Across the country, residential tenants, small businesses, and even national retailers such as Cheesecake Factory, Subway, and Mattress Firm have declared war on their landlords by refusing to pay rent on account of the Covid-19 pandemic (“COVID-19”). This has sent shockwaves through the real-estate industry. As of April 1st, residential tenants owe an estimated $40 Billion in rent. Estimates for the commercial sector are not far off.
So far, federal, state, and local measures have focused on providing relief to residential and commercial tenants and even to some commercial landlords.
Ohio Commercial Landlords, Tenants and Lenders:
On April 1, 2020, Governor Mike DeWine, signed Executive Order 2020-08D (the “Order”) which asks Ohio commercial landlords to suspend (or forbear) all rental obligations for small business tenants that are facing financial hardship due to COVID-19. The Order also requests commercial landlords to postpone any evictions proceedings for the next 90 days, regardless of whether such small business has been financially impacted by COVID-19. Finally, the Order requests all lenders to forbear commercial mortgage payments for the next 90 days.
For avoidance of any doubt, this is a request by the State of Ohio, not mandated. It is important to discuss with legal counsel how the Order should be interpreted and applied with respect to your tenants.
How Should Commercial Landlords Act?
- Review your lease agreements with counsel. Certain provisions may provide relief to tenants due to COVID-19. Such provisions may include:
- Force majeure;
- Tenant’s insurance obligations;
- Anchor tenant / co-tenant requirements;
- Rent abatement;
- Premises access;
- Continuous business operation; and
- Eminent domain
- Review loan agreements and consider options for deferment. Due to the Order, commercial lenders may be more willing to work with commercial landlords to defer mortgage payments. The Paycheck Protection Program (“PPP”) in the CARES Act will provide small business tenants an influx of capital to make their lease payments, which will support requests for deferment. Large anchor tenants not qualifying for the PPP, however, will pose a greater challenge to commercial landlords and lenders in the short term. Communication, cooperation, and the development of a plan to mitigate potential risks will be key.
- Consider forbearance and other workout strategies. As discussed above, forbearance agreements can be entered into between commercial landlords and tenants. Forbearance agreements can specify that any COVID-19 relief proceeds obtained by tenants shall be remitted to commercial landlords, which include any SBA Paycheck Protection Program loan proceeds. Commercial landlords can also condition entering into a forbearance agreement upon tenants applying for such COVID-19 relief proceeds. Further, commercial landlords should ensure the terms and conditions of such agreements remain confidential. Other workout strategies can include: monthly rental reductions for a period of a time and/or allowing tenants to apply their security deposit to monthly rent.
How Should Residential Landlords Act?
The CARES Act provides borrowers, landlords and tenants with certain protections including mortgage forbearance, foreclosure moratorium and eviction protection.
Single-family borrowers with federally backed mortgages experiencing financial hardship related to COVID-19 are eligible for mortgage forbearance regardless of delinquency status. Upon request, forbearance shall be granted for up to 180 days and can be extended for up to an additional 180 days under certain circumstances. In such case, no additional fees, penalties, or interest outside of normally scheduled terms may be levied on the borrower.
Multifamily borrowers with a federally backed multifamily mortgage that remained current on payments as of February 1, 2020, may also submit a forbearance request to their servicer affirming financial hardship due to COVID-19. Upon request, servicers will be required to document the hardship and provide forbearance for up to 30 days and extend that forbearance period for up to two (2) additional 30-day periods. A multifamily borrower that receives forbearance may not, for the duration of the forbearance period, evict or initiate an eviction against a tenant for nonpayment of rent or other fees.
With the exception of vacant properties, servicers of federally backed mortgages cannot initiate a foreclosure, move for a foreclosure or order of sale, or execute a foreclosure sale between March 18, 2020, and May 17, 2020.
For the period of 120 days after the enactment of the CARES Act, the landlord of a covered dwelling cannot notice or initiate an eviction action to recover possession from a tenant for nonpayment of rent, fees or other charges.
A covered dwelling includes properties with a federally backed mortgage or multifamily mortgage, properties participating in a covered housing program included in the Violence Against Women Act, and properties participating in the rural housing voucher program.
Residential landlords and residential tenants should consult with their counsel concerning their rights and options under the CARES Act and applicable Ohio law. Commercial landlords, commercial tenants, and lenders should consult with their counsel concerning potential forbearance and/or other alternatives regarding payment of rentals and mortgages.
For more information or questions regarding this Client Alert, please contact any of the members of BMD’s Real Estate Group – Jason Butterworth, Blake Gerney, Kyle Johnson, Michael De Matteis, Justin Lovdahl, or Nicholas Karam.