a due process claim.  Further, since the plaintiffs will be able to initiate new legal proceedings with respect to their leases once EO 202.28 is no longer in effect, they have also not been denied due process on this basis.  Similarly, the plaintiff’s Petition Clause claim failed since “mere delay to filing a lawsuit cannot form the basis of a Petition Claus violation when the plaintiff will, at some point, regain access to legal process”[17] and the “Plaintiffs’ right to collect both the monetary remedies and injunctive relief they would seek through an eviction proceeding has not been completely foreclosed.”[18]

Auracle Homes, LLC v. Lamont

In Auracle Homes, LLC v. Lamont, the United States District Court in Connecticut considered a similar challenge to the one decided by the Elmsford court.  In this case, numerous owners of residential property in Connecticut challenged the state’s Executive Order Nos. 7G, 7X and 7DDD on the grounds that they violate the Takings Clause, Contracts Clause and Due Process Clause of the U.S. Constitution.[19]

On March 10, 2020, Connecticut Governor Ned Lamont issued a declaration of public health and civil preparedness emergencies and proclaimed a state of emergency due to the COVID-19 outbreak in Connecticut and the United States, allowing the Governor to modify any statute that the Governor finds to be “in conflict with the efficient and expeditious execution of civil preparedness functions or the protection of public health.”[20]  On March 19, 2020, Governor Lamont issued Executive Order 7G, which suspended non-critical court operations.[21]  On April 10, 2020, Governor Lamont issued Executive Order 7X, which (i) temporarily bars residential landlords from delivering a notice to quit to their tenants or from serving any action for nonpayment of rent in most situations, (ii) provides for an automatic sixty-day grace period for April rents and a sixty-day grace period for May rents upon request, and (iii) allows renters who paid a security deposit of more than one month’s rent to apply such portion in excess of one month’s rent to any rent due for April, May or June.[22]  On June 29, 2020, Governor Lamont issued Executive Order 7DDD, which extends and expands the notice to quit prohibition and the security deposit provision of Executive Order 7X.[23]  In seeking to enjoin application of the Executive Orders, the plaintiffs in Auracle Homes argued that the “complete ban on all residential eviction proceedings imposed by Defendant’s Executive Orders nullifies Connecticut’s established statutory eviction procedures,”[24] having the effect of “leaving the Plaintiffs with no recourse, no process to follow, no venue to have their rights adjudicated, and nowhere to appeal.”[25]  The plaintiffs further argued that the Governor’s actions were “unreasonable and inappropriate” since the State “is fully capable or providing monetary relief to those tenants who are ultimately unable to pay on-going rent, either through direct payments to landlords, or by grants to tenants.”[26]

As in Elmsford, the Auracle Homes court quickly ruled out the possibility of a categorical regulatory taking and moved to an analysis of a non-categorical taking by applying the Penn Central factors described above.  Citing Elmsford, the court concluded that the plaintiffs’ claims did not “support a finding that the Executive Orders have a ‘constitutionally significant economic impact.’”[27]  As for the plaintiffs’ investment-backed expectations, the court reasoned that the Executive Orders merely regulate the terms governing how the plaintiffs may use their property as previously planned during a pandemic, and since the Executive Orders do not permanently relieve tenants from their obligations under their leases, “[t]he Executive Orders are a temporary adjustment of the status quo, and only defer the ability of residential landlords like Plaintiffs to collect, or obtain a judgment for, the full amount of rent the tenants agreed to pay.”[28]  As to the third prong of the Penn Central test, the court concluded that “the character of the governmental action also weighs against a finding that Plaintiffs have suffered a regulatory taking, because the Executive Orders are ‘part of a public program adjusting the benefits and burden of economic life to promote the common good.’”[29]  For all of these reasons, the court rejected the plaintiffs’ Takings Clause claims.

Turning next to the plaintiffs’ Contracts Clause claims, the Auracle Homes court also applied the Buffalo Teachers test to the Connecticut Executive Orders.  In deciding against substantial impairment of the plaintiffs’ rental contracts, the court again concluded that because residential real estate is a heavily regulated industry, some sort of legislative action in this field was foreseeable, and therefore both the eviction moratorium and the security deposit provisions could not be wholly unexpected.[30]  Further, as to the eviction moratorium, “the Executive Orders do not eliminate Plaintiffs’ contractual remedies for evicting nonpaying tenants; Plaintiffs instead have to wait” before taking action.[31]  In determining the second part of the Buffalo Teachers test as to whether the Executive Orders serve a legitimate public purpose, the court evaluated whether the state was “acting like a private party who reneges to get out of a bad deal, or is governing, which justifies its impairing the plaintiff’s contracts in the public interest.”[32]  Since the Executive Orders impair private contracts that do not directly involve the State, the court accorded “substantial deference” to the State’s stated reasoning that it was acting to promote the public interest.[33]  Therefore, even if the Executive Orders did create a substantial impairment of the plaintiffs’ leases, their claims would nevertheless fail because the Executive Orders promote a significant public purpose.  In determining the third and final factor in the Buffalo Teachers test as to whether the State acted reasonably in issuing the Executive Orders, the court argued that when governmental entities undertake actions “in areas fraught with medical and scientific uncertainties, their latitude must be especially broad.”[34]  Since there was “nothing in the record to suggest that Governor Lamont acted unreasonably,” the plaintiffs also failed this part of the analysis.  For all of the reasons summarized above, the Auracle Homes court wholly rejected the plaintiffs’ Contracts Clause claim.

The final analysis came with respect to the plaintiffs’ substantive and procedural Due Process claims, and much like the Elmsford court, the Auracle Homes court quickly rejected these claims.  Because the plaintiffs “failed to demonstrate a substantial impairment of their property rights”[35] or “an independent liberty or property interest”[36] requiring protection, the safeguards afforded by the principles of both substantive and procedural due process did not apply to the plaintiffs’ claims.

HAPCO v. City of Philadelphia

In HAPCO v. City of Philadelphia, an association of Philadelphia residential property owners and managers brought suit to enjoin the City of Philadelphia from implementing several temporary emergency laws enacted in response to the COVID-19 pandemic.[37]  On July 1, 2020, Philadelphia Mayor James Kenney signed into law a series of five separate bills collectively known as the Emergency Housing Protection Act (“EHPA”), which (i) temporarily prohibits landlords from evicting residential tenants and small business commercial tenants that can provide a certificate of hardship due to COVID-19, (ii) allows tenants who prove they have suffered a financial hardship due to COVID-19 to be able to pay past due rent on a set plan through May 31, 2021, (iii) requires landlords to attend mediation before taking steps to evict residential tenants who have suffered a financial hardship due to COVID-19, and (iv) temporarily bars landlords from charging late fees and interest to residential tenants who have suffered a financial hardship due to COVID-19.[38]  The plaintiffs sought to invalidate the EHPA on the grounds that it violates the Takings Clause, Contracts Clause and Due Process Clause of both the U.S. and Pennsylvania Constitutions.

The HAPCO court did not rule on the plaintiffs’ likelihood on the merits of its Takings Clause claims.  It ruled that, even if the plaintiffs were able to successfully argue that the EHPA constituted a governmental taking, the plaintiffs would be able to obtain other relief from the government in the form of just compensation for such taking, making an injunction on this basis inapplicable.

The plaintiffs argued that the EHPA violates the Contracts Clause because it compel[s landlords] to enter into contractual arrangements [the City has] devised, give up rights [landlords] had negotiated in pre-existing leases, and surrender their right to seek redress in a court of law.”[39]  The court applied the two-part Contracts Clause test set forth by the U.S. Supreme Court in Sveen: (i) whether the state law has created a “substantial impairment of a contractual relationship”[40], and (ii) if it has, then “whether the state law is drawn in an appropriate and reasonable way to advance a significant and legitimate public purpose.”[41]  Like Elmsford and Auracle Homes before it, the HAPCO court relied on the fact that real estate is a heavily regulated industry at each of the federal, state and local levels, subject to the real possibility of ongoing legislation, which should be foreseeable to the parties to any contract involving real property.[42]  Further, considering that the provisions of the EHPA are temporary in nature, meaning that “the tenants are still bound to their contracts, the contractual bargain is not undermined and landlord rights are safeguarded.”[43]  Given these factors, the court did not find a substantial impairment of the contractual relationship existed.  The court in HAPCO further concluded that, even if a substantial impairment had existed, the EHPA “is a reasonable way to advance a significant and legitimate purpose” to address the housing and public health emergency caused by the COVID-19 pandemic.[44]  Finally, the court reasoned that the EHPA is “an appropriate and reasonable way to advance the City’s purpose,” especially “[c]onsidering the deference owed to [the] legislative judgment” of the City to address the current emergency.[45]

Turning to the plaintiffs’ Due Process Clause claim, the court in HAPCO reasoned that this clause “generally does not prohibit retrospective civil litigation, unless the consequences are particularly harsh and oppressive,”[46] and that “state laws need only be rational and non-arbitrary in order to satisfy the right to substantive due process.”[47]  Because the EHPA meets all of these requirements, the court denied the plaintiffs’ due process claims as well.

Baptiste v. Kennealy

In Baptiste v. Kennealy, three landlords filed for a preliminary injunction with the United States District Court, District of Massachusetts, against the “Act Providing for a Moratorium on Evictions and Foreclosures during the COVID-19 Emergency,” enacted by the Massachusetts state legislature on April 20, 2020.[48]  The Act (i) prohibits all “non-essential evictions,” including residential evictions for a tenant’s failure to pay rent (without a tenant needing to certify that they are unable to pay rent due to the coronavirus pandemic), (ii) prohibits landlord from sending tenants notices to quit or any notices requesting or demanding that a tenant who has not paid rent leave the premises, and (iii) prohibits Massachusetts courts from accepting for filing any eviction case or taking any action in any pending eviction case.[49]  The plaintiffs brought suit, alleging that the Act violates the Takings Clause, Contracts Clause and Petition Clause of the U.S. Constitution, as well as the First Amendment to the U.S. Constitution because of the limits placed by the Act on the types and subject matter of notices that landlords could send to their tenants (which First Amendment arguments will not be analyzed here, as they are outside the scope of this article).[50]

With regard to the plaintiffs’ Takings Clause claim, the Baptiste court applied the same three-factor Penn Central test as used in Elmsford, Auracle Homes and HAPCO, and largely came to the same conclusions that: (i) no physical taking occurred[51], (ii) the economic impact of the Act does not support the finding of a taking because the effect on the plaintiffs’ property was only temporary and that “mere diminution in the value of property…is insufficient to demonstrate a taking,”[52] and (iii) the character of the government action does not support the finding of a taking because the moratorium is a “public program adjusting the benefits and burdens of economic life to promote the common good.”[53]  The only place in the takings analysis where the Baptiste court differed from the decisions reached in Elmsford, Auracle Homes and HAPCO was that the Baptiste court concluded that the moratorium does significantly interfere with the plaintiff’s investment-backed expectations, since “a reasonable landlord would not have anticipated a virtually unprecedented event like the COVID-19 pandemic and the ensuing six-month ban on evicting and replacing tenants who do not pay rent.”[54]  Despite this difference, however, the court in Baptiste ultimately reached the same conclusion reached in Elmsford, Auracle Homes and HAPCO that the Act did not constitute a regulatory taking of the plaintiffs’ property.[55]

In analyzing the plaintiffs’ Contracts Clause claim, the court applied the same two-factor test as the Elmsford, Auracle Homes and HAPCO cases summarized above, but noted that “[i]t is a close question whether the Moratorium substantially impairs the contracts that plaintiffs’ leases represent,” and also “a close question whether the Moratorium is a reasonable means of addressing the undisputed significant and legitimate need to combat the spread of the COVID-19 virus.”[56]  Regarding the substantial impairment question, the court also noted here that residential real estate is a heavily regulated industry, but also (in departing from the Elmsford, Auracle Homes and HAPCO courts’ analyses) that “a reasonable landlord would not have anticipated a virtually unprecedented event such as the COVID-19 pandemic that would generate a ban on even initiating eviction actions against tenant.”[57]  Regarding the reasonableness question, the Baptiste court recognized that the Act was more burdensome to landlords than the laws enacted in New York (as affirmed by Elmsford), Connecticut (as affirmed by Auracle Homes), and Philadelphia (as affirmed by HAPCO), leading to the conclusion that Massachusetts could have enacted a less restrictive law.[58]  In the final analysis, however, the court in Baptiste dismissed the plaintiffs’ Contracts Clause claim, citing the fact that the moratorium is only temporary, recognizing that the proper standard to judge the reasonableness of the law is whether there was a rational basis for enacting it rather than requiring the law to be drafted in the least restrictive way possible, and further reasoning that, because in the case at hand “the state is not an interested party, courts give deference to elected officials as to what is reasonable and appropriate.”[59]

Other Takings and Contracts Clause Suits

Several other lawsuits in various jurisdictions have also been filed to challenge the constitutionality or authority of state and local orders, law and restrictions enacted to combat the COVID-19 pandemic that do not directly involve regulation of real estate-related matters, but which lawsuits have asserted Takings Clause claims.  For instance, in TJM 64, Inc. v. Harris, filed in the United States District Court in the Western District of Tennessee, Western Division, several owners of bars and limited-service restaurants brought an action against officials in Shelby County, Tennessee challenging an order issued by the County Health Department requiring all such bars and limited service restaurants to close in an effort to combat the COVID-19 pandemic.[60]  In Friends of Danny DeVito v. Wolf, filed with the Supreme Court of Pennsylvania, several business owners and one individual in Pennsylvania filed an emergency ex parte application challenging Governor Tom Wolf’s March 19, 2020 Executive Order requiring the closure of the physical operations of all non-life-sustaining businesses in order to reduce the spread of the coronavirus within the State.[61]  In Lebanon Valley Auto Racing Corp. v. Cuomo, filed with the United States District Court in the Northern District of New York, five operators of outdoor auto racing facilities in the State of New York sought to invalidate Executive Order 202.32, which included a ban on spectators at racetracks in the state, on a Takings Clause claim.[62]  Finally, in Blackburn v. Dare County, filed in the United States District Court in the Eastern District of North Carolina – Northern Division, a couple who lived in Virginia but owned a vacation home in North Carolina brought suit against Dare County and several towns within the County to overturn a County declaration prohibiting nonresident visitors from entering the County in an effort to slow the spread of the coronavirus, by declaring that such prohibition constituted a taking of their private property.[63]

One additional suit of note that did directly implicate real estate was filed in California in San Francisco Apartment Association v. City and County of San Francisco, challenging Ordinance No. 93-20 enacted by the San Francisco Board of Supervisors that, among other things, permanently protects tenants from eviction for nonpayment of rent that was unpaid due to COVID-19 if the rent became due between March 16, 2020 and September 30, 2020.  In a one-page order, the judge in this case dismissed the plaintiffs’ Takings Clause and Contracts Clause claims along similar lines as the cases discussed above, as “a reasonable exercise of police power to promote public welfare.”[64]

All of the lawsuits noted above met the same fate as the Elmsford, Auracle Homes, Baptiste and HAPCO cases summarized above – namely, their Takings Clause claims were rejected, and the validity and authority of all of the laws or orders being challenged were upheld.  The analyses in these additional cases followed a similar track as the cases summarized above, in which the respective courts analyzed the Penn Central factors and reached the overarching conclusion that, since the contested laws or orders were temporary in nature, were an exercise of the governmental authority’s police power, were enacted with the intention of providing a public benefit and protecting citizens, and were drafted to be reasonably related to these goals, that they were all constitutionally valid.

Interestingly, each of the courts reached the same ultimate decision to uphold the laws or orders as written, even though certain courts differed on specific elements of the Penn Central analysis.  For instance, in TJM 64, the court concluded that the closure orders did “interfere in a significant way with Plaintiffs’ investment-backed expectations in their properties, despite their status as highly regulated entities.”[65]  However, even though the court conceded “that Plaintiffs will suffer devastating economic impacts if the Closure Orders remain in effect,”[66] the court nonetheless determined that such impacts did not rise to the level of a taking because of the government’s fundamental interest in promoting the common good, and recognizing that [l]abeling Defendants’ Order a taking would require the state to compensate every individual or property owner whose property use was restricted for the purpose of protecting public health [emphasis in original].”[67]  In Friends of Danny DeVito, the court convincingly distinguished between a government taking and the government’s legitimate use of its police power, stating that “[e]minent domain is the power to take property for public use…The police power, on the other hand, involves the regulation of property to promote the health, safety and general welfare of the people.”[68]  In Lebanon Valley, the court concluded that the economic impact of the regulation on the plaintiffs was substantial enough to weigh in favor of allowing the takings claim to proceed on that factor.[69]  However, because the state has issued the order to promote the common good in order to address an existing public health emergency, “[t]he character of the relevant governmental action therefore strongly favors Defendants.”[70]  Finally, the Blackburn court sided with the plaintiffs on the first two prongs of the Penn Central test, concluding that “plaintiffs do allege some unspecified amount of economic loss, which…would provide some support of plaintiffs’ takings claim,”[71] and that “Defendant County’s regulation did temporarily interfere with plaintiffs’ right to personally travel to their vacation property, diminishing plaintiffs’ right to use the property.”[72]  In the final analysis, however, the County’s interest in reducing the spread of the coronavirus and the reasonable relation of the declaration to this objective superseded the individual property rights that were negatively impacted by such regulation: “Defendant County’s concededly legitimate exercise of its emergency management powers under North Carolina law to protect public health in the ‘unprecedented’ circumstances presented by the COVID-19 pandemic, weighed against loss of use indirectly occasioned by preventing plaintiffs from personally accessing their vacation home for 45 days, does not plausibly amount to a regulatory taking of plaintiffs’ property.”[73]

Part II – Challenging The CDC Moratorium

On September 4, 2020, the Centers for Disease Control and Prevention (“CDC”), a division of the Department of Health and Human Services (“HHS”), issued a temporary eviction moratorium through December 31, 2020 with the intent of helping to prevent the spread of COVID-19 in the United States.  Although the moratorium prohibits evictions of certain renters covered by the order, it also “does not relieve any individual of any obligation to pay rent, make a housing payment, or comply with any other obligation that the individual may have under a tenancy, lease or similar contract.”[74]  Since the CDC order was enacted, “an array of lawyers and lobbyists have inundated federal, state and local courts” with lawsuits challenging the validity of the moratorium as well as HHS’s and the CDC’s authority in issuing it.[75]  While many of these lawsuits remain pending at this time (including a recent case filed by the National Association of Home Builders in the Northern District of Ohio), Part II will discuss the most prominent case that has been brought and adjudicated with respect to the CDC moratorium.

Richard Lee Brown v. Alex Azar

The plaintiffs in Richard Lee Brown v. Alex Azar, made up of the National Apartment Association (representing a membership group of 85,000 landlords nationwide) and four landlords in different states seeking to evict tenants from their respective properties, brought suit in the United States District Court in the Northern District of Georgia, Atlanta Division, to enjoin enforcement of the CDC order.  The plaintiffs’ suit alleged that the CDC order (i) lacks a statutory and regulatory basis, (ii) is arbitrary and capricious, and (iii) violates the plaintiffs’ rights to access the courts.[76]

The plaintiffs first contended that “the CDC acted without statutory and regulatory authority because (1) the Order is not reasonably necessary to prevent the spread of the disease; and (2) the Order does not show that the state and local laws were insufficient to prevent the spread of the disease.”[77]  On the first point above, the court ruled that, since Congress gave the Secretary of HHS (and by extension the CDC) broad power to issue regulations to prevent the spread of diseases, and because the CDC’s order is necessary to help control the COVID-19 pandemic, the CDC was authorized to issue it.[78]  Regarding the second point above, so long as the CDC reasonably determines that the measures taken by any local state or local government are insufficient to prevent the spread of the disease, the court will give deference to the CDC’s determination and confirm its statutory and regulatory authority on these grounds.[79]

The court next analyzed the plaintiffs’ claim that the issuance of the CDC order was arbitrary and capricious.  The plaintiffs argued that “the Order is arbitrary and capricious because it is not supported by substantial evidence or relevant data” to demonstrate that the eviction moratorium would help to prevent the spread of COVID-19 or to demonstrate that existing state and local measures were insufficient to prevent such spread.[80]  The court disagreed with this argument, noting that “the Order explains, in detail, why a temporary eviction moratorium is reasonably necessary.”[81]  Specifically, the CDC order notes that as many as 30 to 40 million people in the U.S. could be at risk of eviction without a moratorium in place, which would result in many more people who would move to shared housing or other congregate settings or who would become homeless, which increases the risk of spread of the virus.[82]  Based on this evidence, the court concluded that “the CDC has shown what it needs to: that an eviction moratorium for individuals likely to be forced into congregate living situations is an effective public health measure that prevents the spread of communicable diseases because it aids the implementation of stay-at-home and social distancing directives.”[83]  The court then disagreed with the plaintiffs’ assertion that the CDC did not show that existing measures taken by state and local government were insufficient.  To the contrary, “the Order plainly states that the measures in state and local jurisdictions that do not provide protections for renters equal to or greater than the protections provided for in the Order are insufficient to prevent the spread of COVID-19.”[84]  In fact, “the CDC did analyze each state’s eviction restrictions, and the evidence suggested that in the absence of eviction moratoria, tens of millions of Americans could be at risk of eviction on a scale that would be unprecedented in modern times.”[85]

Finally, the plaintiffs then argued that the CDC order unlawfully strips them of their constitutional right to access the courts.  The court, however, pointed out that “the Order does not apply to every person renting a property,” “does not apply to every reason a landlord may evict a tenant,” “does not prohibit Plaintiffs from seeking a different remedy to recover their losses,” and “does not apply to all procedural aspects of the eviction proceedings,” since landlords may still serve notices to quit and commence eviction proceedings under the CDC order; rather, “[t]he Order only delays the actual eviction.”[86]  Citing both the Elmsford and Baptiste decisions (which the court also noted involved state orders that were more restrictive against landlords than the CDC order), the court concluded the CDC order does not violate the plaintiffs’ constitutional right to access the courts because (i) a landlord maintains the right to pursue other legal remedies against a non-paying tenant, such as a breach of contract claim, and (ii) the eviction moratorium is only temporary, and mere delay does not amount to a denial of a landlord’s rights when they will “at some point, regain access to legal process.”[87]

Part III – Force Majeure, Impossibility and Frustration of Purpose

With the COVID-19 pandemic forcing most retail and restaurant businesses either to temporarily shut down altogether or otherwise significantly reduce their operations, it has become nearly impossible for many of these businesses remain profitable, in turn making it much more difficult for such businesses to stay current on their lease and mortgage payments.  Many of these struggling companies have taken the position that the pandemic (and the shutdowns ordered in response to it) constitute a force majeure event, excusing their obligations to pay rent under their leases (or other payment obligations under instruments such as mortgages and purchase agreements).  In addition to the force majeure argument, many renters have also invoked the legal concepts of impossibility and frustration of purpose to make the case that their rent payment obligations should be suspended during the pandemic.  For their part, landlords have fought back to enforce the terms of their leases as written.  Part III will discuss several notable cases in which tenants (and in one case, a buyer under a purchase contract) have attempted to assert one or more of the force majeure, impossibility and frustration of purpose defenses for their benefit.

In Re: Hitz Restaurant Group

A creditor under the above-named bankruptcy case petitioned the United States Bankruptcy Court in the Northern District of Illinois – Eastern Division, to enforce the obligation of debtor Hitz Restaurant Group to pay post-petition rent and to modify the automatic stay.  The debtor argued that its obligation to pay any post-petition rent was excused by the force majeure clause contained in the lease between the debtor and such creditor and by the creditor’s failure to make necessary repairs to the leased premises.[88]  The debtor argued that the lease’s force majeure clause was triggered on March 16, 2020, when Illinois Governor J.B. Pritzker issued Executive Order 2020-7 to mitigate the effects of the coronavirus pandemic in the state.[89]  The Executive Order stated, in part, that “all businesses in the State of Illinois that offer food or beverages for on-premises consumption…must suspend service for and may not permit on-premises consumption.  Such businesses are permitted and encouraged to serve food and beverages so that they may be consumed off-premises.”[90]

The Hitz court concluded that the Executive Order did in fact trigger the force majeure clause under the lease, which clause reads as follows: “Landlord and Tenant shall each be excused from performing its obligations or undertakings provided in this Lease, in the event, but only so long as the performance of any of its obligations are prevented or delayed, retarded or hindered by…laws, governmental action or inaction, orders of government….Lack of money shall not be grounds for Force Majeure.”[91]  The court reached its conclusion that “[t]he force majeure clause in this lease was unambiguously triggered by”[92] the Executive Order because the Order “unquestionably constitutes both ‘governmental action’ and issuance of an ‘order’ as contemplated by the language of the force majeure clause,”[93] the Order “unquestionably ‘hindered’ Debtor’s ability to perform,”[94] and the Order “was unquestionably the proximate cause of Debtor’s inability to pay rent.”[95]

In response to the creditor’s position that the lease’s force majeure clause was not triggered because the Executive Order did not shut down the banking system or post offices in Illinois, meaning that the debtor was still physically able to send rental payments to the creditor, the court called this argument “specious” and rejected it “out of hand.”[96]  The court also rejected the creditor’s argument that the debtor’s failure to perform arose merely from a lack of money, which was expressly carved out of the force majeure provision in the lease.  The court instead agreed with the debtor’s position that the proximate cause of the tenant’s failure to pay rent was not mere lack of money, but rather the Executive Order’s shutdown of most of the debtor’s business that was the proximate cause of the debtor’s inability to generate revenue and therefore pay rent.[97]  However, because the Executive Order did not completely stop the debtor from conducting its business, since carry-out, delivery and pickup services were still allowed, the court concluded that the debtor was responsible for partial payment of its rent in proportion to the amount of the leased space that was still usable under the Executive Order for such allowed services (i.e., the kitchen), which amounted to 25% of the space (and therefore 25% of the rent owed).[98]

Martorella v. Rapp

Martorella v. Rapp arises from a case originally filed in the Massachusetts Land Court in 2017 entitled Stark v. Martorella, which was an action for the partition of real property located at 15 Wigwam Road in Nantucket.[99]  Defendant Stuart Rapp was the court-appointed commissioner in Stark, tasked with recommending the best way to partition the Wigwam Road property.[100]  Commissioner Rapp conducted a public auction of the property on February 14, 2020, at which the plaintiff Christopher Martorella was the winning bidder.[101]  The terms of Mr. Martorella’s winning bid, as memorialized in a purchase and sale agreement signed upon the conclusion of the auction, provided for him to pay an initial deposit at the time of the auction and a second deposit four days later, with the remaining balance of the purchase price in the amount of $1,644,300 to be paid “at the time of the delivery of the Deed.”[102]  Pursuant to the terms of the purchase agreement, the delivery of such Deed was to have occurred on March 16, 2020 (which was later extended to March 23, 2020 and then April 6, 2020 upon the mutual agreement of the parties), and the agreement did not provide for any financing or other contingencies to the completion of the sale in Mr. Martorella’s favor, nor did the agreement confer any unilateral right upon Mr. Martorella to extend the time for his performance thereunder.[103]

Due to the effect of the coronavirus pandemic on the economic markets, Mr. Martorella experienced difficulty obtaining financing for the purchase and requested to postpone the closing again to May 5, 2020, which the Land Court in Stark denied.[104]  Mr. Martorella then brought the entitled action against Commissioner Rapp, claiming the doctrine of impossibility due to the COVID-19 pandemic.  The Martorella court reasoned that the core of the question of impossibility is the determination “whether the risk of intervening circumstance was one which the parties may be taken to have assigned between themselves.”[105]  In answering this question, the court referenced Massachusetts case law stating that “[o]nce one party has made itself responsible for the disposition of the subject matter of a contract, it cannot later claim that the occurrence in question was not in the contemplation of the parties at the time of contract.”[106]  Therefore, since the purchase agreement contained no contingencies to Mr. Martorella’s obligation to perform thereunder, which he acknowledged, Mr. Martorella “knowingly assumed the risk of delivering $1,644,300 at closing.”[107]  As such, the court ruled that Mr. Martorella was not excused from performing under the purchase agreement due to impossibility, and deemed him to be in default under the agreement.[108]

Other Notable Cases

Richards Clearview, LLC v. Bed Bath & Beyond, Inc. involved a commercial eviction proceeding by the owner of an indoor shopping mall in Metairie, Louisiana against tenant Bed Bath & Beyond, which paid only partial rent in April, 2020 and no rent in May, 2020 after the Governor of Louisiana issued Emergency Proclamation 33 JBE 2020 ordering all malls to close, “except for stores in a mall that have a direct outdoor entrance and exit that provide essential services and products.”[109]  Even though the tenant believed its rent was partially excused due to the force majeure provision in its lease, the tenant did attempt to pay all of its stated rent in full after it received a notice of default from its landlord; however, the landlord refused to accept such late payments and moved to terminate the lease.[110]  The court here invoked the Louisiana doctrine of “judicial control,” which is “an equitable doctrine by which courts will deny cancellation of a lease when the lessee’s breach is of minor importance, is caused by no fault of his own, or is based on a good faith mistake of fact.”[111]  Because (i) there was a good faith question in the lease as to how much rent was owed (due to certain ambiguous co-tenancy clauses in the lease), (ii) the tenant attempted to remedy the default in a reasonable amount of time given the circumstances caused by the COVID-19 pandemic, (iii) the tenant was continuing to sell certain essential products such as soap, hand sanitizer and first aid equipment to the public during the pandemic, and (iv) the landlord was not materially harmed by the delay in payment, the court elected to exercise judicial control and ruled against cancellation of the lease.[112]

In Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., the owner of a shopping center in Hialeah, Florida sued its tenant for past due amounts and accelerated rent under its lease after the tenant stopped paying rent under the lease, with the tenant arguing that the restrictions against non-essential activities and business operations put in place by Miami-Dade County were a force majeure event that suspended its obligation to pay rent.[113]  In ruling in favor of the landlord, the court explained that “force majeure clauses are narrowly construed, and “will generally only excuse a party’s nonperformance if the event that caused the party’s nonperformance is specifically identified.’”[114]  Because the tenant failed to explain how the regulations actually and directly resulted in its inability to pay rent, the court ruled that there was no force majeure event under the lease.[115]

In BKNY1, Inc., d/b/a 132 Lounge v. 132 Capulet Holdings, LLC, a New York landlord sued to terminate its tenant’s lease of for failure to pay rent, which tenant argued that the state’s Executive Order No. 202.3 requiring its restaurant business to close excused it from its obligation to pay rent under the doctrines of frustration of purpose and impossibility.[116]  The court first addressed the tenant’s frustration of purpose defense.  Citing the principle that “financial hardship does not excuse performance of a contract,” the court concluded that the two-month temporary closure of the tenant’s business required by the Executive Order could not have frustrated the overall purpose of the lease with a term of nine years.[117]  In also rejecting the tenant’s impossibility defense, the court quoted the express language of the lease, which stated in part that the tenant’s obligation to pay rent “shall in no wise be affected, impaired or excused because Owner is unable to fulfill any of its obligations under this lease…by reason of…government preemption or restrictions.”

Part IV – Seeking Equitable Remedies

Much like COVID-19’s far-reaching effects on the daily lives of people across the United States, the pandemic has also had far-reaching effects on jurisprudence and the disposition of legal cases in many different areas of law, whether directly or only tangentially involving real estate.  Whether relating to bankruptcy cases, home purchases, or UCC foreclosure sales, no part of the law has been able to avoid the need to account for COVID-19 in determining just outcomes for those individuals and companies utilizing the court system during these times.  Part IV of this article will look at several different courts’ attempts to grapple with this very question of how to deal with the pandemic’s effects to arrive at equitable answers for those affected by it.

In Re: Dudley

The debtor in a Chapter 7 bankruptcy case filed in the United States Bankruptcy Court in the Eastern District of California petitioned the court for an extension of the six-month statutory reinvestment period for debtors to use proceeds from the sale of exempt homestead property in order to acquire another homestead property.  When Clay Dudley, the debtor in the above-referenced bankruptcy case, sold his residence in Chico, California on February 7, 2020, by statute he had six months to reinvest those sale proceeds in another residence to maintain the homestead exemption on the initial sale of his residence.[118]  The debtor claimed that he intended to purchase a replacement property and had been diligent in his efforts to do so, but that his efforts were severely hindered by the COVID-19 pandemic[119] and the State of California’s response to the pandemic, including specifically the statewide “stay at home” order issued by Governor Gavin Newsom under Executive Order N-33-20.[120]

California exercised an option under the Federal Bankruptcy Code to opt out of certain federal bankruptcy exemptions and adopt its own exemptions in their place, which California did in providing for a six-month reinvestment period for the homestead exemption.  Therefore, the bankruptcy court in Dudley applied California state law to determine whether the reinvestment period could be tolled or otherwise extended once it started to run.[121]  Although the court did not find (and the debtor did not cite) any California statutory authority to permit an extension or tolling of the six-month reinvestment period, since the trustee of the bankruptcy estate did not oppose the debtor’s request for such extension, the court looked to equitable remedies to determine whether an extension would be warranted.[122]

The court cited several prior instances under California case law where the six-month reinvestment period was equitably tolled when, through no fault of their own, claimants lacked possession or control over homestead proceeds following an involuntary or voluntary sale of the homestead, or when circumstances beyond the debtor’s control prevented the reinvestment of homestead proceeds within the six-month timeframe.[123]  In referencing these prior decisions, the Dudley court recognized California’s intent to create a liberal construction homestead statute for the benefit of debtors to ensure people’s homes are not lost through a technicality.[124]  Turning to the case at hand, the Dudley court also concluded that the unique circumstances surrounding the current pandemic warranted an equitable extension of the six-month reinvestment period for the homestead exemption, consistent with prior California case law and equitable principles, “reflect[ing] a public policy and legislative effort to protect real property interests, generally, and, specifically, to prevent the loss of residential occupancy and ownership rights due to the COVID-19 pandemic and resulting state of emergency.”[125]

In Re: Pier 1 Imports, Inc.

Pier 1 Imports, Inc. and certain of its related entities, the debtors under a Chapter 11 filing in the United States Bankruptcy Court in the Eastern District of Virginia – Richmond Division, filed their voluntary bankruptcy petition on February 17, 2020, and then saw “their stores shuttered [and their] revenue dr[y] up overnight” during the COVID-19 pandemic.[126]  As a result, the debtors took various actions to preserve their liquidity, but “found that they needed additional relief from the Court to reduce outgoing expenses even further and to preserve the status quo.”[127]  The debtors proposed a temporary period of limited business operations in which only enumerated critical expenses would be paid, meaning that rent payments to certain landlords would be temporarily deferred or reduced during this period, with all accrued rent being paid back over time after the conclusion of the limited business operations period.[128]  Several landlords objected to this proposal.

In considering the debtors’ motion, the court noted that the affected landlords may be entitled to “adequate protection” under the Federal Bankruptcy Code, which is “designed to compensate a non-debtor to the extent any proposed lease ‘results in a decrease in the value of such entity’s interest in such property.’”[129]  However, the court concluded that the “Debtors’ deferred payment of rent while they continue use of the leased premises, does not decrease the value of any Lessor’s interest in the property”[130] since all “insurance payments, security obligations, utility payments, and other similar obligations of the Debtors typically made in the ordinary course of business are continuing to be made by the Debtors.”[131]

In the court’s final conclusion in approving the debtors’ motion, the court recognized the dire situation brought about by the COVID-19 pandemic, stating that “[t]here is no feasible alternative to the relief sought in the Motion.  The Debtors cannot operate as a going concern and produce the revenue necessary to pay rent because they have been ordered to close their business.  The Debtors cannot effectively liquidate the inventory while their stores remain closed….Any liquidation efforts would be ineffective and potentially squander assets that could otherwise be administered for the benefit of all creditors in this case.”[132]

1248 Assoc Mezz II LLC v. 12E48 Mezz II LLC

In 1248 Assoc Mezz II LLC v. 12E48 Mezz II LLC, the New York Supreme Court ruled that Executive Order 202.8 (described above in this article under the discussion of the Elmsford Apartment Associates case), which placed a moratorium on the “foreclosure of any residential or commercial property for a period of ninety days,”[133] did not apply to a proposed foreclosure of an equity interest in a mezzanine borrower entity to be conducted under the Uniform Commercial Code.[134]

The original mezzanine UCC foreclosure sale that was scheduled for May 1, 2020 was temporarily enjoined by the New York Supreme Court on April 30, 2020 on the grounds that the terms of the foreclosure sale were not commercially reasonable in light of the coronavirus pandemic and that Executive Order 202.8’s prohibition on foreclosures extends to UCC foreclosures of mezzanine debt.  The court then issued a final decision in 1248 Assoc Mezz II LLC on May 18, 2020, vacating its prior temporary restraining order and ruling that the scheduled UCC foreclosure could move forward, as it was not prohibited by Executive Order 202.8.[135]  The court reached this conclusion by noting that, “had the Executive Order intended to prohibit sales of collateralized assets…governed by the UCC, such prohibition would have been explicitly provided for within that Executive Order.”[136]  The court then went on to concur with the mezzanine lender’s argument that the foreclosure of a mortgage is “a judicial proceeding, whereas the proposed (and Noticed) sale addresses a disposition of collateral pursuant to Article 9 of the UCC, a non-judicial proceeding,”[137] ultimately concluding that Executive Order 202.8 “addresses enforcement of a judicially ordered foreclosure,”[138]  which does not cover foreclosures conducted under the UCC.

D2 Mark LLC v. Orei VI Investments LLC

In D2 Mark LLC v. Orei VI Investments LLC, the court considered the question of what constitutes a commercially reasonable UCC foreclosure sale in light of the COVID-19 pandemic.  The action involved the Mark Hotel located on the Upper East Side of Manhattan, which was subject to a senior mortgage loan serviced by Wells Fargo Bank, and where 100% of the equity interest in D2 Mark Sub LLC, which was the indirect owner of the hotel, was pledged to the defendant pursuant to a mezzanine loan made by the defendant to the plaintiff.  [139]The hotel “suffered significant financial hardship as a result of the COVID-19 pandemic when it was forced to temporarily close on March 27, 2020,”[140] resulting in the plaintiff missing its April and May loan payments under the senior loan and triggering a default under both the senior loan and the defendant’s mezzanine loan.[141]

On May 18, 2020, the defendant gave notice of a UCC foreclosure sale of the plaintiff’s 100% membership interest in D2 Mark Sub LLC, which sale was to occur on June 24, 2020, which was 36 days from the date of the notice of sale.[142]  On June 8, 2020, New York City entered Phase I of reopening, which allowed the hotel to eventually reopen on June 15, 2020, which in turn allowed potential foreclosure auction bidders to tour and inspect the hotel premises prior to the sale.  New York City then entered Phase II of reopening on June 22, 2020, two days before the scheduled auction, allowing for expanded operations within the hotel and increased ability for potential bidders to perform due diligence on the hotel premises.

The plaintiff filed suit against the defendant mezzanine lender alleging, among other things, that the terms of the proposed UCC foreclosure auction were unreasonable in light of the coronavirus pandemic and seeking to enjoin the sale until September 8, 2020.  In evaluating whether such foreclosure sale terms were reasonable, the court cited the text of the Uniform Commercial Code requiring that “[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.”[143]

Given the totality of the facts and circumstances involving the proposed foreclosure sale, including the pandemic’s effect on bidding on and buyers performing due diligence on the property, the D2 Mark court concluded that such proposed sale was in fact not commercially reasonable and granted a preliminary injunction to delay the sale.[144]  Specifically, the court agreed with the analysis of plaintiff’s UCC foreclosure sale expert, who opined that UCC foreclosure sales for complex commercial assets such as the hotel would typically provide for 60 to 90 days’ notice (as opposed to the 36 days’ notice provided by the defendant), and that the property would not sell at close to its maximum price without potential buyers being afforded a reasonable opportunity to perform in-person due diligence and inspections on the property, which opportunity was severely affected by the coronavirus pandemic and the business closures that the pandemic necessitated.[145]  The court further agreed with the expert’s assertion that the foreclosure sale was “‘rigged’ so that, as a practical matter, only defendant can obtain the Collateral.”[146]  Examples of such rigging include the fact that the entire purchase price for the hotel was to be due and payable within 24 hours of the completion of the auction, and that plaintiff was barred from participating in the auction, “which is per se unreasonable.”[147]  Additionally, the fact that only two out of 115 potential bidders submitted financial statements to the defendant in connection with the proposed auction sale gave further credence to the conclusion that the terms of the foreclosure sale were unreasonable.[148]

Conclusion

There are presently dozens, if not hundreds, of other lawsuits throughout the United States currently being litigated relating to the coronavirus pandemic, which will provide us with many more answers on how COVID-19 is changing the legal landscape of the country.  However, even with so much being unknown at this time as to the contents of these future decisions, orders and opinions to be written, several discernible patterns have emerged from the cases that have been decided thus far and discussed above in this article.  Courts have clearly given deference to federal, state and local lawmakers to enact laws and regulations to protect the community at large, both from a public health perspective in preventing the spread of the virus, as well as from the perspective of protecting those individuals and businesses who have been hurt financially by the virus and its ripple effects.  Given this well-deserved deference, any current or future litigation challenging the authority or constitutionality of such laws and regulations will face a steep uphill climb to have them overturned.

Similarly, in cases involving contracts between private parties, courts have generally given deference to the terms of those agreements and have avoided reading generous force majeure clauses into them or applying broad interpretations of impossibility or frustration of purpose to them.  While the Hitz case stands out as a clear anomaly of this group, many legal scholars have opined that the result in Hitz was mostly the result of the odd formulation of the force majeure language in that particular lease, which allowed force majeure to be applied more broadly than one would typically see, as opposed to a more common description of force majeure in leases and contracts stating that a force majeure event does not excuse any payments due under such lease or contract.  Therefore, the specific wording of a lease’s or other contract’s force majeure clause will be a key factor in whether a court will provide relief to a tenant or other party to a contract based on such clause.  In furtherance of this point, we note that as of the writing of this article, a partial ruling just issued by a bankruptcy court in Texas (ruling on a lease governed by California law) held that the lease’s force majeure clause which included the term “unusual government restriction, regulation or control” warranted a reduction in rent under the tenant’s lease.[149]

When courts have had more leeway to apply equitable principles in their cases, they have generally given a certain amount of latitude to those parties who have been negatively affected by the pandemic, recognizing the sheer unforeseeability of our current situation.  The bankruptcy cases and the two UCC foreclosure cases discussed above bear this out.  This latitude was also demonstrated in the Richards Clearview case, which, although it was decided in favor of the tenant, was notable in that (a) the court applied the equitable concept of judicial control in its decision, and (b) the court did not conclude that the tenant’s rent was suspended or reduced by a force majeure event, but rather that the lease could stay in place since the tenant attempted to repay all of the prior rent that had not been paid.

As future real estate-related cases involving COVID-19 are litigated and decided, we expect these same three patterns of deference to lawmakers’ regulation, deference to existing written contracts, and application of equitable principles when available, to continue.

[1] Elmsford Apartment Associates, LLC v. Cuomo, 2020 WL 3498456, at *1.

[2] N.Y. Exec. Law Art. 2-B § 29-a.

[3] Elmsford, at *3.

[4] Id. at *7.

[5] Id. at *8.

[6] Penn Central Transportation Co. v. New York City, 438 U.S. 104, 98 S. Ct. 2646, 57 L.Ed.2d 631 (1978).

[7] Elmsford, at *10.

[8] Id. at *11.

[9] Id. at *12.

[10] U.S. Const. Art. I § 10, cl. 1.

[11] Buffalo Teachers Federation v. Tobe, 464 F.3d 362, 367 (2d. Cir. 2006) (quoting Allied Structural Steel Co. v. Spannaus, 438 U.S. 234, 240, 98 S.Ct. 2716, 57 L.Ed.2d 727 (1978)).

[12] Id. at 368.

[13] Elmsford, at *12.

[14] Id. at *13.

[15] Id. at *14.

[16] Id. (quoting Sveen v. Melin, 138 S.Ct. 1815, 1822, 201 L.Ed. 2d 180 (2018)).

[17] Id. at *16.

[18] Id.

[19] Auracle Homes, LLC v. Lamont, 2020 WL 4558682, at *1.

[20] Conn. Gen. Stat. § 28-9(b)(1).

[21] Auracle Homes, at *2.

[22] Id. at* 3.

[23] Id. at *4.

[24] Id. at *6 (quoting Plaintiffs’ Memorandum).

[25] Id. at *7 (quoting Plaintiffs’ Memorandum).

[26] Id. (quoting Plaintiffs’ Memorandum).

[27] Id. at *15 (quoting Elmsford).

[28] Id. at *16.

[29] Id. (quoting Sherman v. Town of Chester, 752 F3d 554, 565 (2d Cir. 2014)).

[30] Id. at *17.

[31] Id.

[32] Id. at *18 (quoting Sullivan v. Nassau County Interim Financial Authority, 959 F.3d 54, 65 (2d. Cir. 2020)).

[33] Id.

[34] Id. (quoting Marshall v. U.S., 414 U.S. 417, 427, 94 S.Ct. 700, 38 L.Ed.2d 618 (1974)).

[35] Id. at *19.

[36] Id. at *20.

[37] HAPCO v. City of Philadelphia, C.A. No. 20-3300, 2020 WL 5095496.

[38] Id. at *2 and *4.

[39] Id. at *5 (quoting Plaintiff’s Reply Memorandum in Further Support of Motion for Preliminary Injunction).

[40] Sveen, at 1821-22.

[41] Id.

[42] HAPCO, at *6.

[43] Id. at *8.

[44] Id.

[45] Id. at *9 and *10.

[46] Id. at *11

[47] Id. (quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 15, 96 S.Ct. 2882, 49 L.Ed.2d 752 (1976)).

[48] Baptiste v. Kennealy, 2020 WL 5751572.

[49] Id. at *2.

[50] Id. at *3.

[51] Id. at *20.

[52] Id. at *21.

[53] Id. at 22 (quoting Penn Central, at 124).

[54] Id.

[55] Id.

[56] Id. at *14.

[57] Id. at *16.

[58] Id. at *18.

[59] Id. at *14 and *18.

[60] TJM 64, Inc. v. Harris, 2020 WL 4352756.

[61] Friends of Danny DeVito v. Wolf, 227 A.3d 872 (2020).

[62] Lebanon Valley Auto Racing Corp. v. Cuomo, 2020 WL 4596921.

[63] Blackburn v. Dare County, 2020 WL 5535530.

[64] San Francisco Apartment Association v. City and County of San Francisco, Order, San Francisco County Superior Court, Case No. CPF-20-517136.

[65] TJM 64, at *6.

[66] Id. at *7.

[67] Id.

[68] Friends of Danny DeVito, at 894.

[69] Lebanon Valley, at *8.

[70] Id. at *9.

[71] Blackburn, at *5.

[72] Id. at *6.

[73] Id. at *8.

[74] Richard Lee Brown v. Alex Azar, in his official capacity as Secretary, U.S. Department of Health & Human Services, 2020 WL 6364310, at *1.

[75] “Landlords, lobbyists launch legal war against Trump’s eviction moratorium, aiming to unwind renter protections,” by Tony Romm, The Washington Post, October 12, 2020.

[76] Brown, at *6.

[77] Id.

[78] Id. at *7.

[79] Id. at *9.

[80] Id. at *11.

[81] Id. at *12.

[82] Id. (citing Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19 (the “CDC Order”), 85 Fed. Reg. at 55,295).

[83] Id. at *13.

[84] Id. (citing the CDC Order at 55,296).

[85] Id. (citing the CDC Order at 55,295-96).

[86] Id. at *14-15.

[87] Id. at *16 (quoting Elmsford at *16).

[88] In re Hitz Restaurant Group, No. 20-B-05012, 2020 WL 2924523, at *2 (Bankr. N.D. Ill. June 2, 2020).

[89] Id.

[90] Ill. Exec. Order 2020-7 § 1.

[91] In re Hitz Restaurant Group, at *2 (quoting Dkt. No. 21, Part 2, pp. 9 & 10).

[92] Id. at *4

[93] Id.

[94] Id.

[95] Id.

[96] Id.

[97] Id. at *5.

[98] Id. at *6.

[99] Martorella v. Rapp, 2020 WL 2844693, at *2.

[100] Id.

[101] Id. at *3.

[102] Id.

[103] Id. at *3 and *5.

[104] Id. at *5.

[105] Id. at *8.

[106] Id. at *9 (quoting Winchester Gables, Inc. v. Host Marriott Corp., 70 Mass. App. Ct. 585, 596 (2007)).

[107] Id.

[108] Id. at *10.

[109] Richards Clearview, LLC v. Bed Bath & Beyond, Inc., 2020 WL 5229494, at *1.

[110] Id. at *5.

[111] Id. (quoting W. Sizzlin Corp. v Greenway, 36,088 (La. App. 2 Cir. 6/12/02), 821 So. 2d 594, 601).

[112] Id. at *4 and *7-8.

[113] Palm Springs Mile Associates, Ltd. v. Kirkland’s Stores, Inc., 2020 WL 5411353., at *1.

[114] Id. at *2 (quoting ARHC NVWELFL01, LLC v. Chatsworth at Wellington Green, LLC, No. 18-80712, 2019 WL 4694146, at *3 (S.D. Fla. Feb. 5, 2019)).

[115] Id.

[116] BKNY1, Inc., d/b/a 132 Lounge v. 132 Capulet Holdings, LLC, 2020 WL 5745631.

[117] Id. at *2.

[118] In re Dudley, 617 B.R. 149, 151 (2020).

[119] Id.

[120] Id.

[121] Id. at 153.

[122] Id. at 154.

[123] Id.

[124] Id.

[125] Id. at 156.

[126] In re Pier 1 Imports, Inc., 615 B.R. 196, 198 (2020).

[127] Id.

[128] Id. at 199.

[129] Id. at 203 (quoting 11 U.S.C. § 361(2)).

[130] Id.

[131] Id.

[132] Id.

[133] New York Executive Order No. 202.8, “Continuing Temporary Suspension and Modification of Laws Relating to the Disaster Emergency.”

[134] 1248 Assoc Mezz II LLC v. 12E48 Mezz II LLC, N.Y.Sup. Index No. 651812/2020.

[135] Id. at 3.

[136] Id. at 2.

[137] Id.

[138] Id.

[139] D2 Mark LLC v. Orei VI Investments LLC, 2020 WL 3432950, at *1.

[140] Id. at *3.

[141] Id.

[142] Id. at *4.

[143] Uniform Commercial Code § 9-610[b].

[144] D2 Mark, at *8.

[145] Id. at *9.

[146] Id. at *10.

[147] Id.

[148] Id.

[149] “How Force Majeure Was Successfully Used by a Tenant in Court,” by Patrick Trostle and Alan Gamza, www.globest.com, November 19, 2020 (discussing In Re: CEC Entertainment, Inc., Ch. 11 Case No. 20-33163 (MI) (Bankr. S.D. Tex.)).

MORE FROM THIS AUTHOR

Login or Registration Required

You need to be logged in to complete that action.

Register/Login