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The Coronavirus Aid, Relief, and Economic Security (CARES) Act that Congress passed in March contained several different initiatives designed to help Americans cope with the economic consequences of the COVID-19 pandemic. This includes several programs which may provide financial help for landlords whose tenants can’t pay rent as a result of job loss.
We’ve provided answers to some of the most common legal questions landlords may have about the economic impacts caused by the global health crisis.
Traditionally, if a tenant fails to pay the rent on time, landlords are entitled to serve an Eviction Notice and move forward legally with the eviction process. However, some states and local municipalities are issuing moratoriums on evictions. Thus, many landlords are looking for alternative ways to collect rent payments in order to meet their own financial obligations.
It is worth noting, however, that the eviction moratoriums typically do not forgive the tenants’ financial responsibilities, but rather push back the due date for the amount owed. Landlords should keep this in mind when entering into any alternative agreements with their tenants.
What is a Rent Payment Plan?
If your tenant has recently become unemployed or furloughed due to COVID-19, they may find themselves unable to pay rent on the first of the month. In order to avoid losing rental income altogether, you can opt to offer a deferral on rent payments. A Rent Payment Plan outlines the terms of deferred rent payments and allows you to define if the tenant will receive a discount in exchange for performing yard work or repairs.
What is a Late Rent Payment Agreement?
Another alternative for collecting overdue rent is a Late Rent Payment Agreement, which allows you to set a deadline for payment by the tenant. The Late Rent Payment Agreement sets guidelines for repayment and defines the grounds for eviction, such as if the tenant fails to pay the owed rent as outlined in the agreement.
What is a Barter Agreement?
If a tenant is unable to make monetary payments due to unemployment or a loss of income, a Barter Agreement might be an option. A Barter Agreement serves as a contract spelling out what each party is providing in an exchange of goods or services. In the case of a landlord, housing is being provided. In the case of the tenant, it specifies what they will provide in lieu of rent payments. For example, a tenant who is an accountant may offer their professional services to the landlord in exchange for a few months’ rent.
The Barter Agreement should specify:
The length of time for which it will last
Whether it will be impacted by any change of circumstances (e.g. tenant secures employment)
When rent payment will be due again
What are other landlords doing?
Some landlords are taking another approach and lowering rents by 10 percent, for example, in order to ease the potential financial burden on their tenants. Freezing potential rent increases is also being implemented by some.
Landlord and Tenant Practices Arising From Eviction Orders
After a wait-and-see period, landlords and tenants are negotiating deals to handle rent payment defaults. In California, for example, the right to rent deferral under the orders depends on the tenant’s demonstrated inability to pay rent due to the adverse impacts of COVID-19. Tenants are well-advised to document the circumstances causing the inability to pay as required by any applicable order, and follow the procedures provided for obtaining rent payment deferral. By following the rules, tenants preserve their rights to use the protections provided in the orders as an affirmative defense in an eviction action; and a tenant’s failure to comply may weaken the tenant’s affirmative defense. Landlordshave a right to require tenant compliance to confirm that rent deferral requests are legitimate and supported. If rent remains unpaid and defaulted after the tenant protections expire, a landlord will need to be able to demonstrate that it also complied with the orders to support itssubsequent exercise of lease default remedies.
Landlords should respondin writingto a tenant request for rent deferral, outlining the financial and other information required to support the request within the parameters stated in the orders. Landlords typically are not inclined to provide automatic long-term forgiveness or deferral. Landlords are asking for a range of relevant financial information including what governmental assistance and insurance payouts the tenant is seeking or has obtained, and information about the financial strength of the lease guarantor. It can be difficult for a landlord to determine whether rent deferral and other accommodations will actually increase the likelihood the tenant will succeed and continue to perform. Before amending leases to provide accommodations, landlords should check their loan documents to be sure they will not violate loan covenants.
Once a tenant demonstrates its inability to pay and relief is justified, both landlords and tenants can benefit from the certainty of a written agreement. The parties’ agreement can be a simple letter agreement between the landlord and tenant and any lease guarantor. For more significant leases, landlords can require a more formal lease modification with the additional elements characteristic of that type of agreement, including relevant representations and warranties, additional covenants,default clause and recitation of default remedies, release of tenant and guarantor claims, confidentiality, and reaffirmation of the lease obligations and lease guaranty.
The agreement should state the amount and the term of rent deferral, any conditions of continuing deferral consistent with the orders,the circumstances under which the deferral may be terminated or extended, and a rent repayment plan providing the payment term and amounts to be repaid consistent with the orders. Instead of or in addition to deferral, some landlords are obtaining the tenant’s agreement to first apply the tenant’s security deposit against rent payments until exhausted, with an agreed payment plan to replenish the security deposit, all consistent with the orders. The landlord could decide to forgive part of the rent and defer the remainder, or defer only a portion of the rent and require current payment of the rest. The rent deferral or forgiveness should be terminable if the tenant later defaults, subject to the limitations of the orders. The landlord can require the tenant to provide additional financial information during the deferral period demonstrating the tenant’s continuing inability to pay rent, with the knowledge that the financial information may or maynot be reliable. The landlord may request other concessions on key terms of the lease in exchange for the relief granted to the tenant.
The eviction and rent deferral rules are in flux and landlords and tenants are adapting as well as possible to the developing economic impacts of COVID-19. State orders, judicial rules and local ordersare set to terminate at various points and may be amended or extended.Landlords and tenants, and lenders,should monitor the orders and seek guidance from legal counsel to respond to changes and continue to implement best practices in a difficult situation. When the courts reopen for eviction proceedings, the rights of landlords and tenants will be influenced by each parties’ substantive compliance withthe applicable orders during the emergency.
What is the Paycheck Protection Program, and how can it help me?
The Paycheck Protection Program (PPP) is a subsection of the CARES Act designed to help small businesses cope with decreased proceeds as a result of the economic shutdown. PPP loans are calculated based on average historical payroll costs and the program allows for favorable loan terms, with the potential for partial forgiveness of repayment.
In addition to loan proceeds being used to meet payroll obligations, the PPP explicitly allows expenditures on rent or mortgage interest obligations.
How can the PPP help my tenants?
If you are unable to qualify for a PPP loan, your tenants may qualify. Landlords may consider working with professional third-party firms in order to facilitate the application process for tenants wishing to apply for PPP aid. The terms of the PPP program explicitly state that the funds can be applied to rent payments, therefore resulting in a mutually beneficial outcome for the tenant and landlord.
Is the Economic Injury Disaster Loan Program an option for landlords?
Yes. The CARES Act also expanded the SBA’s Economic Injury Disaster Loan (EIDL) program, available to any business with fewer than 500 employees. The expanded terms allow for:
A $10,000 loan advance
Bridge loans of up to $25,000
Total loan amount of up to $2,000,000
What mortgage protections are available for landlords?
In addition to seeking emergency funding, a landlord with a federally-backed mortgage loan who is experiencing financial hardship (such as receiving decreased rent) due to the COVID-19 pandemic can request a forbearance. The CARES Act provides multifamily property borrowers with certain forbearance rights under federally-backed residential mortgages covering residential multifamily properties.
This applies to properties designed to house five or more families and requires satisfaction of certain other criteria (federal lender, HUD program, or federal insurer). Contact your lender directly to submit a request and provide the necessary paperwork.
In exchange for the protections, a landlord receiving a forbearance under the program must not:
Evict any tenants for nonpayment of rent
Charge any fees relating to late payment of rent
Serve a notice to vacate
If granted, the mortgage servicer must allow an initial forbearance of 180 days, with the option for an additional 180-day period that must be separately requested. This does not forgive the mortgage obligation, it merely provides a temporary delay of the monthly payments due to the current shelter-in-place restrictions.
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