There is a lot to say about the California Eviction Moratorium, but we have all heard the gist of it. It will be several months before evictions can resume in the California Courts. Unless the California Judicial Council repeals or changes the Emergency Rules of Court issued on April 6, evictions will not proceed until after August 30, 2020.
In light of this, we have kept our ears to the ground, asking our colleagues and clients how they are managing, reading up on this topic, and identifying as many creative solutions we can find. Here’s a list of strategies that landlords can employ in order to maintain the value of their investment properties through the COVID-19 pandemic and the eviction moratoria. Some strategies work better for commercial landlords than residential, and some work for both. We explain these strategies below.
Juggle So You Don’t Struggle Strategies:
- Payment Deferment and Repayment Plan for Any Kind of Tenant: Offer tenants a payment deferment plan and a repayment plan. Document the plan using an addendum to their lease agreement. For example, a tenant who lost their job or had to terminate operations in March might not be able to pay for up to 6 months. If the tenant returns to work in September and can begin paying the monthly rent on the first day of October, a reasonable repayment plan might include an additional payment of half of one month’s rent on the fifteenth day of each month until paid in full. This would be a one-year payment plan. For a residential tenant, this agreement might be accompanied by a new one-year lease term so that the tenant is obligated to stay until the payment plan is fulfilled. A landlord could offer a waiver of a portion of the past-due rent if the landlord is inclined.
- Payment Deferment and Repayment for Commercial Tenants: If a commercial landlord and tenant enter into an agreement as described above, there may be an opportunity for amortization of the repayment plan over a longer period depending on the lease term. The commercial landlord and tenant could agree to an extension of the lease term, or the commercial tenant could exercise an option to extend the lease earlier than expected to facilitate a longer amortization period for repayment.
- Move-Out Agreement: A move-out agreement could be included as an alternative to a repayment plan. If the rent deferment, stay at home orders, and/or eviction moratorium come to an end and the tenant cannot repay the past-due rent or follow a repayment plan, a written move-out agreement puts the tenant on notice that this is the expectation, and will support the eviction lawsuit (unlawful detainer lawsuit) as evidence of this mutual understanding, thus avoiding claims of retaliation or discrimination by the tenant. It is still recommended to serve appropriate notices on the tenant to pay rent or quit before filing an eviction.
- Pledging Security or Collateral (option 1): There are multiple forms of financial assistance available to help people get through the COVID-19 crisis, including but not limited to, government stimulus checks, unemployment assistance, federal CARES Act funds, California state and local financial assistance, etc. A tenant could make a good faith pledge to pay all or a portion of the rent from their government assistance when it is received. The landlord maintains the right to pursue the tenant for unpaid rent if the agreement is not fulfilled, and for any remaining unpaid rent after partial payments are made. The parties would rely on the honor system.
- Pledging Security or Collateral (option 2): A tenant could entrust to the landlord a personal item of substantial sentimental or monetary value, such as a musical instrument or a family heirloom. The principle here is that the personal item is so important to the tenant that they would not want to lose the item, not that the value of the item could be traded for the same value as the rent. Upon payment, the item is returned to the tenant. It is up to the landlord whether the item is returned if the rent is unpaid. The landlord would maintain the right to pursue a judgment for the unpaid rent, regardless. The downside is that the landlord would be responsible if the item is lost or misplaced.
- Credit for In-Kind Services to the Property Owner: If the property requires landscaping, painting, maintenance or improvements, and if the tenant can fulfill that need, a landlord could credit the tenant for the value of services. It is important to place a value on the services up-front and define the scope of services in writing. Consider whether any licenses, tools, or safety gear are necessary for the job, and whether the tenant can safely perform the services. Be careful, though! The landlord could be liable for code violations, injuries to the tenant or third parties, and other problems.
- “Play the game”: In a recent conversation, a landlord had a paying tenant who was in violation of the lease due to an illegal subtenant. The concern was that the tenant would stop paying as soon as the landlord issued notice of the lease violation pursuant to CCP §1161(3), a non-curable breach. After I advised the landlord about the eviction moratorium and several months to go before we could file an eviction, we devised a plan to keep the rent flowing (i.e. not letting the tenant know that an eviction would be forthcoming), without waiving the landlord’s right to evict the tenant for the underlying lease violation.
- Security Deposit: A landlord may use a tenant’s security deposit to cover past-due rent. It is recommended that the landlord send a letter to the tenant documenting this. The landlord may require the tenant to deposit funds to replenish the security deposit later, if the tenant is able to do so. The landlord maintains the right to pursue the tenant for any unpaid past-due rent.
- Virtual Mediation: All landlords and tenants could benefit from hiring a neutral third party to help them work out the details of a negotiated settlement of past-due rent. Through virtual mediation, the parties can hire a neutral third party to assist with forming an agreement and putting it in writing. Most mediation service providers are offering virtual mediations during this time.
- Commercial: Tenants continue to pay NNN or CAMS during rent deferment to cover LL’s expenses;
- Commercial Landlords and Tenants: Once the country resumes business as usual, a landlord might consider a waiver of some or all past-due rent. The Landlord should request to review the tenant’s profit and loss statement, financial records, and business plan, among other useful information, and communicate with the tenant before determining a waiver of rent.
- Promissory Note: A tenant may sign a promissory note for payment of the past-due rent, that could be enforceable by court action at a much later date. The note could provide an agreed-upon due date that is beyond legal statutes of limitations, and set forth a predetermined principal balance, interest rate, and other terms, so that those terms are predetermined and do not become legal issues if a lawsuit is commenced later on.
- Lease Termination: The landlord and tenant may form a mutual agreement to terminate the lease and the tenancy and put the agreement in writing. This would allow the landlord to start the process of finding another tenant.
We hope that one or more of these “juggle and struggle” strategies may help landlords weather this storm. Please let us know which ones you utilize and keep us posted on how they work out!
Shanna Welsh-Levin is a California Real Estate Attorney who assists Realtors®, investors, and homeowners with real estate sale transactions and litigation. She authored legislation that became the California short sale anti-deficiency statute, Cal. Code of Civil Procedure §580e. Her firm, So. Cal. Realty Law, resolves real estate disputes and protects real estate investments. Services also include managing risk for real estate brokers and preventing future liability.