As the economy continues to slow and business for many comes to a halt due to the spread and uncertainty of the coronavirus (COVID-19), tenants and landlords alike are faced with the inevitable question: what happens when the rent cannot be paid? Unfortunately, as it seems to be with everything related to this virus, there are no clear answers and the parties must forge ahead and work together through these difficult times.
Under standard residential and commercial lease agreements, following default by a tenant, a landlord is granted a host of rights and remedies by agreement, at law, or in equity, including eviction. Eviction being the process under which a landlord may remove possession of rental property from a defaulted tenant either through reentry upon the property or through court action. While in some instances, a tenant’s obligations under a lease may be excused or delayed pursuant to “Force Majeure” or “Act of God” provisions, most of these provisions exclude payment of rent as an excused obligation and, prior to this crisis, generally have been construed too narrowly by the courts to include pandemics or epidemics. Given the rising rate of unemployment and shuttering of doors of many retailers and small businesses due to coronavirus related precautions, individuals and small businesses, many of whom survive paycheck to paycheck, soon will be forced to default under their leases and add eviction to their growing list of concerns.
In an effort to protect and provide relief to their already overwhelmed citizens, several state, county and local governments, courts, and agencies across the country, including the states of New York and Pennsylvania, Miami-Dade County, Los Angeles, San Francisco, Boston, Orlando, Denver, Seattle, San Antonio and Charleston, have granted a moratorium on evictions and foreclosures, primarily with respect to residential leases, for thirty, sixty or ninety days. As of Wednesday, March 18th, the U.S. Department of Housing and Urban Development (HUD) suspended all evictions and foreclosures of mortgages to single family homeowners backed by the Federal Housing Authority (FHA) through the end of April and the Federal Housing Finance Agency (FHFA) suspended foreclosures for homeowners with mortgages backed by Fannie Mae and Freddie Mac. Though not guaranteed, tenants in jurisdictions not under a moratorium may also receive a reprieve from eviction due to the gathering restrictions and other precautions being enforced on government property, which will limit court functions and slow the eviction process.
Few will argue against the benefit an eviction moratorium provides from both a public policy and public safety perspective for the tenant, but what about the landlord? What about the bills that the landlord will be unable to pay if they do not receive rent payments? Until relief is granted from lenders, utilities, and taxing authorities, without sufficient rental income, many landlords will be at risk of losing their properties by eviction, foreclosure or lien.
While some landlords may be tempted to use this opportunity to remove undesirable tenants, some tenants may discover they are in a strong negotiating position given the landlord’s reduced rental options and desire to keep good tenants. For landlords, for the millions of residential tenants not benefited by an eviction moratorium, and for commercial tenants, who have largely been left out of the protections granted, the best, and only, option for relief and to protect their interests is a properly documented, voluntary agreement between the parties. Among other things, a written agreement may provide for temporary reduction or abatement of rent, for waiver of late fees and attorneys’ fees, or for landlord’s forbearance from exercising any rights or remedies available to it due to Tenant’s failure to pay rent or maintain regular business hours all as a result of COVID-19’s spread and its impact on a tenant’s business operations. As governments implement stimulus packages and SBA or similar loans are offered to small businesses as relief from COVID-19 shutdowns, the parties may also consider application of relief proceeds to accrued rent. In any case, communicating early and maintaining an open line of communication between landlord and tenant will be key to the parties reaching and continuing a mutually beneficial arrangement.