May 21, 2020. People in Corona Plaza, Queens, N.Y unfold banners from a subway platform during a vigil memorializing more than sixty persons who died from COVID-19 and were associated with Make the Road New York. AP Photo: Bebeto Matthews

On April 22, 2020, the New York City Council Speaker Corey Johnson introduced a bill meant to give much needed relief to residential and commercial tenants suffering from the economic fallout of the COVID-19 pandemic (the Bill). The Bill—Int. No. 1912, titled "A Local Law in relation to ceasing the taking and restitution of property and the execution of money judgments by the City sheriff and marshals due to the impacts of COVID-19"—is intended to effectively extend the existing federal and New York state moratoria on evictions by directing New York City marshals and sheriffs not to enforce any possessory or money judgments until as late as April 2021, so long as the judgment debtor can show a court that it has suffered a "substantial loss of income" because of COVID-19. The Bill is part of a larger tenant-focused legislative package, some parts of which the City Council has already recently approved.

In addition to the profound negative economic consequences that the Bill would have—among other significant oversights, the Bill does not consider how property owners would be expected to pay their property taxes, mortgages, staff salaries, maintenance costs, utilities, and other expenses without rent revenue for nearly a full year, nor does it address how the City would make up for the significant shortfall in the City's largest source of tax revenue—the Bill likely runs afoul of the U.S. Constitution's Takings Clause because it creates government-coerced tenancies without just compensation to property owners.

Takings Clause Challenges

The Bill would be ripe for attack either as effecting either a physical taking or a regulatory taking, for which property owners would be entitled to just compensation under the Fifth Amendment, as incorporated by the Fourteenth Amendment.

The Supreme Court has articulated two categories of government action that generally qualify as per se takings: (1) government action that causes an owner to suffer a physical invasion of its property; and (2) "regulations that completely deprive an owner of 'all economically beneficial us[e]'" of its property. Lingle v. Chevron U.S.A., 544 U.S. 528, 538 (2005) (emphasis in original). Regulatory action that does not fit into one of those two categories is evaluated by reference to the following criteria: "(1) the economic impact of the regulation on the claimant; (2) the extent to which the regulation has interfered with investment-backed expectations; and (3) the character of the governmental action." Connolly v. Pension Benefit Guar., 475 U.S. 211, 225 (1986); Penn Central Transp. Co. v. New York City, 438 U.S. 104, 124 (1978).

The fact-specific question of when regulation rises to the level of a taking places heavy emphasis on the economic effects of government regulations and the extent to which they interfere with reasonable expectations of property owners. If government regulation of real property goes "too far" in burdening property owners' rights to possess, use or dispose of property, then it is considered a regulatory taking. Penn. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922); Manocherian v. Lenox Hill Hosp., 643 N.E.2d 479, 482 (N.Y. 1994).

Per Se Takings

Property owners would be on solid ground arguing that the Bill's forced continued tenancies effect a physical invasion of their property.

It is axiomatic that the right to exclude others from one's property is "one of the most essential sticks in the bundle of [property] rights." Kaiser Aetna v. United States, 444 U.S. 164, 176 (1979). The physical occupation or the regulatory action causing the physical invasion need not be permanent to qualify as a taking. First English Evangelical Lutheran Church of Glendale v. Los Angeles, 482 U.S. 304, 318 (1987). Additionally, physical occupation by a third party under the government's authority can constitute a taking. Seawall Assocs. v. City of New York, 542 N.E.2d 1059, 1063 (N.Y. 1989) (citing Loretto v. Teleprompter Manhattan CATV, 458 U.S. 419, 432-33, n. 9 (1982)).

The Bill hamstrings property rights—specifically the rights to possession and to legally exclude others—to such an unreasonable extent that property owners are essentially compelled by the government to give physical possession of their property for free until April 2021 to a tenant who would otherwise no longer have that right, and against whom the property owner has already obtained a possessory judgment.

In Seawall Assocs. v. City of New York, 542 N.E.2d at 1064, the Court of Appeals held that a New York City law with similar forced control over property owners' possessory interests infringed upon the owners' right to exclude others and effected a physical taking. The City law at issue in Seawall forced Single Room Occupancy (SRO) landlords to refurbish their SRO buildings and keep them fully rented. The court struck down the law as "impos[ing] on the property owners more than their just share of such societal obligations" and effecting a physical taking. Id. at 1062-64. Although the law at issue in Seawall forced property owners "to accept the occupation of their properties by persons not already in residence," whereas the Bill here forces upon property owners continued occupation by their existing defaulting tenants, the "most important" possessory right of property owners to exclude others is no less disturbed by a defaulting tenant's continued possession solely by force of government coercion. Id. at 1063.

The Bill would likely effect a taking, notwithstanding its temporary duration. The Seawall court dismissed the contention that the temporary nature of the statute there at issue removed it from the Takings Clause, stating that the law "results in a deprivation of the owners' quintessential rights to possess and exclude and, therefore, amounts to a physical taking … for whatever time period it is in effect." Id. at n. 5 (citing First English Evangelical Lutheran Church, 482 U.S. at 318).

As the Seawall court noted then, the Supreme Court still "has not passed on the specific issue of whether the loss of possessory interests, including the right to exclude, resulting from tenancies coerced by the government would constitute a per se physical taking." However, just as the Court of Appeals held that the statute in Seawall amounted to a physical taking, "it is difficult to see how" the Bill, which would result in "forced occupancy of one's property could not [amount to a physical taking]." Id. at 1064. "By any ordinary standard, such interference with an owner's rights to possession and exclusion is far more offensive and invasive than the easements … or the installation of the CATV equipment" that the Supreme Court has previously held to constitute physical takings. Id.

With respect to the second category of per se takings, the disastrous economic effect of the Bill cannot be understated. The Bill deprives property owners of "all economically beneficial us[e]" of their property in situations where tenants are not paying rent and owners can neither evict the tenants nor enforce money judgments against them. Property owners who rent their property give up exclusive use of the property to their tenants, but only so long as the tenant remains in possession and pays the agreed-upon rent. If a tenant does not pay, the owner's remedy is either to seek a possessory judgment and/or a money judgment so that the owner can continue to enjoy the economic benefits of property ownership. The Bill neutralizes this remedy. Indeed, even if the owner were to obtain a possessory or money judgment against a tenant, that tenant would be free not to pay any current use and occupancy to the owner knowing that the owner has no legal remedy until April 2021. Meanwhile, owners would be compelled to effectively give their properties away for almost a year without any compensation.

Regulatory Takings

Even if the Bill does not rise to a per se taking, it nevertheless may satisfy the Supreme Court's factors for finding a regulatory taking.

It is clear that the first factor, the "economic impact of the regulation," on property owners is satisfied by an owner's inability to collect rent until April 2021 and the likelihood of owners losing their properties without income from the rent roll, either in foreclosure or for non-payment of property taxes.

With respect to the second factor, "the extent to which the regulation has interfered with investment-backed expectations," a property's rent roll is the central piece of data that informs investment expectations in the real estate market. Property owners, investors, and lenders rely upon a property's rent roll to make sound investment, management, and financial decisions about real property. To effectively statutorily suspend rent collection and prohibit owners from regaining possession of their properties for almost a full year—which could tank property values and cause owners to lose their properties—is economically devastating and represents unprecedented interference with investment-backed expectations in real property.

The third factor, the "character of the governmental action," is generally understood as asking whether the government is physically invading a property or whether it has instituted a "public program adjusting the benefits and burdens of economic life to promote the common good." Penn Central, 438 U.S. at 124. Here, as discussed, the forced continued tenancies that the Bill would create would amount to physical invasion of property. That alone satisfies the third factor for finding a regulatory taking. Moreover, the Bill does not reflect a "public program adjusting the benefits and burdens of economic life to promote the common good." The "[e]lementary and strong constitutional principles that protect private property rights and govern takings of property for public use without just compensation" specifically "evolved to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole." Manocherian, 643 N.E.2d at 481. The economic burdens of property owners and tenants following the COVID-19 pandemic should be "borne by the public as a whole," not solely by property owners. Yet the Bill promotes the interests of a discrete class of businesses and individuals at the expense of property owners by disproportionately saddling only owners with the economic burdens of their tenants while exacerbating those owners' own post-pandemic existential financial hardships.

Finally, laws that make it "commercially impracticable" to exercise property rights have been found to constitute regulatory takings. Penn. Coal v. Mahon, 260 U.S. 393, 414-15 (1922). The Bill creates a favored, protected class of tenants at the expense of making property ownership commercially impracticable for owners equally affected by the pandemic.

Just Compensation

The Bill awards property owners no just compensation for the takings it effects. On the contrary, even though it technically does not absolve tenants of their rent obligations, the Bill would likely cause many owners to lose their properties for failure to pay property taxes or in foreclosures well before they are permitted to enforce judgments and collect rent. As a practical matter, even once the Bill permits the execution of judgments after April 2021, there is no guaranty that money judgments will ever be collectible because the judgment debtors may file for bankruptcy protection prior to execution of the judgments. As general creditors, judgment creditors may never be able to collect on their judgments. In addition to interfering with collecting on money judgments, filing for bankruptcy would trigger an automatic stay of all proceedings outside of bankruptcy court that would further delay execution of possessory judgments. It would take property owners months and additional legal fees and expenses—all of which they would incur while not receiving any rent revenue or any government compensation—to lift the automatic bankruptcy stay and regain possession of their property.

Conclusion

The next few months will be a critical time for our fragile economy during which the policies enacted by legislators could either make or break our recovery. In their search for novel solutions to an unprecedented crisis, legislators must be mindful of the constitutional limitations on their authority to interfere with private property rights and contractual rights as they consider policies to ease the burdens of the pandemic. Indeed, though not addressed in this Article, it is possible that the Bill violates not only the Takings Clause, but the Contracts Clause as well. Legislators must also account for the grim economic realities suffered not only by tenants, but by property owners and judgment creditors. Any relief measures for tenants and debtors must also include commensurate relief for property owners and creditors to avoid causing more harm and financial instability.

Eliad S. Shapiro is an associate at Smith & Shapiro in Manhattan, where he practices commercial litigation and real estate litigation. He can be reached at [email protected].