Last month we asked if it was possible that eviction moratoriums from the federal government were illegal.
“If you’re a real estate investor with rental properties you depend on monthly rental payments to cover the mortgage, taxes, repairs, and other costs. But what happens if the government says, nope, you can’t evict tenants who don’t pay because of the pandemic? And what happens if the courts later determine that the entire eviction moratorium is illegal?”
The question was not whether the government has been well-intentioned in the midst of a pandemic. It has. Nor is this a political issue — both DC Democrats and Republicans have broadly supported nationwide eviction bans. Instead, the concern is whether the government ban is constitutional. The answer, according to a well-regarded federal judge in Alabama Association of Realtors vs. HHS, is no, not the way the eviction ban is now structured.
A lot is at stake. The Eviction Laboratory estimates that “at least 1.55 million fewer eviction cases were filed nationwide in 2020 than would be filed in a typical year.” At the same time, according to the Brookings Institute, a liberal think tank, 30% of landlord households have annual household incomes of less than $90,000 and 40% of all rental units are owned by individual investor landlords.
“For the typical residential property owned by individual investors, which has 4 or fewer units, average annual operational expenses per unit range from $4,600 to $5,400,” Brookings explains. “For many of these ‘mom and pop’ landlords, property-related expenses can consume more than half of their property income. Without rental income to offset these expenses, low- to moderate-income landlords may struggle to maintain the residences on which tenants depend. Consistent rental income is essential for individual investor landlords – especially those of modest means who rely on rental income as a substantial portion of their total household budget.”
What we have in the Alabama case is a small victory for real estate investors. The Justice Department is appealing the decision, the judge has agreed to a temporary hold, so at the moment nothing has changed. Also, state and local eviction bans remain in place.
But it is a first step.
“This case,” said Rick Sharga, Executive Vice President at RealtyTrac, “is likely to make its way to the Supreme Court and this is where things can get interesting. While there is no way to know how the Court might rule, there is also no way to know if the Court might rule narrowly or broadly. A broad ruling, based on the Fifth Amendment’s ‘Taking Clause,’ a clause that says the federal government can only take private property in exchange for ‘fair’ compensation, could determine how federal eviction and foreclosure bans are handled for decades to come.”
US District Court Judge Dabney L. Friedrich has the distinction of being well-regarded by just about everyone. A graduate of both Oxford and Yale, and with extensive judicial experience, she is a 2017 Trump appointee, approved in the Senate in a 97-3 vote. That’s not something you see very often these days in DC.
The Alabama case brought before Friedrich questions whether the Centers for Disease Control and Prevention (CDC) has the authority to establish such a ban. There are three major issues.
First, what is the CDC’s eviction authority? The $2.2 trillion Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allowed the government to ban evictions for properties that involved financing associated with the VA, FHA, USDA, Fannie Mae, and Freddie Mac. However, the CDC order went beyond the CARES Act, it applied to all residential rentals, not just those with federal financing.
Second, is a continued eviction ban okay? The original eviction ban under the CARES Act was supposed to end December 31st. It was extended by Congress until the end of January, yet the CDC continued the ban through March.
Third, can the CDC impose included criminal penalties? Individual violations of the CDC order can result in as much as a $250,000 fine or one year in jail, $500,000 for organizations.
Were the CDC actions legit?
“The question for the Court is a narrow one,” wrote Friedrich. “Does the Public Health Service Act grant the CDC the legal authority to impose a nationwide eviction moratorium? It does not.”
The Friedrich decision does not question the right of the federal government to establish a national eviction ban. It did so under the CARES Act and that was okay with the court. However, lurking in the background are a number of questions that could emerge if the matter goes to the Supreme Court.
The Plaintiffs asked Friedrich if “the eviction moratorium constitutes an unlawful taking of property in violation of the Takings Clause.” She did not offer an answer, but maybe the Supreme Court will.
The CDC eviction ban, as well as state and local bans, deny property owners the right to evict in the event of non-payment due to COVID-19, but do not end an owner’s obligation to pay property taxes. The bans do not explain how landlords can fund taxes, property insurance, or repairs without rent, they assume that landlords are universally wealthy.
The Friedrich decision notes that the federal eviction ban applies to those who “expect to earn less than $99,000 in annual income in 2020, were not required to report any income in 2019 to the Internal Revenue Service, or received a stimulus check under the CARES Act.”
Given the justification for the eviction prohibition — the CDC ban was put in place as a “temporary halt in residential evictions to prevent the further spread of COVID-19” — the Supreme Court may wonder why it only applies on the basis of income. Do not people in the upper brackets get the virus?
Separately, there may be other “taking” cases created by the bans that reach the Supreme Court. For instance, the Orange County Register reports that in California “landlords can receive 80% of back rent due between April 1, 2020 and March 31, 2021. Landlords must agree to waive the remaining 20% of the debt and not seek eviction. Landlords refusing to waive their right to evict may collect 25% of back rent.”
Although the Friedrich ruling is not the end of the eviction debate, it may set the stage for a broad Supreme Court review. There’s no way to tell how the justices might rule, but with a newly conservative court an overturn of the eviction ban would not be surprising.
If the Court rules against a ban the government can still prevent evictions. The government has set aside $25 billion under the 2021 Consolidated Appropriations Act and $21.55 billion under the American Rescue Plan Act of 2021. That money can be used to directly compensate property owners when tenants are unable to pay their rent.