Court OKs Governor’s Executive Order Concerning Security Deposits

A New Jersey appellate court has upheld Governor Phil Murphy’s Executive Order No. 128, which permits residential tenants to use their security deposits to pay rent during the COVID 19 pandemic. The Executive Order, entered in April 2020, was one of many entered since last March in response to the economic and public health crises caused by COVID-19. These efforts in New Jersey included a statewide residential mortgage relief program, a “small landlord” emergency grant program, and two Executive Orders to assist tenants facing hardships in making rent payments due to job loss or income loss spurred by the pandemic. In March 2020, Governor Murphy issued Executive Order 106, which imposed a “temporary” moratorium on evictions (and which still exists 17 months later), preventing eviction and foreclosure proceedings, but not forgiving any schedule of rent due. One month later, the Governor issued EO No. 128, which acknowledged the continuing hardships caused to renters by the pandemic and authorized a “temporary” way to help tenants make rent payments to their landlords. Under EO No. 128, tenants would now be able to pay rent with the security deposits they “own” to mitigate the consequences regarding possible evictions and the accumulation of interest and late fees.  In an effort to justify this mandate, EO No. 128 indicates that it does not alter the amount(s) owing by tenants to landlords, requires the tenants to replenish the security deposit in full if they renew their leases, and only applies to rent payments which become due during the public health emergency, or within 60 days after the emergency terminates.

Governor Murphy lifted the public health emergency in New Jersey on June 4, 2021, through the issuance of EO No. 244.  As a result, rent payments due up to and including August 4, 2021, would be qualified as payments to which tenants’ security deposits may be applied.

The plaintiffs and appellants in this week’s decision in Kravitz v. Murphy, et als, included five individuals and three businesses who own or manage residential rental properties in New Jersey.  All of them had tenants who paid security deposits in connection with their leases and those tenants suspended their rent payments to their landlords during the pandemic, with some of those tenants vacating their leaseholds.  Their rental delinquencies became significant.   The appellants first filed an action in U.S. District Court, seeking declaratory and injunctive relief concerning EO No. 128, and which alleged that EO No. 128 violated federal law, including the federal Contracts Clause, substantive and procedural due process, and equal protection laws.  When the State of New Jersey declined to waive sovereign immunity over any state law claims, the appellants dismissed those claims and refiled in New Jersey Superior Court, where the Appellate Division eventually took jurisdiction on the challenge to the Executive Order. The remaining claims in the federal proceeding were dismissed by the U.S. District Court in March 2021, leaving the State court challenge as the only remaining dispute.

Before the New Jersey Appellate Division, the appellants asserted that EO No. 128 was invalid because (i) it exceeded the Governor’s emergency powers; (ii) violated the separation of powers doctrine; (iii) violated the contract clause, and (iv) violated due process.  In a 48-page opinion, the appellate court rejected all of these claims. First, the court held that EO No. 128 constituted a valid use of the Governor’s emergency powers, recognizing that earlier legislation in the Emergency Health Powers Act (giving the Governor the power to declare a public health emergency and to act in furtherance thereof) and Disaster Control Act (giving the Governor to act in times of crisis to protect public health and safety) provided the Governor with the authority to take the actions authorized by EO No. 128.  Specifically, the court ruled that the mandates of EO No. 128 were rationally related to protecting public health and closely tailored to the magnitude of the emergency because inter alia. tenants were faced with economic hardships caused by the pandemic and the application of security deposits, which they “owned” under State law, could allow them to continue in their residences and to use funds ordinarily allocated to rent for other purposes such as sustenance or healthcare expenses.  Slip Op. at 16-31.    Next, the court found that EO No. 128 did not violate the separation of powers, because the executive orders flowed from powers granted in prior legislation, and were entitled to strong presumptions of validity and wide latitude and discretion.  Due to the widespread nature and impacts of the public health emergency, these actions were upheld.  Slip Op. at 31-35.

Appellants also argued that EO NO. 128 violated the contracts clause of the N.J. Constitution, but were shot down here too, as the lease contracts in question were not found to be “substantially impaired” because security deposits were already a “heavily regulated” activity in New Jersey and EO No. 128 was not found to undermine the contractual bargain, since the tenants would still be legally obligated to pay rent and comply with other contractual obligations. As such, the court held that the landlords would still be able to recover unpaid rent and the cost of damages and, therefore, the Order did not violate the contracts clause.  Slip Op. 41-44.  Finally, the appellants argued that EO No. 128 violated the due process clause of the N.J. Constitution.  According to the court, the flaw in appellants’ arguments on this point is that, in order to prevail, there would need to be a deprivation of the right to protect the landlord’s real property, while EO No. 128 was construed to apply to the tenant’s property – the security deposits. Slip Op. 44-48.

While the appellate court’s decision represents another example of judicial deference to executive powers during times of emergency, it also suggests that such deference has been skewed, at least in some regards, to the rights of some of the parties, not all.  For instance, while the tenants are still “obligated” to pay rent and landlords are “entitled” to collect it and to sue if there is a breach, this latest decision fails to reconcile the paradox it creates – the landlord “can” recover for his/her/its losses but, due to the moratorium in place, by the time the landlord is entitled to pursue its remedies in a court proceeding, the tenant may be “gone” and the judgment(s) that the landlord may obtain could be worth no more than the paper they are written on.  Historically, a landlord could protect its property and its contractual rights by (a) pursuing legal action for money damages recovery and (b) recovering possession from delinquent tenants, but both of those rights and remedies have been delayed or suspended by these executive orders.  In addition, while the Kravitz court found that the property rights at stake (the security deposits) belonged to the tenants, it seemingly ignored the reality that the landlord’s real property – the leased property – was also at stake.

As has been the case, we do not suggest that the extraordinary circumstances presented by this pandemic should be ignored, or that the government should not act to protect public health, safety, and welfare. But this latest decision seems to reinforce that the emergent efforts and actions undertaken, while they may be well-intentioned, may also be causing undue hardship to some at the expense of others.  With respect to the rent and foreclosure moratoria that have proliferated around our country since early 2020, the brunt of the burden appears to be placed on landlords and lenders, not renters or borrowers.  Perhaps a more careful look into how these efforts can be made fairer to all those affected, and how the government might be able to provide equal assistance to all involved, as has been attempted in California, is warranted going forward.

We’ll continue to watch these developments and report back as they occur.