2d Circuit weighs in on the City's pandemic legislation intended to help commercial tenants

The City of New York enacted various laws in the wake of the Covid-19 pandemic intended to protect commercial tenants from being evicted because they were unable to pay the rent. The concern was that, without these protections, the businesses would have to close up for good and New York City would never recover economically from the pandemic. Two of those measures came before the Second Circuit.

The case is Melendez v. City of New York, decided on October 28. The first law prevents commercial landlords from harassing or threatening their tenants because of their actual or perceived status as a person impacted by Covid-19. The landlords argue this law violates the First Amendment's free speech guarantees because it might prohibit the collection of rent. The Court of Appeals disagrees.

The anti-harassment provision does not define "threatening." The Court (Raggi, Cabranes and Carney in dissent on the contracts clause issue) uses the dictionary definition of "threatening" in finding the law would not make it illegal to make a routine request for rent because that would not be an illegal means to seek payment for delinquent rent. Nor would such a routine request signal an intent to inflict harm on the tenant. Since the plaintiffs do not intend to pursue unlawful remedies in collecting rent, they cannot claim the law violates the First Amendment. The Rule 12(6)(6) motion to dismiss that claim was therefore granted.

The second law under review says that commercial tenants do not have to pay back rent ever if they were unable to do so during a 16-month window. The idea was to ensure that city businesses do not face the loss of their businesses and face financial ruin or bankruptcy because the pandemic. This law would allow them to recover financially and save their businesses once the pandemic subsides.

The landlords challenge this law under the Constitution's contracts clause, a relatively obscure provision of the Constitution, which says that "no State shall pass any law impairing the obligation of contracts." Judge Raggi provides an extensive review of contracts clause jurisprudence over the years, noting that courts used to interpret it literally, without any balancing test. But courts have since interpreted the clause with more flexibility. As now understood, the contracts clause "allow[] states to protect the public welfare" in cancelling some contracts, so long as the state can identify a legitimate and significant public purpose through reasonable and appropriate means. Courts like balancing tests in applying constitutional provisions that have absolute language, and the contracts clause is no exception.

Under this test, the landlords may proceed with their constitutional challenge to the rent-cancellation law, and the district court should have denied the Rule 12(6)(6) motion. The rationale here is that the law "appears permanently and unexpectedly to repudiate commercial lease guaratees for arrears arising over a sixteen-month period" such that they have suffered significant impairments of their contracts. In addition, While the law is motivated by a significant government interest, it is not clear that the City adopted the best means to protect tenants from financial ruin, as the law does not provide them temporary protection from paying back rent, but permanent protection, even if they never reopen their businesses. The law also protects tenants even if they do nothing in the public interest in generally ensuring functioning neighborhoods. Nor is the law necessarily based on need, as even businesses that might someday be able to pay their back rent are excused from doing so. In short, there may have been better ways for the City to protect tenants during the pandemic. The case returns to the district court to sort out these issues in discovery.