SACRAMENTO – Governor Gavin Newsom issued an executive order that authorizes local governments to halt evictions for renters and homeowners, slows foreclosures, and protects against utility shutoffs for Californians affected by COVID-19.
The Executive Order comes as Californians are experiencing substantial loss of hours or wages, or layoffs related to COVID-19, affecting their ability to keep up with their rents, mortgages, and utility bills.
“People shouldn’t lose or be forced out of their home because of the spread of COVID-19,” said Governor Newsom. “Over the next few weeks, everyone will have to make sacrifices – but a place to live shouldn’t be one of them. I strongly encourage cities and counties take up this authority to protect Californians.”
The order does not relieve a tenant from the obligation to pay rent, or restrict the landlord’s ability to recover rent that is due. The protections are in effect through May 31, 2020, unless extended. The order also requests banks and other financial institutions to halt foreclosures and related evictions during this time period.
The Governor’s Executive Order asks the California Public Utilities Commission to monitor measures undertaken by public and private utility providers to implement customer service protections for critical utilities, including electric, gas, water, internet, landline telephone, and cell phone service on a weekly basis.
As a Landlord
Landlords should be in communication with their tenants and talking to them about their situation. Landlords should also direct tenants to local assistance programs, including those run by cities and local chambers of commerce or regional foundations.
Landlords should also review their own insurance policies as well as existing contractual obligations to lenders and to other tenants. Many insurance policies will contain exclusions for viruses or pandemics, but it is worth reviewing the policy to determine if any coverage is available. Loans often require minimal levels of cash reserve and cash flow. Many lenders would prefer to work with landlords to avoid loan defaults, so landlords should also be in communication with their lenders.
Landlords should also consult their property managers, attorneys and accountants to evaluate abatement and deferral requests so that they are structured to maximize the benefit to both landlord and tenant. Landlords should consider whether obligations to existing tenants will be impacted if certain tenants are lost and the overall impact to the property. Finally, landlords should consider the long-term market implications for the rental property. Some factors to consider are:
- Property cash flow
- Occupancy rates
- Loans or leverage on the property
- Lender cooperation — covenant deferral or waiver, payment restructure, interest-only payments
- Rental interruption or other insurance without pandemic/epidemic as an exclusion
Please remember, this is a crisis that is not of the tenant’s making.
These are individual questions to each landlord and its own property. If a landlord refuses to abate rent (or grants only minor relief) and the tenant goes under, the vacancy loss and costs to fund a replacement tenant could be the same as the abatement requested. The number of viable tenants will be reduced drastically in the economic downturn caused by this crisis, and landlords will need to examine the cost to re-tenant when considering what abatement it can (or can’t afford) to grant/offer.
Some of the solutions that are being used by landlords include:
1. Reduce, defer or abate rent for a set period of time, with no repayment, in exchange for more favorable lease terms, such as an extension of the term, termination of options or rights of refusal/first offer or elimination of exclusive or restrictive use provisions.
2. Reduce or defer rent for a set period of time with repayment amortized over remaining term. If the term is short (under a year), and rent amounts are high, extend into a promissory note secured by a personal guaranty after term ends.
3. Reduce or defer rent for a set period of time, but tack term onto the end of the lease.
4. Reduce rent to percentage rent where applicable.
5. Suspend late fees and interest.
6. Tie rent deferral or abatement to length of shut down so rent starts again when shut down ends, but to avoid unintended results add end date/cap to rent deferral or abatement in case shut down lasts longer than expected (i.e. rent is abated so long as the shutdown order is in place, but the deferral or abatement capped at 2 months).
7. Consider a prohibition against “double-dipping.” That is to say, if the tenant receives relief from another source, the landlord will not also provide relief, thus making relief available to other tenants.
8. Consider confidentiality requirements in any lease modification. Each lease is unique and one solution will not work for all leases. Therefore, it is not advantageous for tenants to “compare notes.”
Things to consider as a Tenant
Before requesting a rent concession, tenants should be prepared to demonstrate their loss and actual need for a concession with bank statements, balance sheets, prior financials, evidence of lost orders or other supporting documentation. Tenants should be prepared to demonstrate that they have applied for the various disaster relief programs and explored their insurance coverage. Tenants should understand that there are many fixed costs a landlord must continue to pay even when there is no income (such as debt service, property taxes, insurance). In fact, some costs (e.g. security) will be increased during this time. The information for landlords, above, will assist a tenant in evaluating their request of the landlord and working with the landlord to create a modification that will help both the landlord and the tenant weather this storm.
With cooperation and a universal desire for a vibrant economy, landlords and tenants, lenders and business owners can forge a successful and enduring relationship.
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