The devastating economic impact of social-distancing and stay-in-place orders has resulted in a wave of commercial, industrial, and residential tenants struggling or outright failing to meet rent obligations. In April nearly one-third of tenants failed to timely pay rent, a number that is only expected to increase as government stay-in-place orders continue and businesses struggle to regain lost revenue. This has presented landlords with a dilemma and new and old laws to navigate.
In response to this growing rent crisis, landlords of commercial, industrial, and residential properties should consider a variety of factors when evaluating tenants in default or requesting rent relief. By providing narrowly tailored rent relief to struggling tenants, as needed, landlords can protect their investments by maintaining cash flow, lessening future revenue reductions, keeping space occupied, and strengthening their existing landlord and tenant relationships. Additionally, landlords of residential property need to be particularly aware of recent actions by the State of Minnesota and the federal government that place restrictions on the ability to evict a tenant. Landlords of commercial and industrial properties are not currently subject to those restrictions.
Legislation that Prohibits Evictions for Failing to Pay Rent
At the federal level, Section 4024 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) establishes a 120-day moratorium on residential eviction filings for tenants living in certain properties that are part of government programs or are financed by Federally backed mortgage loans (CARES Act Eviction Moratorium).
Pursuant to Section 4024 of the CARES Act, a landlord of a “covered dwelling” is prohibited from:
- commencing an action to recover possession of the covered dwelling from the tenant for nonpayment of rent; and,
- charging the tenant a late fee, penalty, or other charges for the nonpayment of rent.
Covered dwellings include those dwellings that are on or in “covered properties,” which in turn are defined by the CARES Act as properties that:
- participate in a “covered housing program” as defined in section 41411(a) of the Violence Against Women Act of 1994;
- participate in the “rural housing voucher program under section 542 of the Housing Act of 1949”; or
- have a “Federally backed mortgage loan” or a “Federally backed multifamily mortgage loan.”
The CARES Act Eviction Moratorium lasts for a period of 120 days, which began on March 27, 2020, and will end on July 25, 2020 (the Moratorium Period). During the Moratorium Period, the landlord of a covered dwelling is prohibited from issuing a tenant a notice to vacate for failing to pay rent. After the Moratorium Period, the landlord must give a tenant thirty (30) days to vacate the premises.
In addition to the CARES Act, on March 23, 2020, Minnesota Governor Tim Walz issued Emergency Executive Order 20-14 – Suspending Evictions and Writs of Recovery During the COVID-19 Peacetime Emergency (MN Executive Order). Unlike the CARES Act, which only covers certain properties, the terms of the MN Executive Order include all residential properties and establishes a moratorium on all residential evictions (MN Eviction Moratorium).
Pursuant to the MN Executive Order, a landlord, property owner, mortgage holder, or other persons entitled to recover residential premises are prohibited from commencing an action to recover possession of the covered dwelling from a tenant for the duration of the MN Executive Order. Please note that this order also includes other actions that are prohibited, but this article focuses only on the prohibition against evictions.
Should landlords offer rent relief to their tenants?
Whether a tenant is leasing residential, commercial, or industrial property, before deciding whether to offer rent relief or other payment arrangement, and how best to do so, we suggest landlords keep the following considerations in mind.
Not every tenant will need rent relief, and not every landlord will be in a position to provide it. Before engaging in meaningful discussions with tenants about rent relief, landlords should evaluate their existing financial and legal arrangements to ensure that offering relief is appropriate, and if so, how to do it.
When making that evaluation, some landlords may find they have loan documents, partnership agreements, subleases, or other lease-related agreements with lenders or third parties that prohibit or place restrictions on their rent relief options. Specifically, those agreements may have provisions setting forth income tests, fiduciary obligations, co-tenancy, or operational provisions that could be implicated by a lease amendment or other forms of rent relief. As a practical matter, those restrictions might make rent relief unfeasible, or they may simply provide an additional hurdle requiring third-party approval.
Landlords should also evaluate whether granting rent relief would impact their ability to pursue insurance claims, obtain government funds, or receive other relief in connection with the ongoing pandemic.
Can landlords request proof of financial hardship before providing rent relief?
Though laws may vary by jurisdiction, generally speaking, a landlord is not prohibited from requesting proof of financial hardship from a tenant before deciding whether to offer rent relief. In fact, documentation regarding the nature and extent of financial hardship may actually assist both the landlord and the tenant in reaching a mutually beneficial rent relief agreement.
If a landlord elects to request proof of financial hardship from tenants, it should set up a clear, objective procedure identifying the types of information and documentation that will be acceptable for that purpose, and it should take steps to ensure that the procedures are uniformly followed. Failure to do so could increase the landlord’s exposure to claims of discrimination from tenants who believe they were treated unfairly.
How should a landlord structure rent relief?
Where possible, rent relief should be narrowly tailored to each tenant’s unique circumstances, including the terms of their lease, the nature of the tenant’s business (if any), financial considerations, and other relevant factors. Selecting the appropriate form of rent relief could be the difference between a continued and successful lease arrangement, or a failed one. The following are some forms of rent relief that may be available to landlords.
Deferring or reducing rent. The most common form of rent relief will likely be rent deferral or reduction. How and when rent is deferred or reduced can be customized depending on the particular needs of the landlord or tenant. For example:
1. rent obligations could be reduced over a specified period or over the remaining term of the lease;
2. rent obligations could be deferred and added to the end of the lease;
3. rent obligations could be deferred and then amortized over the remaining term of the lease or another period of time; or
4. deferred rent could be paid back through a future balloon payment.
Applying the security deposit. Some landlords, depending on their jurisdiction and the terms of their lease agreement, may be able to immediately apply a tenant’s security deposit toward unpaid rents, or may be able to do so as part of a lease amendment. After doing so, the tenant may be required to replenish that security deposit (or may agree to do so) within a certain period of time or upon demand.
Obtaining or renegotiating a personal guaranty. Under certain circumstances when dealing with commercial or industrial property, it may be appropriate to provide rent relief in exchange for a personal guaranty. Or, if a personal guaranty already exists, a landlord may wish to modify the terms of that guaranty so as to be more favorable, for example, caps on a guarantor’s liability may be increased, or sunset clauses may be pushed further out in time.
Conditioning rent relief on seeking bailout funds. Where appropriate, landlords may choose to condition deferred or reduced rent relief on the later repayment or clawback of funds if a commercial or industrial tenant receives state or federal bailout or insurance proceeds.
Releasing and waiving tenant rights. Some landlords of commercial or industrial space may also be willing to offer rent relief in exchange for a tenant’s waiver of certain legal rights. These might include the waiver of a tenant’s right of first refusal, right of first offer, termination options, or exclusive use rights.
No matter what rent relief options a landlord may offer, all agreements should be memorialized in writing, as part of an amendment to the existing lease or, if appropriate, as a separate agreement. And, as with any contract, the landlord should take steps to ensure their agreement complies with all governing statutes and other applicable law.
What other contract terms should a landlord consider when agreeing to rent relief?
When deciding the form of any rent relief, landlords should also carefully consider whether other terms may be necessary or appropriate to ensure that the rent relief agreement is reasonable, enforceable, and less likely to lead to future litigation. These include, among others, obtaining third-party approvals (as discussed above), lease extensions, releases of claims or defenses by the tenant, confidentiality and disclaimer provisions, and notice provisions.
Let us help
At Henson Efron, we are committed to helping our clients navigate these difficult and uncertain times, and our knowledgeable team of attorneys is ready to provide you with assistance and advise you of your rights and options. For more information, please call 612-339-2500 or send us an email.