Landlord Rights and Remedies for Tenant Defaults in a COVID-19 World
By Winnifred C. Ward, Esq., Stewart Ward & Josephson LLP
In light of the COVID-19 pandemic and resulting historic and rapid job losses in California, Governor Gavin Newsom enacted a statewide prohibition on residential evictions through May 31, 2020, pursuant to Executive Order N-28-20, which was issued on March 27, 2020. Following that order, a number of California cities and counties instituted their own ordinances, which limited or prohibited eviction of commercial tenants. Subsequently, on April 6, 2020, the California Judicial Council issued a set of rules that prohibit California courts from prosecuting any unlawful detainer actions (i.e., it halts all court summons, judgments and lock out orders) and foreclosure actions “unless the action is necessary to protect public health and safety” for a period of 90 days following the date that the state of emergency is lifted in California. Given that many landlords experienced widespread commercial rent defaults in April (when rents first became due following the economic devastation of California’s shelter-in-place order that took effect on March 20), commercial property owners are wondering what remedies they still have available for non-payment of rent and what tenant defenses to that payment may apply.
First, to answer a question I have had numerous times over the past few weeks, the “force majeure” clause in a standard commercial lease likely will not be a basis upon which a tenant can claim that rent is not due. These clauses tend to be construed narrowly, and unless events such as a “pandemic”, “epidemic” or “public health crisis” are specifically defined as “force majeure” events, the recent COVID-19 economic shutdown likely would not be construed as a “force majeure” event. Moreover, most force majeure clauses in a typical commercial lease (including the current versions of the AIRCRE forms) provide that a force majeure event does not excuse non-payment of rent. Other possible defenses to rent payment due to the current pandemic that tenants may claim include acts of God, illegality, frustration, frustration of purpose, prevention of performance, duress, impossibility, emergency, unconscionability, absence or lack of control, rescission and/or breach of the covenant of quiet enjoyment. Whether any of these defenses will ultimately be successful will depend upon how the courts and arbitrators view the specific situation. Given the novelty of the current economic circumstance, judges and arbitrators may be more sympathetic to some of these arguments, but most landlords are taking the position that the rent remains due, regardless of the impact of COVID-19 on businesses.
Assuming that a given tenant has not paid rent, and the landlord and the tenant have been unable to work out any type of compromise to address the current business climate, then the landlord is left with a decision regarding whether to proceed with evicting the tenant and pursuing the tenant for damages under the lease. Our office has been advising landlords to work out rent deferments or abatements if possible (due to both the fact that keeping tenants and landlords afloat until better economic times prevail is in both parties’ interests and the difficulty of litigation, especially in the current climate), but if a compromise is not possible, or the tenant is either unreasonable or non-communicative, the landlord may be forced to take legal action.
In light of the new Judicial Council rules cited above, landlords may still serve notices to pay or quit, and file unlawful detainer complaints (subject to restrictions by individual jurisdictions – see below), but the California court system will not issue summons or lock-out orders. So, the action will be on file, but until the moratorium is lifted, the action will not move forward. Even if a judgment for possession has been granted in an unlawful detainer case that was prosecuted before the courts announced the moratorium, sheriff’s offices will not be directed to enforce an eviction order.
Given the above restrictions, it may seem pointless to proceed with notices of default in the commercial lease context. However, there still may be advantages to doing so. Among other things, a landlord can still serve notices to pay/perform or quit, and if the landlord elects a forfeiture in the notice, and the tenant does not respond within the cure period, the lease will still terminate under California law. The tenant would then be in holdover status as a month-to-month tenant, triggering penalty rent amounts for holding over (if the lease contains such a provision). Also, many tenant rights (e.g., a right to terminate the lease, reduce space, assign the Lease or sublease space) are contingent upon the tenant not being in default under the lease. Documenting a rent payment default may provide leverage by preventing the exercise of those rights. In addition, the ability to draw down a security deposit or letter of credit generally is predicated on a lease default, so exercising those remedies likely will require documentation of the default. Similarly, pursuing a lease guaranty might require the landlord to provide notice of default. Last, providing the notice of default clearly documents the default, including any late fees and interest, and can be used as a basis to create the record necessary to pursue an unlawful detainer if necessary once all moratoria have been lifted.
The following cities and jurisdiction have their own commercial eviction moratoria, as of the date of this article, although they seem largely unnecessary now in light of the new Judicial Council rules:
- City of Sacramento through May 31;
- City and County San Francisco through April 17 (but may be extended for another 30-day period);
- City of Los Angeles through an unspecified date;
- County of Los Angeles through May 31;
- City of Santa Monica through April 30;
- City of Pasadena through the termination of the later of any local emergency or local public health emergency that relates to the COVID-19 pandemic;
- City of Glendale through March 31;
- City of Long Beach through May 31;
- City of San Diego through May 31;
- City of San Jose through April 17, and the City Council may extend it;
- City of Santa Ana as allowed under Governor Newsom’s Executive Order (i.e., through May 31, 2020), or longer if that Order is extended by the Governor;
- City of Costa Mesa as allowed under Governor Newsom’s Executive Order (i.e., through May 31, 2020), or longer if that Order is extended by the Governor;
- City of Coachella through May 31; and
- City of San Mateo through May 31.
Most of the above moratoria require the tenant to provide to its landlord some proof of having been impacted by COVID-19, and require repayment of the subject rent over a certain time period following the lifting of the order. Some of the moratoria apply only to small- and medium-sized businesses, and some prohibit even the issuance of a notice to pay/perform or quit. All are subject to change given the fluidity of the current health crisis, and the above is not a complete list of all effected California jurisdications, so it is best to check the local jurisdiction before proceeding.
DISCLAIMER: This article does not constitute legal advice. Readers should consult with their own legal counsel for the most current information and to obtain professional advice before acting on any of the information presented.
BIOGRAPHY: Winnie Ward is a named partner of Stewart Ward & Josephson LLP. She specializes in office, retail and industrial commercial leasing, as well as real property acquisition and divestment. email@example.com; 916-569-8161.
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