Legislation enacted by state, county, and local municipalities over the past several months has prohibited landlords from evicting commercial or residential tenants for nonpayment of rent if such nonpayment is due to a reduction of income related to Covid-19. Most of these prohibitions on eviction were initially scheduled to expire on May 31. However, on May 29th, Governor Newsom issued a new executive order that allows local governments to halt evictions of renters impacted by Covid-19 through July 28th.
To be clear, the state, county, and local ordinances do not provide for rent forgiveness. Rather, the tenant still owes the rent, but it is up to the landlord and the tenant to agree upon the terms and conditions to make up for any reduced or missed rent payments.
If a tenant cannot pay the rent and the moratorium on eviction remains in effect, then the landlord has various options including:
- Granting some type of rent forgiveness;
- Negotiating a further rent deferral;
- Negotiating a voluntary termination of the lease by the tenant (either with or without an early termination payment);
- Agreeing to allow the tenant to sublease some or all of the premises with all sublease payments going directly to the landlord; or
- Renegotiating the lease to provide more short-term economic benefits to the tenant (such as lowering the rent for the next six months) in exchange for the landlord getting more favorable terms in other provisions of the lease (perhaps a longer or shorter lease term, eliminating renewal options, increasing the tenant’s maintenance or repair obligations, increasing the rent at a defined time, or other such provisions).
The parties can also agree upon some combination of these factors. The landlord could also tie the rent to increases in the tenant’s gross revenue, effectively obligating the tenant to pay more rent as its ability to pay increases.
In evaluating the options, the landlord needs to understand the tenant’s current financial condition and future financial prospects.
For commercial tenants, the landlord should request copies of current and projected financial statements. The parties should discuss the likelihood of the tenant being able to restart their business and what that business will look like in the next six months.
For residential tenants, the landlord should discuss the tenant’s employment prospects for the next six months. If the tenant has been furloughed, when does the tenant anticipate going back to work? Will it be part-time or full-time? If the tenant has been laid off, how much is the tenant receiving in weekly unemployment compensation? What are the tenant’s job prospects over the next six months? Tenants may not have answers to these questions, but it is important to have this discussion so as to understand what the tenant may—or may not—be able to afford (if anything).
Whatever the parties agree upon, it is inclement to have a written agreement signed by the parties to reflect their new arrangement.
This article is written by Patrick Casey, who is a business attorney with JRG Attorneys At Law in Monterey. You may reach the author at (831) 269-7114 or at firstname.lastname@example.org.
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