Some things to keep in mind are that defaults happen, so the consequences of that default are at your discretion. Now there are things, in many leases, that get triggered when the defaults happen. Sometimes they’re things like ability to sublease. There’ll be things like obligations put on a guarantor, like a guarantee, like that guarantee may be extended if a default happened. Or you may need to notify the franchisor of a tenant because there’s been a default. That is important to keep in mind, because sometimes those can give you leverage and sometimes help you with that decision about: “Okay, I can modify my lease in this way automatically because the default happened, but I should probably just send them notice that a default did happen, as I continue to work it out.” Now, I wouldn’t do this work for a residential lease. This part is very, very specifically on a commercial lease only. For a residential lease, talk to a real estate attorney because sending a notice that there’s been a default could be very detrimental to your long-term purposes.
Part of your strategy should also be that cost element. It probably goes without saying, but how much is it going to cost you? And what’s the likelihood of prevailing? Those things are very, very important. You know, we’re business people here, and we need to determine: is this worth the investment? Is it worth the risk? Am I going to get the return on the money that I outlay on?
So let’s talk about four strategies that may help you. Number one is evicting. Right now, you’re not allowed to serve it. You wouldn’t be able to file it for 90 days after the emergency period is over. That period may be July 28. It may be extended out further, so it’s 90 days after that period. So eviction isn’t really even an option at this point, but it certainly could be something that you’re gearing up towards. For your commercial tenants, you may very well want to serve that three-day notice, just so that when you can file an eviction, you are able to. But really, it’s whether you decide that eviction is the right route for you. The other problem with eviction is that judges, by the time this gets heard, may be very inclined to lean towards the tenant anyway. The rules are already stacked that way; judges could easily lean very, very strongly towards tenants.
That said, there is kind of a way around eviction; an eviction is to really remove the tenant from the property, but you still can sue on the lease, and this is a possibility for you. As courts begin to reopen you can file it, and they will issue a summons on the lease contract itself. It will not give you the right to retake the property or to remove that tenant. But you can collect based on time. The downside is it could be very expensive. So it all depends on the other side: how much money they have, how likely are they going to be able to do things. They may decide to leave anyway. The other side of the coin is that judges may be inclined to be tenant-centric, and they may say that the eviction moratoriums are in place—that even though this isn’t a lawsuit on the eviction, as a matter of equity, it should be interpreted as such. They could do that; it would be probably within their discretion to make that decision.
But you could also use it as leverage. You could file a lawsuit, then use it as leverage in order to get your money and make things happen. Now, it can be worth it if it’s worth it. It’s a money thing, and it’s a long-term strategy. This could make sense for your specific situation; in some cases it absolutely will make sense. If it’s a large-credit tenant and they’re not paying their rent, it might make sense to do it. I would say if you’ve got a Burger King tenant, it might very well make sense; they have the ability to pay but aren’t paying. I’ve heard of some Starbucks that haven’t been paying rent also. I haven’t actually seen one of those yet, but they may do it.
Again, for suing, this is very specific, I have to say it over and over just to make sure I’m very clear: I’m not talking about your residential tenants. For residential tenants, you have to talk to a lawyer, and make sure you tread very carefully, because the rules are very strict.
Another option, number three, is just waiting to see what happens; hoping rent comes in, reminding them every so often that their rent is due, and sort of letting things go. This is a completely valid option, if you can afford it, and if your mortgage obligations aren’t requiring that rent to come in, that may be what you want to do. If you do decide this, the only caution I would have is look over your lease and make sure that there’s a waiver provision. Almost every lease does have a waiver provision, which says that if the landlord just accepts partial payment or doesn’t collect rent during that month, that it doesn’t automatically become a waiver for the tenant. Just make sure that that’s in your lease. If it’s not in there, then you definitely need to consider something other than this.
And that gets us to what I think is the best option, option number four, and that’s renegotiating. This is a time to reset your leases. You’ve got tenants with leases that are just not quite perfect. So, a great example is that I have a lease in one of my buildings from 1990. It’s very old, how it talks about pass-throughs is old. It doesn’t make it very clear that property taxes are due. If my tenants know this, this is a time to take advantage of that and to renegotiate. You’re giving something in exchange—you’re entitled to get that back rent, you’re entitled to get that money. But this is an opportunity, by affording some time or giving something that the tenant needs, to get something that you need too. It could be something like sales reporting numbers. I mean, if they’re in retail and you’re not getting sales numbers, this is definitely a good time to negotiate that. I would only do this if people are in default. If everybody’s been paying, then this would be kind of strange to go to. But look at those things that you want and how you can improve your lease, because you can add value to your building just by improving the lease.
The approach to renegotiation is very important. You’d be very surprised at how incredibly well a good approach from an attorney can be taken by a tenant who’s in default. Yesterday, I approached two very different tenants. One was a retail tenant, and one was a residential tenant. I went to each of them and I said, “Hey, I represent these people, and I would love to talk with you on your phone about your situation, and understand what your situation is and see how we can resolve this.” Very simple, honest. And the response I got, you’d be surprised—it was extremely excited. These tenants have been scared about you coming to them and saying things like, you’re demanding the rent and things like that. The tenants are scared, and by approaching them in the right way, it sets the whole negotiation process on the right track. It sets it in problem-solving mode, rather than, “Well, we’re going to just sue you and we’ll see you in court.” Both of the people who I contacted were positive; one of them specifically said, and I’m quoting here, “I’d be very happy to talk with you. Give me a call.” So, great! I love a response like that, because then it’s okay, and I don’t need to be adversarial. I need to protect my client’s interests, but we can solve this problem. And I think we can; my clients are very reasonable, and we’ve now set it up for the tenants to be reasonable as well.
There are two types of deferment that you can do as part of your renegotiation. One is amortization, which is when the rents are repaid over a period of months, and that begins at some point in the future, e.g., in three months it becomes due. So one of my clients is a very large franchisee; he owns 30 stores. He came to me at the very beginning of the crisis and said, “I’m very worried about making my April rent. Can we negotiate?” I said, “Yeah, we can discuss that. Let’s see what we need to do. What are you asking for first?” And he said, “Really, all I’m asking for is up to three months.”
And I said, “Okay, well, up to three months. It’s kind of vague, so how about we do something like: I’ll give you up to three months to defer your rent. You still need to pay all of your CAMs, but up to three months, you can do a deferment. But I know you’re applying for all of the SBA loans—as soon as those SBA loans come in, you need to start paying your rent.” And that was acceptable. The deferment we negotiated was, beginning in April, any rent that’s past due gets repaid over a period of three months, beginning in July. So that was a dream come true. It was a very easy negotiation: he was happy, I was happy, that worked out very well. So that’s the amortization.
The other way to do it is a lease extension. Basically, you’d say, “Okay, your lease ends in June of 2021, so we’re going to extend it by three more months, and then the lease amount will be that additional amount to make up for the past.” That’s a little bit less common, but it is happening right now.
So, let me talk with you a little bit about me and my practice. I’ve been running Moschetti Law Group for quite a while. I come from a background primarily in litigation. I was a litigator for a long time; I practiced primarily up in the Bay Area. I had a lot of great clients. I was very fortunate that out of law school, I had some notable names, and I’m very thankful for being able to represent them. I’ve represented Some C level executives from some major banks and investing institutions that you’ve heard of, and some extremely prominent technology CEOs. I was lucky to build a very fast reputation amongst those people and get to represent them: some high-level investors, a lot of multifamily.
So I practiced there for ten years, and then I moved down here. I have been working a lot in the brokerage space as well, learning the the finance side and bridging to my financial education. What I really enjoy doing is looking at it from both ends, because all these decisions for commercial real estate owners are not just legal decisions, they’re financial decisions as well, so you need to have an eye toward growth and you need to have an eye toward how your cash flow is going to work—making sure you’re profiting properly.
All those things need to be met in order for it to be a good action, and that’s what my firm brings to the table: the ability to look at it more holistically than then some other law firms do. I also try to operate more as a boutique; I try to make sure that you’re able to get a hold of one of our attorneys right away. We are here for you, we’re here to serve. I believe communication is extremely important. You have the right to be updated with your matter, anytime you want. We have systems in place to make sure that our communication is excellent, and we also have systems in place to make sure that your specific goals are met, that our legal strategy needs to match up with your business strategy. That’s what sets us apart.
So in conclusion, the rules can be really complicated because there’s so many layers: you’ve got your state rules, your county rules, your local rules, your court rules, and then just general rules as well. You also have your laws and things like that, you have your leases, and all those things have to mesh together. It can be complicated. And if you need help with strategy, my firm is is ready, willing and able to help you with that, or any prominent real estate attorney can help you with it as well. But I’m happy to have those conversations with you, and make sure that we can get you on the right track. Now, if you can renegotiate your lease, that’s great. I really do believe that your best outcomes happen by renegotiating; I’d much rather see a very successful negotiation, where everybody walks away at least somewhat happy, than have to take it to court where nobody is going to walk out happy at all. That’s the best situation.
I will caution, on the residential side—before you have those renegotiation talks, please talk to an attorney first. Even trying to get to an agreement can be a violation of the rules, which is punishable and you can be fined for. For residential people, you have definitely got to talk to an attorney. But I’d encourage commercial owners as well to talk to an attorney, even if it’s just to say, “Hey, this is what I’m thinking about doing, does this make sense? Am I going to get into hot water?” I’m happy to have those conversations with you.
So with that, let’s go to some question and answer and see where we can go:
Okay, somebody wanted me to go a little bit more into force majeure. Force majeure can be thought of as the act-of-God claim. It can excuse performance, but it’s really a very specific thing. Almost every lease says it does not excuse the performance of paying rent. What it is designed to do is to excuse performance of certain things; for example, your ability as a landlord to deliver to the tenant may have been interrupted by the coronavirus situation. And so a force majeure is a valid claim to defend against holdover penalties or the operating covenants, like you need to be open certain hours or do tenant improvements. When those have to be done, force majeure can be a valid excuse.
Great, security deposit burn-down. So security deposits can be burned down; I would say this is something to consider in the commercial space, I would not do it in the residential space without talking with an attorney. The security deposit burn-down is when you take some of that security deposit as partial rent. Do it in writing—it should be written out. It would be most helpful if you had an attorney write this, because it’s a substantial change to your lease. On the residential side, do not do this without talking with an attorney. And I think that’s it.
So I want to say again, I really value your time today. Thank you so much for letting me talk with you. We are going to be doing these webinars every month on different topics. We are recording this and so this will be made available to you, as well as a transcript, as well as the local rules. A lot of you have been asking for the rules: yes, I will send those out to you and I will also put them up on our website, so you have a nice place to find them. So again, thank you for your time. I appreciate the opportunity to talk with you about this, and have a great rest of the day.