What are some of the effects of the COVID-19 pandemic on rental operations?
Many jurisdictions have implemented tenant protections such as eviction moratoriums that stop tenant evictions during the coronavirus emergency. Tenants will not be evicted if they are unable to pay full rent during the COVID-19 emergency. Many jurisdictions also issued stay orders on all current evictions until after the coronavirus emergency has passed. While tenants affected by COVID-19 have temporary protection from being evicted, the bigger issue is their loss of income due to job closings or reduced work hours and additional expenses due to personal illness, household illness, school closings, and closing of childcare centers. For many tenants April rent is past due and there is good reason to believe that May rent will not be paid.
Rent defaults create financial hardships on many landlords, particularly independent landlords with a small number of properties, who depend upon steady, stable rental income from their tenants to meet their mortgage obligations.
Most landlords would prefer to keep their good tenants in place despite the unexpected rent defaults and are willing to work with tenants to find an acceptable plan for payment of past due rent. Tenants will not be charged late fees on unpaid rents as they work through payment of their rent debt.
However, a landlord should make clear in working with the tenant that the moratorium on tenant evictions is not a rent waiver and does not relieve the tenant of his legal obligations for rents.
In some areas, landlords have been asked, to the extent possible by the landlord’s own financial condition, to forgive rents for April and possibly May; discount tenant rent for the months of April, May, and June (those months being the expected period of COVID-19 related rent defaults); or defer rents during those months to be paid subsequently upon the expiration of the COVID-19 emergency declaration. Some cities have proposed installment payment plans of 6 months or more to allow tenants to make good on their past due rents. Payments would begin after the COVID-19 emergency has been declared over.
In other considerations that would allow a tenant to make payment toward or in full of unpaid rents could be the conversion of the tenant’s security deposit to rent obligations. If a landlord has collected a security deposit, usually equal to one month’s rent, a landlord might consider refunding the security deposit in its entirety to the tenant with the understanding that the tenant would use those funds to pay the current month’s rent. This could be problematic if the tenant does not perform according to the understanding. The landlord will not have financial protection to call upon if the tenant again materially defaults on the lease and/or physically damages the property beyond normal wear and tear. Such an agreement may not be allowed by some state statutes. Before considering this option it may be prudent for a landlord to obtain legal advice. The same cautions should be applied if the landlord collected a prepayment of the last month’s rent, and the landlord allowed the tenant to apply the last month rent amount to the current rent due. There could be complications with tenant understanding and/or inadvertent violations of applicable laws.
For many landlords, partial rent is better than no rent at all. A landlord has the ability to reduce rent or accept partial payments provided his rental practices are fair housing compliant – i.e., any change in stated policy is offered to all tenants that have been verified to have been impacted by the coronavirus. Payment arrangements cannot be selectively offered to one tenant and not to another tenant in the affected category. Written signed documentation of payment agreements should be retained in the tenant’s file.
In general a landlord should make sure his tenants understand their legal obligations for lease terms and conditions. For tenants who can pay rent, they should pay rent. For tenants impacted by the coronavirus as noticed to the landlord and subsequently verified by the landlord, they should understand that rent is still due but that landlords are willing to work with tenants to satisfy past due rent amounts. Any payment arrangement should be documented by a lease addendum or a supplemental agreement and signed by both landlord and tenant.