Repayment of COVID-19 Deferred Rent for Commercial Tenants
By Sandy Mallory
Paying rent during the COVID-19 crisis has been a serious hardship for most retail tenants and many will not be able to survive the pandemic. Retailers who have been ordered by governmental officials to shut down their businesses or severely curtail their operations to prevent the spread of COVID-19 have been granted a temporary reprieve in the form of an eviction moratorium, allowing the deferral of rent during the COVID-19 emergency. These moratoriums do not require landlords to abate or forgive rental payment, only to defer them for a specified amount of time without risking eviction; all deferred rent must be repaid. The period of time during which a tenant is required to repay deferred rent is governed by local laws and/or governmental regulations. These local laws and/or governmental regulations are continually changing, and this article only addresses those local laws and regulations in effect as of October 1, 2020.
If a tenant’s business is located in the County of Los Angeles, then the time period for repaying deferred rent is governed by the resolutions adopted by the Los Angeles County Board of Supervisors (the “County Order”), unless the City in which the business is located has its own moratorium and that moratorium has more protective provisions for the tenant, in which case the more protective provisions apply. (1) Under the County Order, a commercial tenant with 9 or fewer employees as of March 4, 2020 has 12 months to repay deferred rent and, within 7 days after the date rent is due each month, is required to self-certify to its landlord that it is unable to pay the rent due to financial impacts related to COVID-19. There is no requirement for tenants with 9 or fewer employees to repay the deferred rent in equal monthly installments. A tenant with 10 or more employees but less than 100 employees as of March 4, 2020 has 6 months to repay deferred rent and, within 7 days after the date rent is due each month, is required to provide notice and documentation to its landlord demonstrating that it is unable to pay the rent due to financial impacts related to COVID-19. (2) The deferred rent payable by tenants with 10 or more employees but less than 100 employees are required to repay deferred rent in 6 equal monthly installments, unless the landlord agrees to another repayment plan. The repayment period for commercial tenants covered by the County Order runs from the date the County Order is lifted, which at the time of this writing, is October 31, 2020, subject to further extension by the Los Angeles County Board of Supervisors on a month-to-month basis. (3) Tenants who are able to pay some rent are encouraged to make partial rent payments.
The City of Los Angeles (as opposed to the County of Los Angeles) has its own eviction moratorium for non-payment of rent due to the financial impacts of COVID-19. Ordinance Nos. 186585 and 186606 (collectively, the “City Order”) codify the current eviction moratorium in the City of Los Angeles. Under the City Order, commercial tenants would have just 3 months after the Mayor declares the “Emergency Period” ended to repay all deferred rent, or face eviction. Until August 31, 2020, the City Order, not the County Order, governed landlords and tenants in the City of Los Angeles. (4) However, on September 1, 2020, the Los Angeles County Board of Supervisors adopted a resolution that establishes the County Order to be “the baseline for all incorporated cities within Los Angeles County to the extent that the cities’ eviction moratoria do not include the same or greater tenant protections as the provisions of the County’s Eviction Moratorium.” Thus, commercial tenants in the City of Los Angeles with less than 100 employees are now governed by the County Order described in the immediately preceding paragraph, which affords greater protections and longer payback periods than did the City Order. The City Order does not have notice requirements, so arguably, the requirements for notice, self-certification and providing supporting documentation to landlords does not apply to commercial tenants in the City of Los Angeles. Also, though the County Order applies to commercial tenants having up to 100 employees, the City Order at present still covers commercial tenants having from 101 to 500 employees as of March 4, 2020. Again, these orders, laws and regulations are constantly being amended, modified, and superseded, so what applies today may no longer apply next month or next week.
In addition to prohibiting a landlord from prosecuting an eviction action against a qualified commercial tenant based on non-payment of rent during the “Emergency Period,” the City Order and the County Order contain provisions that prohibit landlords from serving tenants with a “notice to pay rent or quit,” which is a prerequisite to an eviction action. Some landlords are interpreting the City of Los Angeles and County Orders as allowing the service of default notices, but not allowing the service of the statutorily required “3-day notice to pay rent or quit” until after the Order is lifted. This distinction is important because the existence of a default can trigger the loss of rights on the part of a tenant. For example, a lease may condition the tenant’s right to exercise an extension option on not ever having been in default. Another example is that a default could trigger a landlord’s right to draw down on a security deposit or letter of credit. The big question is whether tenants can be found by a court to have defaulted in the payment of rent even though an applicable governmental order permitted those tenants to defer those rent payments. This question has yet to be addressed by the California courts or our public officials.
(1) The Los Angeles County Consumer and Business Affairs page contains a link to a list of the cities that have their own moratoriums in place: https://dcba.lacounty.gov/noevictions.
(2) Sample forms for notice and self-certification can be found at: https://dcba.lacounty.gov/wp-content/uploads/2020/04/Self-Certification-4.21.20.pdf. These are only samples and were attached to the County resolution dated June 3, 2020 and revised June 23, 2020. Thus, some information in the documents may no longer be accurate, such as the expiration date of the moratorium and the applicability of the County Order to cities that have their own moratoriums.
(3) As of June 1, 2020, tenants with more than 100 employees or which are multinational companies or companies that are publicly traded no longer qualified for the protection of the County Order.
(4) Prior to September 1, 2020, the County Order, by its own terms, applied only to unincorporated cities within the County of Los Angeles, or to cities that did not have their own eviction moratoriums in effect.