Practical Landlord and Tenant Considerations Relating to the Moratoria on Commercial Tenant Evictions
Practical Landlord and Tenant Considerations Relating to the Moratoria on Commercial Tenant Evictions
Since Governor Gavin Newsom’s Executive Order lifted restrictions on the ability of local governments to implement COVID-19 related eviction protections, many cities and counties throughout the State have enacted ordinances prohibiting evictions of commercial (and residential) tenants who are able to demonstrate that their inability to pay rent is caused by the pandemic.
As we discussed in our first client alert on this subject, the cities of San Francisco and Los Angeles were the first to announce such moratoria. Both ordinances, however, restricted their protections to small and mid-sized businesses. In less than a week, numerous other cities and counties issued their own ordinances, leading to many questions about the rights of landlords in light of these moratoria, which we discussed in a subsequent client alert. Since then even more local jurisdictions have enacted moratoria on commercial evictions due to COVID-19 and some have amended their initial ordinances to extend the expiration dates. The ordinances, which the Firm is tracking on its COVID-19 Additional Resources website page, vary by jurisdiction. Care should be taken to review and understand the impact of the specific ordinance(s) applicable in the relevant city and/or county.
Not surprisingly, many commercial tenants did not pay their April rent. While many were unable to pay due to a decline in business revenues, some tenants who were otherwise able to pay rent mistakenly believed their rent payment obligations were deferred or simply refused to pay. Needless to say, the current climate is causing significant concern among both landlords and tenants. While navigating each business and legal situation depends on unique circumstances, such as the terms of the lease and the applicable ordinances, below we offer some practical tips for commercial tenants and landlords to consider in light of the eviction moratoria in many jurisdictions.
Issues Tenants Should Consider If They Cannot Meet Their Rent Obligations
1. The protections of the eviction moratoria ordinances are not automatic and generally require tenants to take additional steps. It is not advisable for tenants to assume they are protected by an eviction moratorium. Some cities or counties have not passed any eviction moratorium for commercial tenants or have carved out certain businesses from the moratorium. If the tenant is not in the class of businesses protected by or does not follow the specific conditions of an ordinance, then the nonpayment of rent may allow landlords to pursue its usual remedies. If the tenant is protected by an eviction moratorium, the tenant must understand what it must do to receive that protection. Most of the ordinances require tenants to notify landlords of their inability to pay rent due to COVID-19 from a week or more before the rent is otherwise due up to thirty days after the rent is due. The ordinances generally require that tenants give notice to their landlords in writing. Therefore, it is incumbent on tenants to review their lease and comply with the notice procedures set forth in it. In addition to delivering notice, many ordinances also impose additional requirements on tenants in order to benefit from eviction protections. For example, the City of Anaheim requires tenants to take the following actions in order to avail themselves of the protections afforded under its ordinance: “(i) notify the landlord in writing before the day rent is due that the tenant has a covered reason for delayed payment; (ii) provide the landlord with verifiable documentation to support the assertion of a covered reason for delayed payment; and (iii) pay the portion of rent that the tenant is able to pay.”
2. Tenants should consider how they approach landlords with requests for rent relief. Tenants should remember that landlords may also be struggling financially, particularly if multiple tenants fail to pay rent timely. Depending on their financial situation, relationship with their landlord, and desire to continue operations in the leased space, tenants may want to consider approaching landlords with a solution that puts some of the financial burden on both parties, e.g., by paying some portion of the rent due. Aggressive positions are not likely to be well received by landlords. In our experience, the more reasonable the approach taken by tenants, the more likely many landlords will be in working with their tenants.
3. Tenants need to provide objective proof to landlords of their inability to pay. The ordinances generally require that tenants demonstrate that their inability to pay rent is due to COVID-19 reasons. If tenants can pay rent or the reason they cannot pay is due to some other factor, then the eviction protections do not apply. In some jurisdictions, the supporting information must be provided with the initial notice to the landlord, but many jurisdictions require the information be given to the landlord within 30 days. If an ordinance is silent as to when or if the information should be provided to landlords, a tenant should anticipate that a landlord is likely to ask for documentation to support that tenant’s claim that COVID-19 has adversely affected the tenant financially. Tenants should be prepared to provide financial records for at least the last year and describe how COVID-19 is currently impacting their business.
4. Although nonpayment of rent may not result in an eviction at this time, it still may be a default under the lease and afford landlords other remedies. The general purpose of the commercial eviction moratoria is to mitigate instability that would arise if large numbers of businesses were to be evicted. The ordinances do not otherwise modify the rights or obligations under the lease between the parties (except in some cases, the ordinances prohibit landlords from charging late fees or penalties to eviction protected tenants). None of the ordinances abate tenants’ obligation to pay the rent agreed to under the lease; they simply preclude landlords from evicting tenants for a period of time. However, nonpayment of rent is likely still a default under the lease for which landlords may be able to take actions other than eviction against tenants. For example, landlords may be able to apply a security deposit, draw down on a letter of credit, or make claims against guarantors to collect the unpaid rent.
Issues Landlords Should Consider If A Tenant Does Not Meet Its Rent Obligations
1. Landlords may be able to mitigate the impact of the nonpayment of rent. As an initial step, landlords will want to review the lease and the applicable ordinance(s) to determine what rights and obligations apply. Some tenants have been sending force majeure letters to landlords even where such a provision does not apply or even exist in the lease. Other tenants are simply asserting an inability to meet rental obligations even when they have the ability to do so. In those cases, landlords will want to correct any misconception tenants may have and/or send default notices in accordance with the lease. Landlords retain the usual rights and remedies if tenants are not protected from eviction and their default is not timely cured. Next, landlords are permitted to, and should, request that tenants provide financial documentation supporting tenant claims that they are unable to pay rent as a result of COVID-19. Some landlords have form questionnaires that they request tenants to complete in addition to providing backup information. After reviewing the information, landlords will be in better position to evaluate solutions that may be attractive to a tenant and still beneficial to the landlord. For example, landlords may (i) defer rent for a number of months, with that deferred rent being repaid at some later date with interest; (ii) request partial rent payments now with the rest paid at the end of the lease or over the course of several months after state of emergency is lifted; (iii) offer discounted rent payments to the tenant based on when it pays; or (iv) request that a tenant pay the landlord some or all of the past due rent as soon as the tenant receives other financial assistance, e.g., from a government sponsored program, a line of credit or a loan. There is a myriad of other creative solutions that may be negotiated between landlords and tenants in response to rent relief requests.
2. Lender requirements may restrict the ability of landlords to modify a lease. Any resolution between a landlord and tenant will need to be documented. However, many loan documents prohibit the ability of landlords to make certain modifications to a lease or waive rights against tenants without lender consent. Landlords should determine if such limitations may apply and obtain any necessary consent before waiving any rights or finalizing any agreement with the tenant that could be deemed a lease modification requiring landlord approval.
3. There are business reasons for maintaining a good relationship with existing tenants. Of critical importance to landlords, is ensuring occupancy of their buildings with good tenants who pay their rent timely. If such tenants already occupy the leased spaces, then it may make sense for a landlord to provide certain rent concessions to foster goodwill of the tenant or help it to stay in business. Indeed, in many situations, it is unclear how long it will take landlords to replace tenants who are either evicted or otherwise vacate the space before the conclusion of the lease term. At least for the near future, there may be a shorter supply of tenants willing to sign new deals or invest capital to build out spaces and ramp up operations. Alternatively, lease terms may not be as beneficial to the landlords. Landlords need to assess how aggressive of a stance they want to take with tenants who fail to meet their rent obligations.
4. Access to courts or a judicial resolution may be limited for a period of time. On April 6, 2020, the Judicial Council of California adopted an emergency rule, prohibiting courts from issuing a summons on a complaint for unlawful detainer until 90 days after the Governor declares that the state of emergency related to the COVID-19 pandemic is lifted. Note there is an exception allowing such issuance if the court finds the action is necessary to protect public health and safety. Although technically landlords may file other lawsuits, e.g., breach of a guaranty, most of the courts in California are operating at limited capacity. Once the courts open again fully or implement remote systems to allow cases to move forward, there will likely be a backlog of cases. In order to clear that backlog, courts will need to address the cases that were already pending before the state of emergency and will prioritize criminal and family matters over civil matters such as commercial landlord tenant disputes. As an alternative to the lengthy court process, a lease may contain an arbitration provision or the parties may want to mediate a resolution, either of which should allow the claims to be resolved more expeditiously.
We anticipate that COVID-19 will further distress commercial leasing as the economic fallout continues to unfold and delayed business impacts become clearer. However, as we continue to work with our clients on a wide range of commercial leasing issues, we remain optimistic that landlords and tenants will use best efforts to cooperate and weather the storm.