Due to the downturn in today’s retail economy, many commercial tenants are financially unable to afford to pay their ongoing rental obligations at their lease’s rate. Businesses which generated enough monthly receipts to pay, for example, $10,000 per month rent, now are lucky to bring in $4,000 per month with no real improvement in sight.
What protections do tenants have to landlord’s threatened eviction actions? On April 6, 2020, the California Judicial Council issued an order barring all California courts from issuing an unlawful detainer summons for at least 90 days after Governor Newsome may declare the existing state of emergency related to the COVID-19 pandemic amended or repealed, i.e., landlords may not now, or for at least 90 days herefrom, file an unlawful detainer action in court to evict a residential or commercial tenant. So tenants have been given a reprieve, i.e., a delay, but not forgiveness, against being evicted for not paying rent.
Cal Civil Code § 1167 has been amended effective 1-1-2020 to require that any tenant who cannot afford timely to pay its rent must deliver to its landlord within 7 days after the rent become due a written notice to landlord specifying that due to COVID-19 caused income reduction tenant was not able to afford to pay that month’s rent. No proof of reduction in income need be attached to the notice, yet tenant is required to maintain access to relevant documents to support its income reduction claim, e.g., income & expense record and their backup bank records. Once the emergency stay has been lifted and the lawful detainer action may proceed to trial, the court may rule in favor of landlord but allow the tenant time to cure its rental arrears before enforcing an eviction order.
So a tenant faced with an assertive landlord who threatens to evict once allowed by the court has some timing to leverage to negotiate with landlord to adjust the rent down to what tenant may be able to afford – this under tenant’s threat simply to remain in possession indefinitely without paying any rent. Cash flow-weary landlords have great incentive to negotiate down rental obligations with tenant’s legal counsel.
A further reason landlords should negotiate down the rent is that if the case ultimately gets to trial, the tenant may prevail in limiting the amount of, or eliminating its obligation to pay rent under one of three available legal defenses:
- force majeure,
- frustration of venture, or
- impossiblity of performance.
For either of these defenses to work, tenant’s financial situation must have been (and continues to be) dire, e.g., foot traffic at the site’s shopping mall is substantially reduced, e.g., by 50%, such that it is impossible to generate enough income to pay the rent. No landlord wants to “roll the dice” for 12 months’ time until trial with a non-paying tenant during such time. Also, although attorney’s fees may be recoverable by the prevailing party, many leases limit recovery to $1,500, or less, for example. So a landlord’s refusal to negotiate down the rent may be a major cash-flow mistake for landlord.
Defense counsel’s arguments to landlord’s property manager may be, “Look, you can’t get blood out of a rock! I’ll send to you tenant’s ‘financials’, i.e., applicable income & expense records, balance sheet, and income tax returns, for review, so that we may begin to talk about what my client may afford to pay over what period of time. Otherwise, it’s going to be a long, and expensive, haul to get to trial, and if you win, dealing with tenant’s proceeding in bankruptcy court for relief”.
About the Author: Attorney, Pete Wittlin, 30+ year real estate and bankruptcy law attorney represents distressed commercial tenants seeking to reduce their ongoing rental obligations and stay in business. Tel. (949) 430-6366. Pete is also the 30-year Editor of the OCBA’s Real Estate Law Section’s monthly “Real Estate Law Update” and the section’s current annual April guest speaker on top appellate case decisions & legislative developments.