Legal scholar applauds SJ City Attorney's rejection of rent cancellation

In early April, San Jose City Attorney Rick Doyle concluded that a proposal to cancel rents for 90 days for tenants financially harmed by the coronavirus outbreak would be unconstitutional. Tony Francois of the Pacific Legal Foundation agrees and finds Doyle's analysis refreshing, in an exclusive interview with Opportunity Now.  

Opp Now: What are governments currently doing to help out people who are having trouble paying their rent due to coronavirus outbreak and subsequent shutdowns?

Tony Francois: The main thing being done is suspension of evictions as a remedy for people failing to pay rent.  This doesn't mean that rent isn't due, it just means people can pay it later and that landlords can't kick you out if you can't pay right now because of coronavirus.

This strikes me as a reasonable approach, I don't have criticism of governments looking for ways to protect people from losing housing in an emergency situation like this. 

ON: If you're a landlord, how might you view these "no eviction" ordinances?

TF: Usually, non payment of rent is dealt with on an individual basis. But let's just say you're a landlord and one of your tenants can't pay because they're sick or got laid off because of coronavirus, and the world is in a shutdown mode. Eviction isn't a very attractive option in this case, anyways, because who are you going to replace the evicted tenant with? Maybe nobody, because the economy has slowed down so much. So when you consider that it would take you at least 60-90 days to evict a tenant and get a new one, it probably would make sense to most landlords just to accommodate the affected tenant and roll back the rent payments a couple of months. Landlords want to avoid vacancies because they become non-performing investments.

The Fed and Treasury have printing presses working full steam so they can buy up all the debt, so outstanding loans that landlords have don't get called in right away, so that can also help landlords ride this out. But of course there will be landlords who behave inhumanely and they should be scorned and renters should have legal recourse against being unfairly evicted. 

ON: What are the legal issues around changing rental contracts during an emergency like this?

TF: In a lot of different contracts there are what are known as "force majeure" clauses, which is a French term meaning something like "acts of God." It means that significant unexpected events can alter the legal obligations of the parties. If you are just looking at the legal relationships between renters and landlords, I would be pretty comfortable representing a renter to the landlord claiming that coronavirus is a force marjeure event, and that while there may be rent accruing, my client can't pay it right now but you can't evict or penalize me right now.

ON: OK, let's move to the more recent discussion at San Jose City Council, where some councilmembers were asking the city to pass an ordinance that would have gone much further. It was not just banning evictions. It was not just okaying delayed rent payments. But it actually proposed *no* rent payments were due. Rents were to be cancelled during the emergency period, and landlords were obliged to give free housing. Does a city have the right to consider that?

TF: The assertion of this power reflects a longstanding struggle between private rights and government control. Right now, a lot of renters benefit from government control in various ways, and also suffer from government control in often hidden ways. Rent control is a great example: people who have fixed rentals for a long time may prefer rent control, but other people are harmed by it, because lots of studies show how rent control ultimately increases rents and limits housing supply. 

But the recent debate over the No Payment idea, and the pushback from the San Jose City Attorney,  was illustrative and refreshing. From my observations, San Jose government doesn't usually have the constitutional rights of its property owners front and center. So the pushback was counter to form for San Jose, and in a good way. Here's why.

There are constitutional limits the Supreme Court has set on rent control measures that cities can enact. The key case is Pennell v. City of San Jose . There are two main conditions: First, the rent has to prove a reasonable rate of return on the investment in rental property: you can't force a landlord to lose money. That limit doesn't actually stop much rent control. Second, the city cannot prevent landlords from exiting the rental business. So let's look at this No Payment idea in front of San Jose. Let's say you  make a rule that's even temporary, something in effect for, say,  90 days. And that rule says tenants' obligation to pay rent is vaporized. It's like saying you've lowered the rent control rate to zero. And of course it's impossible for landlords to get a reasonable rate of return on zero.  That will cause landlords to default on their loans. And it also puts serious limits on your ability to exit the rental market, because if you can't charge, who's going to buy that property? 

This is an idea that clearly runs afoul of the limits the  Supreme Court has set on how much government can control rental prices. It also illustrates the degree to which governments often reflexively and immediately conclude that the only way anything good will happen is if the government bigfoots some poorly thought out measure and forces it through.

ON: The Law Foundation of Silicon Valley challenged Doyle by saying there's a 2016 court case which they interpret as saying, “The broad authority of the police power likewise extends to local governmental authority to enact price controls, including on rent, provided the legislation is ‘reasonably related to the accomplishment of a legitimate governmental purpose.'" What do you make of that contention?

TF: That case is CBIA (California Building Industry Association) vs. San Jose. That case provides no support for the pretty outrageous argument that a city can change an existing rental rate to zero, for any period of time. That case wasn’t even about rental housing. It says that a city can require those providing new homes for sale to set aside some of them at regulated prices for qualifying buyers. Nothing in it says a city can change an existing rent to zero.

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