Talk the Talk
Businesses have suffered severe economic impacts as a result of COVID-19. Commercial landlords should make a serious attempt to come to a mutually agreeable rent repayment plan.
Q. A commercial tenant has not been able to pay rent since closing their doors in March. This business has otherwise always paid rent on time, and I would like to work with them as best I can. What are my legal obligations?
A. On March 18, 2020, the Mayor of San Francisco issued an Emergency Order (the “Order”) that implemented a temporary moratorium on evictions for commercial tenants who are unable to pay rent due to COVID-19. However, the Order only applies to commercial tenants with gross receipts of $25 million or less in 2019. Nothing in the Order relieves the tenant of the obligation to pay rent, or restricts the ability of the landlord to recover rent due, but the Order does prevent the landlord from being able to file for eviction if the tenant qualifies for relief under the eviction moratorium. As such, you can always bring a non-eviction action against your tenant for breach of the lease contract, but utilizing such a tactic may not be advisable if you want to keep the tenant in business.
So if a covered commercial tenant fails to make a rent payment that was due after the issuance of the Order, you are required to provide the tenant written notice of the violation (“Notice of Default”) and an opportunity to cure the default. The Notice of Default must specify a cure period of at least one month, although the Order encourages landlords to offer a longer period. Upon receipt of the Notice of Default, the tenant will have the cure period to either pay the rent or provide documentation to the landlord showing that the tenant is unable to pay the rent due to a financial impact related to COVID-19. A financial impact is deemed related to COVID-19 if caused by the COVID-19 pandemic or by any local, state, or federal government response to COVID-19. If the tenant
provides the landlord documentation
of the tenant’s inability to pay rent due to a financial impact related to COVID-19, then the cure period is further extended by one month. Subject to submission of updated documentation each month, for a period not to exceed six months after the rent was originally due, the tenant may obtain additional monthly extensions of the cure period. The cure period requirements survive the expiration or termination of the Order, which now expires on June 17 (the “Expiration Date”).
For example, assume that June 2020 rent, due on June 1 and therefore predates the Expiration Date, is not paid. You then decide to provide the tenant with a Notice of Default on June 5. The tenant has until July 5 to either (i) pay the rent OR (ii) provide objectively verifiable documentation to you stating its inability to pay the rent due to the financial impacts of CIVID-19. Upon submission of this documentation, the cure period is automatically extended to August 5. At the end of this thirty day period, your tenant may then obtain additional extensions through December 5 in order to repay June rent.
This rule applies to leases on fixed terms as well as to holdover and month-to-month tenancies. “Rent” means all payments the tenant is required to pay the landlord, including monthly base rent, CAM charges, NNN reimbursements, and security deposit installments. No late fees or other charges may be tacked on unless the operative lease agreement that was entered into before the Order allows for these assessments.
Bottom line: Work with all of your commercial tenants to attain a rent payment schedule. Almost all businesses have suffered severe economic impacts as a result of this crisis. Do not get hung up on document verification; rather, make a serious attempt to come to a mutually agreeable repayment plan in accordance with the guidelines set forth in the Order.
Q. I’d like to start collecting no-contact rent payments electronically. Is this something I can enforce with notice?
A. Mindful of public health during the pandemic, landlords and property managers are innovating ways to minimize direct contact, while maintaining building security and honoring tenants’ rights. Whether your tenants drop checks onsite or use the postal service, electronic payment is certainly safer. There is actually a recent statute that addresses form of payment. Of course, the legislature penned those rules to address an overheated housing crisis years in the making, and we must now maintain business while the ice breaks and shifts underneath our feet.
Section 1947.3 of the Civil Code requires that landlords allow at least one form of payment that is neither cash nor electronic funds transfer (e.g., they must accept checks or money orders), and that landlords accept payments from third parties (with some conditions). The bill addresses concerns about tenant defaults and finds that easing the method of payment and payor are tools to prevent tenant displacement.
Assuming the lease doesn’t already provide for EFT, you could certainly “change” the payment term of the tenancy to require it. But you couldn’t refuse other forms of payment, so enforcement is a non-starter.
On the other hand, many banks will issue paper checks for their customers and automatically mail them out every month. Since this is neither cash nor EFT, you could presumably enforce it. (I assume these checks are printed and processed mechanically, but of course, they’re still dropped in mailboxes and handled by postal carriers, so that may not meet your goals.)
A softer touch may work better. If you appeal to your tenants to enroll in EFT to enhance safety, presumably few would object. Further, if any of your tenants are withholding rent during the eviction moratorium, you might incorporate an EFT provision in your forbearance agreement.
However, I must caution that, while we are taking extraordinary steps to promote safety in these uncertain times, it is generally inadvisable to allow payments through electronic portals, as it removes a safeguard of monitoring who is paying. For instance, while Section 1947.3 provides that landlords can condition third party payment on an acknowledgment that the payor is not a “tenant,” EFT conceivably permits a subtenant to begin tendering payments and building their case for a Costa-Hawkins waiver.
Coincidentally, Michael Weinstein, the architect of the ballot measures to repeal Costa-Hawkins, has offered to withdraw his current initiative if the state will suspend the state law right. These are extraordinary times to be sure. But it remains important to be mindful of preserving your rights while addressing these public health issues.
The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Justin A. Goodman is with Zacks, Freedman & Patterson, P.C. and can be reached at 415-956-8100.