Creative Strategies for Landlords and Tenants to Survive the COVID-19 Shutdown

By Dana Delman and John Vukmanovic

Published in Commercial Leasing Law & Strategy

When COVID-19-related restrictions imposed by state and local governments are lifted, there is no guarantee that they will have done more than delay the inevitable: eviction and bankruptcy. Modifications should be used to cut risk and losses. If at all possible, landlords and tenants should cooperate now to avoid that outcome.

In attempts to alleviate the impact of job losses and business disruption due to COVID-19, state and local governments have passed emergency orders and regulations temporarily prohibiting evictions and extending deadlines to pay rent, among other restrictions. When those restrictions are lifted, there is no guarantee that they will have done more than delay the inevitable: eviction and bankruptcy. Modifications should be used to cut risk and losses. If at all possible, landlords and tenants should cooperate now to avoid that outcome.

It is important to note that eviction moratoria and related restrictions differ across states, counties, cities and regions. While city and local jurisdictions seek to employ their state’s guidelines, they often take it a step or two further, or not far enough, based on local conditions, which can be impacted by politics and lobbying. New law, rules and ordinances are not relieving any tenants of rent liability, but rather merely extending the tenant’s time to pay. Thus, unless a lease provides for rent abatement under these particular conditions, the burden of the pandemic is still left squarely on tenants’ shoulders. Few, if any, leases shift the financial burden of the pandemic shut down to the landlord. Few, if any, insurance policies insure against pandemic shutdowns. However, although contractually it appears that landlords will not bear the burden of the shutdown, in fact many will lose a lot due to necessary evictions, vacancies, and the probability of a more competitive rental market and tenant insolvencies.

Tenants and landlords should be proactive and cooperative in strategizing solutions to minimize financial ruin on both sides, regardless of what the lease says. Tenants should be transparent and forthcoming with information that the landlord should consider in deciding on lease modification requests and terms. Hopefully, the landlord will be reasonable, empathetic and cooperative. If not, tenants still have options. For example, tenants can form alliances with other tenants of the same landlord, lobby politicians and, as a last resort, file bankruptcy to reorganize the debts. Whether you are a landlord or a tenant, the first step in the negotiation process is to know the laws that apply to you and make sure you meet the requirements in those laws.

Examples of Moratorium/Delayed Rent Laws

In California, Governor Gavin Newsom issued an executive order on March 25, 2020 allowing local governments to impose protections for residential and commercial tenants unable to pay their rent due to COVID-19. Two days later, Newsom issued a second executive order prohibiting landlords from evicting residential tenants for nonpayment of rent through May 31, 2020. This order also authorized local governments to pass further restrictions and extend eviction moratoriums, and indeed they have. For example, on April 30, 2020 the City of Santa Monica extended the end date for its eviction moratorium from May 31 to June 30, 2020. Meanwhile the City of Los Angeles enacted Ordinance No. 186585, which prohibits residential evictions during the “Local Emergency Period” if the tenant is unable to pay rent due to COVID-19. This period is defined as “March 4, 2020 to the end of the local emergency as declared by the Mayor.”

Aside from eviction moratoria, the ordinances include other restrictions and guidelines. For example, residential tenants in Los Angeles now have up to 12 months following the local emergency period by which to repay any past due rent. Commercial tenants, by contrast, have only three months. Interestingly, the Santa Monica ordinance provides that while a landlord and tenant may enter a payment plan for payment of delayed rent, the landlord may not require a tenant to enter a payment plan. With or without a plan, the tenants have to pay the unpaid rents within the specified time period (12 months). A landlord cannot bring an eviction action unless the tenant fails to pay the unpaid rent within the 12 months of the moratorium order.

The first step is to know and understand the requirements in your local jurisdiction. If your jurisdiction doesn’t have these protective measures, contact your local politicians or nonprofit lobbying groups to see if you can get helpful legislation passed.

While tenants are being protected in some jurisdictions, and justifiably so, they are not excused from paying rent. The ordinances only provide interim protections for tenants against eviction due to nonpayment of rent, and it must be the result of COVID-19. Depending on the jurisdiction, the tenant may also have to notify the landlord in writing before the rent is due, or within a reasonable period afterwards, that the tenant needs to delay payment of all or a portion of the rent because of an inability to pay due to reasons associated with COVID-19. Tenants may not be protected if they do not provide the requisite notice or proof as each new law requires.

Commercial lease restrictions differ in each jurisdiction. Circumstances in Los Angeles that would excuse a commercial tenant include loss of business income due to a COVID-19 related closure, child care expenditures due to school closures, health care expenses related to being ill or caring for a family member who is ill with COVID-19. Be careful, however, of any caveats or exceptions. For example, while some jurisdictions continue to provide eviction protection to most commercial tenants affected by COVID-19, they may exclude protection for large multi-national companies, publicly traded companies, companies with over $25 million in annual gross receipts, and/or companies that employ more than 500 employees. Again, it is important to carefully review city, county and state guidelines that may apply to your unique situation. Keep checking these governmental entity websites often.

What Should Landlords Do?

The good news for landlords is that unless the lease abates rent due to pandemic shutdowns, all rent must be paid. That doesn’t change any hardship a landlord may experience from delayed payment, and also from the relative certainty that many tenants are now, or will soon be, insolvent and eventually evicted after not paying rent during the eviction process. There could be a glut of available lease space after that, which will drive down rental rates. At this stage landlords must be patient, while at the same time diligent and proactive. As an initial matter, familiarity with local ordinances is critical. This will provide guidance, and perhaps immediate steps to take (i.e., required written notices to tenants). Some ordinances may require that the landlord advise its tenant of the enactment of the ordinance itself, as well as its requirements. Other laws include language prohibiting a landlord from deceiving a tenant in connection with their rights and obligations under the eviction moratorium.

In the face of such unprecedented uncertainty, the lines of communication should be open. Landlords should be proactive in initiating and maintaining communication with their tenants as it relates to their tenancy in general, but particularly with their ability to pay rents during this economic downturn. If agreements, modifications to existing lease terms, or even informal understandings can be reached now, it can resolve or alleviate potential issues down the road, and potential lawsuits when the moratoria are lifted and courts are potentially overwhelmed. The key is to document everything in writing, even if only in a confirming email or text. Ideally, all lease modifications should be in a writing that both parties sign, and certainly if the original lease requires it.

When Landlords File a UD Complaint

When the moratoria are lifted, one by one, landlords will have the ability to file and resume prosecuting unlawful detainer actions seeking eviction of problematic tenants. Tenants facing eviction will be able to plead an affirmative defense if the requested eviction is for nonpayment of rent and the tenant’s inability to pay was related to COVID-19. For example, tenants or their attorneys can raise the existence of a city or local executive order or moratorium as a complete defense in any unlawful detainer (UD) action for nonpayment of rent if related to COVID-19, assuming the tenant meets other criteria. In order to prevail, a tenant may be required to provide documentation to establish the inability to pay, and a direct connection to the virus, as part of their defense. Therefore, while the various moratoria may provide an opportunity for negotiating for delayed payment of rent, or payment of reduced rent to be made up at a later date, tenants will not be able to successfully argue a break from rent altogether. However, landlords should keep in mind that eviction actions may be delayed because the courts have been closed for several weeks and upon reopening, will have both a backlog of cases and likely hundreds, if not thousands, of new UD actions. This consideration should be factored into any modification negotiations.

Best Practices for Drafting Commercial Lease Modifications

Many leases include a force majeure provision, which refers to events outside of the parties’ control, such as natural disasters, terrorist acts or war. If such a force majeure event occurs during the lease term, a tenant may be entitled to rent abatement or a specified rent reduction during the relevant time period. It is likely the courts will soon be entertaining landlord lawsuits stemming from the nonpayment of rents, and in turn, tenants raising a force majeure defense related to COVID-19. It will be up to the courts or, if applicable, arbitrator, to determine if the COVID-19 pandemic qualifies as a force majeure event under each particular lease, and if so, whether all or part of such unpaid rents were excused.

Litigation or arbitration can be expensive, protracted and uncertain. Even if a landlord believes that it has an absolute right to rent under the lease, the unusual times may dictate a different outcome so that the landlord will save money and maintain an ongoing tenant. If the lease doesn’t require it, mediation might be a good solution to working out lease modification terms.

Conclusion

These are unique times, and therefore, we are navigating through a very fluid and evolving landscape. In the past few weeks, many state and local jurisdictions have been proactively passing laws to keep up with our ever-changing circumstances, and future outlook. At the same time, some state and/or local municipalities have remained relatively quiet. It is important for landlords and tenants to review and be familiar with the laws in their city and/or state.

The adage “we are all in this together” is symbolic of the common struggle we face as a result of the COVID-19 pandemic. While it may not be readily apparent, and their roles are often seen as adversarial, this adage also applies to property owners and their tenants. The level of communication, flexibility and cooperation now between these old foes may well determine their respective position, and recovery, later. Landlords should understand tenants’ position and particular circumstances, and tenants should understand that the landlord will certainly lose money from other defaulting tenants and thus, must try to save as many ongoing tenancies as possible. A tough landlord may only be trying to stave off his or her own bankruptcy. Both parties should be honest, calm and try to equitably share the burden of the shutdown losses.

Questions about negotiating a commercial lease? Contact Delman Vukmanovic LLP at LA 213.943.1340 / OC 949.852.3590 or info@DelVukLaw.com.