The COVID-19 situation is likely to be a concern for the upcoming year and maybe longer. We’ve heard varying news about whether there’s going to be a new spike in the winter, maybe new cases or maybe not. Be that as it may, what would have to shut down? Another shutdown would be very detrimental to our economy; it would also be very detrimental to our tenants, which means it would be very problematic for our landlords as well. And that situation may go on longer. It may go on beyond a year. A lot of us are hoping for the vaccine shots in order to make sure that we can stave off this infection. But it’s hard to say whether that’s going to happen on time or not. It hopefully will, but it may not; vaccines are difficult to do.
So the cities, counties and states are all reacting to these things, and they’re reacting based on what they think they need to do. New legislation in the California legislature is being enacted, which has great impacts on all of us—for example, Senate Bill 939, which we’re going to talk about. New York, for example, has decided to extend its eviction moratorium. Its eviction moratorium goes through the end of August. And that may happen here as well; we haven’t really heard word from the governor on what their plans are. They haven’t come out with new orders, there hasn’t been a press release as of this recording, so it may be that we won’t be able to open up anytime soon, really, or have businesses go back to normal again.
I think before we talk about the rules, it’s important to remember one thing: that your set of leases came into this situation already drafted, so it’s important to look at your lease first. Your lease may have vulnerabilities that you need to think about, because no one really foresaw that this would happen when they were drafting your lease. There are a couple of code sections I want to point you to, which, if there was an eviction action or a lawsuit on your lease, I would expect this sort of thing to be brought up. I’m not saying that it will be valid, but we don’t know for sure. Different judges will do different things, and we kind of have to let things sort themselves out. But these are certainly going to be some of the arguments that a lawyer representing the tenant is going to argue.
The first one that is a possibility is Civil Code Section 1441. It says, “A condition in a contract, the fulfillment of which is impossible or unlawful…or which is repugnant to the nature of the interest created by the contract, is void.” So, that obviously is of concern. I don’t think it’s too likely to be successful for a tenant to bring that kind of argument. The reason is the difference between a commercial contract and a lease. A lease really is, as we learned in Law School, a whole bundle of sticks. So it’s all these things: it’s your use of the property, your use to advertise the property, making sure that nobody else can come in who you don’t want to come in, and those types of things.
It’s a whole bunch of rights that you include in a lease, while a commercial contract tends to be just for one thing. It’s “you build this,” or “I’m going to sell you this and you’re going to get delivery of that,” and that’s really what impossibility is supposed to cover. Impracticability is similar. It’s that the performance is not possible because it’s excessive and unreasonably difficult to do. But that’s not actually in fulfilling the contract; you still gave the use of the of the property to your tenants. So they still technically have the use of it. You haven’t acted to take it away, and the performance of giving it to them hasn’t been taken away. It’s just that all their plans, of what they wanted to do with it, are not there anymore, and so there may very well be some Takings Cases that are filed.
Again, there is the right not to have your property seized or over-regulated by the government, so there probably will be some lawsuits. It’s unsure how successful that’s going to be. The main case on it, which I think would apply, is the Tahoe Sierra case, which was done in about 2002. Tahoe Sierra said that regulation from the government is allowed in most situations, and so I think that probably the Takings Cases won’t be successful either. There may also be a frustration of purpose argument, which is a common law argument, saying that the point of the contracts has become pointless or valueless. Well, that may be, but it also isn’t. The point of the contract was you giving the property and the use of it to the tenant. It hasn’t become pointless in that respect.
So I don’t think that that’s likely to prevail, but these are the things that you need to worry about. These are the things that need to be at least thought of, because if there is a lawsuit or an eviction, this is the argument that your tenants are going to be making. So let’s go through a little bit more about how we got here from the last slide.
On March 16th, Governor Newsom enacted State Executive Order N-28-20. What that did was give the local authorities the ability to increase their police power, to make certain rules about eviction moratoriums, or closing of commercial spaces. Before, they weren’t able to do that, so Governor Newsom overrode that order because of the emergency. What’s also important—what you need to keep in the back of your mind about this, and what should be part of all of your discussions with your tenants as well—is that consistently through this executive order, through what the county has said, and through pretty much what every city has said as well, it is very clear: nothing in this order shall relieve a tenant of the obligation to pay rent, nor restrict the landlord’s ability to recover the rent due. That’s really important, because your rent is due to you, and so you should be able to get it. It’s just how do we get to that, is what becomes more of a question.
State Executive Order N-66-20 extended N-28-20 until July 28. That’s the moratorium, and maybe it will get extended into late August. It all depends on how we reopen. So we started with California, but let’s talk about the context as it relates to Los Angeles County. There are a lot of properties in LA County, and a lot of you also have properties in Ventura. But I think because of how Los Angeles has done it, it will give you a little bit more context to see what some of those strategies are. Two things are important for LA County: first, it has a very narrow set of rules. It’s very, very strict against landlords, but it also only applies in certain areas; it only applies to the unincorporated areas, and cities which do not have an eviction moratorium. Most cities do. So really, more often than not, it’s your unincorporated areas; for example, the north side of the 101 in Calabasas is mostly an unincorporated part of Los Angeles County, even though it has an address of Calabasas.
What does the rule say? Well, first it gives the tenants 12 months to pay back unpaid rent, so after the the moratorium ends, they have 12 months to pay the landlord backwards. 12 months is a very long time, and in one respect it makes sense, because after two and a half months of not paying rent, it would be difficult to bump that up and get that all paid up immediately, when they haven’t had those sales. On the other hand, 12 months is a very long time for us as landlords.
Two things that, I think, are the worst part of this bill, are: number one, in order to make this claim and get that deferment, if the tenant has less than 10 employees, it may self-certify. So anybody could just write to their landlord and say, “I’ve been impacted by COVID-19, I’m not able to pay my rent, and so I’ll pay you back within 12 months after the order stops.” That’s very onerous because you could have somebody who has quite a lot of money, and we’ll talk about an example of that, who is just deferring because they can. It makes good cash flow sense for the tenant. It is a horrible impact on landlords. If they have more than 10 employees, they just need to show some sort of financial impact within seven days.
I think the worst part is number two. Number two is that this bill prohibits landlords, or those acting on their behalf, like their lawyers, from harassing or intimidating tenants, and the problem with that is that it’s so vague. I mean, is it harassing or intimidating for me to call a tenant on behalf of my landlords? Is it harassment for me to call them once a week to say, “Checking on you, want to see where you’re at, want to make sure that you’re paying your rent?” A judge could very well say that’s harassment, and there’s a penalty which goes with that. In Los Angeles County, the penalty is $2,000 per occurrence. Well, if I’m making a phone call a week, that’s a lot of penalties that are getting racked up just for me protecting my clients’ interests, or for you protecting your own.
So let’s talk now about cities, and how the cities have reacted. We’re going to get more into the elements here because I think that’s a little bit better way to understand it. So we started with California, which said that local municipalities can make these rules. Then we zoom down to the county, which says, okay, this only applies to those unincorporated areas, and we’ve got very strict rules. But now the cities have all sort of reacted.
First off, when does this moratorium end? The city of Los Angeles is actually one of the most generous on when the moratorium ends, probably. They have said that it is three months after the local emergency period as declared by the mayor. Not to get on a political discussion here, but it seems like the city of Los Angeles is very tenant-friendly, and may very well decide to put off declaring the local emergency period as long as possible. It’s certainly within their ability, and they may. Some cities have decided, well, we’re just going to do it by proclamation of the city council, and some have a fixed date. For example, Thousand Oaks is June 30. Now, they could extend it, and they may. It’s a little too early to say they haven’t extended it, but they could.
The second element of one of these moratoriums is notice. Almost all cities require some sort of notice, except, interestingly enough, Los Angeles. Los Angeles is silent on the issue of notice; a tenant in Los Angeles does not need to give notice to their landlord that they’ve been affected and so they’re going to be withholding rent. That’s unusual, and we’re going to talk a little bit about that in a minute, but I also want to talk about some of the other cities first. In most of the other cities, the tenant needs to give 30 days notice and have evidence of the hardship. Interestingly, some cities have said there’s actually seven days to furnish notice, and then 30 days to provide that evidence. For example, Burbank and Beverly Hills both say seven days for the notice, and 30 days to show the hardship.
Now why is this important? Because it is important. It is extremely important because if the tenant hasn’t provided you notice as they are required to, then they are late on their rent beyond just a default under the moratorium, so the eviction rules do not apply if they have not given notice, and they are in within one of these things, and they are not a residential tenant. This only applies to commercial tenants. Make sure that you’re documenting whenever your requests come in, so that you can not only know about them, but also know when the notice comes due. For example, if your tenant in Burbank didn’t tell you until May 15, you have a valid claim in Burbank for it being late in May. But if they gave you notice on May 15th for June, that becomes more of a protected class. You couldn’t evict them in Burbank for June, but you could evict them in Burbank for May—that is, when you can evict them, because right now you can’t.
Let’s talk a little bit about that evidence they need to show. Most often, it is a substantial decrease in the business income caused by the pandemic or the government. This probably is not going to be a very substantial thing for them to have to show. But, for example, a restaurant doing curbside delivery probably has a substantial decrease in their income, but not all. If you look at what the news has been about Burger King, for example, they did not have a substantial decrease. In fact, their sales rose in most locations during the pandemic, because people still wanted to go out and get food that they didn’t have to make themselves, and so they were going to Burger King. So Burger King had substantial sales, and they wouldn’t be able to show that they’ve had a substantial decrease in their business, and even if they decided not to pay their rents, that would not be in accord with the rules here and so they would be responsible. So, it’s important that you also keep a record of that communication that you receive about their financials, as well as how you decided that they didn’t meet the burden that they had, and whether they had a substantial decrease in their business income.
Let’s talk about which tenants this applies to, because there actually are some cases where it doesn’t apply. In the city of LA, Burbank and Beverly Hills, for example, there are certain exceptions where they say, “Okay, these are eviction moratoriums, and giving them more time to pay back their rents doesn’t apply.” For example, a lot of times it’s a public company that it doesn’t apply to, or in the case of Beverly Hills, for Fortune 1000 companies it also doesn’t apply. It’s important to consider, does it even apply to these tenants? Because if it doesn’t apply to the tenants, or if they didn’t do the notice, or if they didn’t do the showing of evidence, it doesn’t apply to them, and so they still owe you that money right now.
There is time to pay back in most of these rules. In fact, every city that I’ve looked at, and every county, has different rules. The city of LA actually seems to be one of the shortest. City of LA’s timing is three months from the time that the mayor has declared the local emergency period over. The rest can range from 120 days, like Camarillo, to six months, which is most of them, to a year for Beverly Hills. And then there also is the issue of late fees. I get a lot of questions: can I charge late fees? And the answer is: no, except sometimes. So sometimes in the city of Burbank, yes, you can charge late fees. In Camarillo, you probably can charge late fees; their rules actually don’t say you can charge late fees and they don’t say you can’t charge late fees. So I would assume that you can charge late fees, and you can charge late fees if they didn’t apply for anything up above; if they didn’t give their notice, if they didn’t do their showing, or if it’s one of those tenants that doesn’t qualify, you can definitely do late fees.
Now, I’m talking just about commercial. This is not about the residential tenants. No charging late fees to residential tenants: you cannot do that. The rules are different for residential, and they get a lot more complicated. Really, if you have any questions about how to do it—how do you get notice from those tenants? do they meet the criteria for residential tenants?—the rules are so strict against landlords, so you really have to talk to an attorney to look at your individual case because one mistake can cost you very, very dearly. There are some very bad things happening and the rules are very, very generous towards those tenants; for example, if your residential area speaks predominantly Spanish, but you know that one of your tenants speaks English, and he hasn’t paid his rent and you give them that notice just in English—no, you didn’t give the notice at all because you have to give it to him in Spanish as well. You are required to give notice, not only for the language that you know that they speak or believe that they speak, but also the same in the general language of your community. The best practice is to serve that notice, which is formal and on the city website, in every single language; there can be no argument that you’ve done it properly. But let’s go on.