Landlords and tenants alike are facing unprecedented legal and financial challenges resulting from the COVID-19 quarantine and closure of many American businesses. It is important for landlords to know and understand what options are available to them to protect their property and investment during this unprecedented time. What are the rights of the landlord? What steps should a landlord take now? What resources are available for the landlord if the tenant does not pay rent? The following recommendations generally apply to both residential and commercial tenancies, and will otherwise be pointed out as one or the other.
As landlords, it is likely that you have already experienced the frustrating situation of either not being paid rent, or receiving a letter that rent is being withheld during this time. Multiple legal arguments may have been cited as the reason for the non-payment of rent, including: force majeure (both, but most prevalently used in commercial settings), impossibility of performance (commercial); frustration of purpose (commercial); constructive eviction (commercial), violation of the covenant of quiet enjoyment (can be used in both, but mostly commercial), or inability to pay because of financial circumstance (most common reason given in residential or multi-family settings). Each of these reasons have legal nuances and require a review of the specific situation to determine whether the legal argument for not paying rent is valid, and all but the last require those legal issues to be decided by a judge based on the facts and circumstances of each particular case. However, the last circumstance, the inability to pay because of the financial circumstances, is one where the landlord must take steps now to protect their investment, as outlined below.
Initially, it is important to note that there is presently a moratorium on evictions that will likely remain in place until after the reopening of the court system, perhaps for as long as two to three months. Moreover, if you have a federally backed mortgage loan on your property you may be prohibited from taking any eviction actions under the Coronavirus Aid, Relief, & Economic Security Act (“CARES Act”). As a result, it is imperative that landlords take proactive steps with their tenants in securing their continued tenancy and the complete payment of rents. Ideally, it is recommended that landlords reach out to their tenants before the payment stops to determine if the tenant is need of financial assistance. This should be done verbally at first to establish the tenant’s situation and possibility that rent payments can continue during this time. Following the initial determination, the landlord may propose a rent alteration in the form of rent deferment. It is critically important that the word “deferment” is used – the rent is not being forgiven, but merely deferred. This means that the entire rent will eventually still need to be paid. Also, the tenant should be made aware during the negotiation process that what is being offered is not final until accepted in writing by both parties. The rent deferment may be structured to be paid back in a variety of forms. For example, the landlord can defer the rent payment(s) in exchange for an increase in monthly payments for the duration of the lease term; a one-time payment at a future date; an extension to the lease; security for rental payments (more likely in commercial situations); or a creative solution, such as having the tenant take over payment of services that the landlord provides such as utilities or lawn care either in total or during the term of the deferment. Commercial landlords should also be aware of and address CAM charges, parking fees, and other services that are paid for through the rent, given that these are obligations that may not be able to be modified and can cause an unexpected default or unexpected expense for the landlord if left unpaid.
Once the terms of deferment are agreed upon, the final rent modification document can then be prepared and signed. A master rent modification document should be created for the landlord by an attorney so that the same format is used for all tenants. This will avoid any appearance of impropriety or favoritism and should contain several key points: First, it should specifically detail the arrangement agreed upon by both the landlord and the tenant regarding the future payment terms and when any altered payments are to begin. Second, this document should specifically state that the reason for the modification is the COVID-19 pandemic, and specifically state the representations made by the tenant as to the reason for needing the rent alteration. The document should also state that any misrepresentation voids the rent alteration, and is considered a default under the terms of the lease. This is particularly important for commercial tenants. For example, a restaurant may lose its dine-in business but end up make a significant profit from its take-out business. This is also a good practice to use for residential tenants to avoid situations where the landlord’s willingness to assist may be taken advantage of. Third, the rent alteration agreement should state that no default of any other lease term is permitted or excused by the stated alteration. Fourth, the altered agreement must include a statement that the landlord is not waiving its rights to future enforcement of the lease or its terms. A strong rent alteration document signed by both Landlord and Tenant will protect the landlord’s right to evict and sue for damages after the crisis is over, and position the landlord as the reasonable party who attempted to in good faith work out solutions with tenants during this time.
Another recommendation is to include an estoppel statement in the alteration agreement where all prior obligations of the landlord up to and including the execution date of the alteration have been satisfied or waived. This will ensure that there are no pending issues that could be used to otherwise impede or thwart the purpose and intent of the alteration agreement.
It is a difficult time to be a landlord, but there are things that can be done now to protect the investment in the long term. The laws and regulations are changing on almost a daily basis so now is the time to be proactive and protect that investment.
OTHER THINGS TO CONSIDER
Recommending Additional Solutions: As a landlord, it may be a good idea to assist tenants by providing ideas on alternatives to non-payment of rent that may ease their financial burden during this time. For example, and this is for lessee businesses in particular, the Paycheck Protection Program (“PPP”) allows for up to 25% of a business loan to be used for other items other than payroll (including rent), or the business may be able to file a claim against a business interruption insurance policy, if available. Additionally, tenants may be able to obtain relief from utility and other companies to which they make monthly payments. Providing these recommendations in writing can then later be utilized to demonstrate good faith on the part of the landlord.
Landlord Relief. There are also sources of relief available for landlords. However, it is imperative that landlord first confirm that seeking such relief does not violate their own mortgage or business loan terms. If there is a mortgage loan to pay, the first place for the landlord to look for relief is from their lender. Lenders are presently willing to negotiate and offer deferrals and forbearances. It is recommended that the landlord already have all rent alteration agreements in place with tenants so that the agreements can then be presented to the lender as a showing of good faith. If you operate your rentals as a business, you may be eligible for PPP, SBA and other loans that may be 100% forgiven, to continue to manage and protect your business during this downturn. Remember to seek only those options needed, as you may be required to adhere to reporting guidelines as well as pay back those funds borrowed.
Ricardo L. Carmona, Esq.
Tomasita D. Carmona, Esq.