What is a landlord to do in these difficult times dealing with covid-19, moratoriums from city, state and federal governments along with rent not coming in regularly from tenants. Here are some thoughts from two Oregon attorneys that may help landlords.
By John Triplett
Rental Housing Journal
Many landlords have been without clear guidance on how to deal with late rent payments, tenants and laws during the moratoriums around COVID-19.
Rental Housing Journal asked a couple of expert Oregon attorneys recently to weigh in on the question: What is a landlord to do in these difficult times?
The attorneys, Bill Miner, partner-in-charge, with Davis Wright Tremaine in Portland, and David J. Petersen, partner, Tonkon Torp LLP and chair of the Real Estate and Land Use Practice Group, each had several suggestions for landlords.
Under the current Oregon moratorium, a landlord cannot terminate a tenancy or threaten to terminate a tenancy for nonpayment of rent due based on Oregon law under HB 4213. So far, the moratorium has been extended to September 30.
Landlords so far have avoided being stuck between “a rock and a hard place” Petersen said, “because there’s both a moratorium on evictions for nonpayment of rent and a moratorium on foreclosure for nonpayment of mortgages, and they both expire September 30. “But unless tenants can start paying rent on October 1 (including back rent), or the foreclosure moratorium is extended, then landlords will be between a rock and a hard place at that time.”
“So for landlords and tenants both, and for their attorneys for that matter, we’re all kind of just in a holding pattern,” Petersen said. “Many tenants are not paying the rent. But many landlords are not paying their mortgages. And nobody can really do anything about it, but come October 1, assuming that the legislature or the governor do not act to do something to extend it or change it, as long as those two things move in lockstep with each other, then it’s not so bad.”
During this difficult time, Miner added, “I think you could probably ask 20 different landlords on the best tactics, and you’ll get 20 different answers. Alternatively, you can ask 20 different landlord attorneys and get 20 different answers.”
Landlords need income for more reasons than just paying the mortgage
Petersen said in the case of landlords, “They’ve got to upkeep the facility. They’ve got to eat. So it’s not a perfect situation, but certainly probably the biggest single expense landlords have is their mortgage. And they got some relief there because the foreclosure moratorium is big.”
So with the rent moratorium and foreclosure moratorium, “if those two things were to get out of whack, then I think things will tend to go haywire. That’s actually what we were worried about before June 30 when (the moratorium) was extended to September 30, because previously the moratorium was set to expire on July 1.”
So, what is a landlord to do?
Petersen said while not perfect, he would offer a couple of suggestions.
“No. 1, when October 1 rolls around, assuming things don’t change, the rent that’s going to come due from October 1 onward is presently due. The deferred rent, or the pre-October 1 period, is not due until April 1, 2021, so landlords would be best positioned to make clear with their tenant that the money they start receiving on October 1 is applied to past-due rent if you can achieve that because then you’ll be both collecting the past-due rent and you’ll be collecting the current rent, assuming of course the tenant can pay.
“On the other hand, if it’s just applicable to the current rent, then you still got this nut for the past-due rent that you’re not going to collect until April.
“So it’s advantageous for the landlord starting October 1 to apply payments first to the past-due rent. So if you can achieve that, that’s good. The way the law is set up in Oregon is that the tenant has to specifically notify the landlord what the rent applies to, the payments apply to, so if they don’t then the landlord would be free to apply it to past-due rent. So that’s the first thing that I would suggest,” Petersen said.
Miner also offered a couple of suggestions.
“If landlords have instances where they have tenants who they know can pay, but (those) people are taking advantage of this bill, the landlord should contact their legislator and give them specific examples of tenants who are taking advantage of the bill.
“To be fair, I haven’t heard of a lot of tenants who are acting in bad faith. But I think we need to know about it if there are, because there’s no means-testing to this bill. It just says: ‘you don’t have to pay rent.’ It doesn’t matter if you can pay, it doesn’t matter if you’ve been negatively affected by COVID-19, or if you’re just being a jerk. So that’s No. 1. Legislators need to know if there are bad apples out there.”
What else is a landlord to do?
“There’s nothing in the bill that says you can’t remind tenants of what they owe,” Miner said. “It’s okay to continue to send a monthly statement saying, ‘Here’s what you owe. Here are all of your utilities.’ You can send those types of statements.”
Other than that, “a landlord needs to wait until the end of September,” when landlords can send notice in October.
If a landlord asks a tenant to provide information concerning how they plan to pay the rent or a rent payment plan, Miner said that “offering a payment plan and suggesting a payment plan is perfectly okay.” However he said landlords should avoid making any types of threats, or doing anything that sounds like a threat, to the tenant. He said landlords should be very careful especially to stay away from any threats suggesting what may happen after September 30.
Miner says that approaching tenants in a collegial fashion – “We’re assuming that you’re not paying because you’re being negatively affected by COVID, right? We understand these are hard times and trying times … is there some type of repayment plan that we can work out?” will get the best response.
Put the magic language in any agreement with tenants
“If a landlord does end up working out a repayment plan, it’s of course important to get that in writing, get it signed by both parties,” Miner said, adding that HB 4213 set aside some of the waiver arguments found in Oregon law.
“I think if you have a payment plan, you’re still going to want to put the magic language in there that preserves a landlord’s right to bring an action down the road once a landlord is able to bring an action.”
Some attorneys may advise landlords that if they accept partial rent payments, such action could permanently change the amount of rent due in the lease. However, Miner said, “right now the bill suspends the waiver provisions of the statute, which is ORS 90.412” The current language should protect a landlord from waiver.
“However, tenants’ lawyers are very creative in what they do. And so I think a tenant lawyer could potentially find a run-around of that exception. So I would follow the rules that are found in 90.412 to be safe.
“A landlord should work with their attorney or with their management company to make sure that they have the magic language in there. And the magic language essentially being: ‘Hey, look, I’m accepting a partial payment. By accepting a partial payment I’m not waiving my right to send you a notice of termination in the future. And everybody agrees that I can, at some point in the future, actually terminate your tenancy if you don’t pay the balance.’ I think something along those lines. Most forms that management companies or attorneys use have that magic language included.” Miner said.
Petersen pointed out another issue involving current leases.
“If landlords already have a lease amendment in place that they entered into with their tenants, pre-June 30, and that amendment is stricter for the tenant than the current rules of the current moratorium, chances are it’s unknown whether or not that will be enforceable.
“The legislature tried to address that in the bill and said that basically any other private arrangement reached between landlords and tenants that was harsher for the tenant than this bill aren’t enforceable. I think it remains to be determined whether that’s legal – if they can interfere with a private contract in that fashion.
“So landlords who have lease amendments in place that attempted to deal with COVID-19 that were less generous to the tenant than the law, depending on the financial incentives, may have an incentive to try to enforce that nonetheless, but it remains to be seen whether or not that’s going to happen.”
Petersen added, “I suspect some landlord somewhere will test it, sooner or later, and then we’ll know.”
When asked about the ability to change private agreements, Miner added, “it is an important question of whether the Legislature is violating the Contract Clauses of the Oregon and U.S. Constitutions, especially when the Legislature is allowing individuals who may not be negatively affected by the emergency declarations. If a landlord ends up in a lawsuit alleging violations of the law, the landlord should talk with their lawyer about such an argument. Is the law Constitutional?”
Maintenance, habitability requirements and security deposits
Both attorneys agreed that landlords and property managers may want to put some maintenance or other improvements on hold unless it affects the landlord’s habitability requirements under Oregon law.
“Defer all the maintenance you can defer,” Petersen said. “You have very limited cash flow and you’re going to have to do triage. Non-essential building maintenance is probably just going to have to wait. I think a tenant would have a hard time complaining that their building is not being maintained to the standards that they’re used to given that they’re not paying the rent.
“There is an implied warranty of habitability in all residential property in Oregon, so the landlord is still going to have to meet that minimum habitability standard,” Petersen said.
As far as the maintenance side, “that’s another problem with this bill,” Miner said. “Landlords continue to have habitability requirements. They have to meet their duties for maintenance. But if you have improvements or something along those lines, (it’s) probably best to put those things on hold until we get through this pandemic,” Miner said.
Miner said landlords and property managers cannot use security deposits to help pay for maintenance or to help with mortgage payments.
Landlords and their mortgage payments
“Those security deposits are still security deposits that you are holding under the Landlord Tenant Act. If you are having a difficult time with making a mortgage payment, the best thing to do is to contact your mortgage provider and ask if you can get relief, especially if you’ve been economically harmed. Of course, the landlord as a borrower is probably going to have to actually show some economic harm.” Miner said.
Petersen said his advice for landlords who are not getting rent payments from tenants is “to get out in front of it with your lenders. Lenders right now, in our experience, my experience and my firm and my creditors’ rights group, is that lenders are also in a kind of a cooperative mood right now, and they’re perfectly willing to work out payment plans, forbearance agreements.
“Everybody likes certainty, and lenders particularly like certainty. If they can get something on paper that will give them an understanding of how they might get partially paid or when they’re going to get paid, in my experience most lenders are interested in that. So don’t wait until October 1 when you’re in default of your mortgage to call them. Get out in front of it and find out what they’re doing for borrowers now because you may feel alone, but there’s a gazillion similarly situated parties,” Petersen said.
Other kinds of lease breaches and the courts
Miner said while many people are focused on and talking about the non-payment of rent, “If there were other violations going on, or other breaches of the rental agreement, make sure that you’re enforcing those breaches.”
Petersen said the courts are operating in Oregon on a limited basis.
“So at least in theory, you could even get into court today on a lease-enforcement action if your tenant was in default for something other than nonpayment of rent, by violation of a use clause or hazardous materials, or who knows? Anything that’s not nonpayment of rent is still at least, in theory, something that could result in a termination of a lease and an eviction. Now, I highly doubt you’re going to get the kind of rapid response that you normally get for forcible entry and detainer, or unlawful detainer as they call it in California, but you still should be able to do it,” Petersen said.
The coming clash of political forces
Petersen compared some of the differences between commercial landlords and the residential side.
Petersen said on the residential side, there’s going to be an interesting clash between tenants who just can’t make up the past rent and the trend in Oregon to protect tenants.
“That’s going to be really interesting to see how that plays out. On the commercial side, I guess there’s a little less sympathy for the tenant that can’t pay its rent. I think we probably are going to see come April next year – or even October – a rash of evictions, tenants just walking away or filing for bankruptcy. Those are probably the three most likely outcomes.
“I think in the residential market is where the rubber’s really going to hit the road, because the legislature and the governor are going to be stuck between the financial reality for landlords who aren’t getting paid rent, and kind of the political winds that blow in favor of tenants,” Petersen said.
The legislature and the tenant lobby
Miner said, “At this moment in time, the tenant lobby is very powerful. They have the ears of important legislators and have been effective in getting their message out. They have also been able to use actions a few bad apple landlords to push through sweeping laws that has a negative effect on the vast majority of landlords. For whatever reason, the legislature is afraid to go up against these tenant groups.”
“I think it is really important for the landlords to get organized. Right now, they are not speaking with a cohesive voice. Landlords need to understand what their associations are doing and saying, because I do think that there have been some instances i where some pro-landlord organizations or individuals associated with those organizations are saying, ‘Oh, these types of changes are just fine.’ And so some of the pro-tenant legislators are saying, ‘Oh, look, we have at least one landlord that’s okay with this; therefore we’re covered.’
“Again, it’s important for landlords to know what’s going on with their associations. Ask the questions like, ‘What do you think of this? What are you doing to protect us?’ Ultimately I think we’re going to keep seeing the same types of proposals and disregard for the negative affects of landlords until we start fighting it at the Legislative level and in the Courts. How far can a Legislature go to challenge our existing contracts? How far can a Legislature go to lump all landlords in the same category? How are we expected to continue paying our obligations?’
“It’s one thing to have an emergency, and to be able to interfere with people’s contracts because of an emergency, but is the Legislature’s response to the emergency too broad?” Miner said.
“If there are people out there who are taking advantage of this, if there are tenants out there who can pay but are choosing not to pay for whatever reason, then they’re taking advantage of the situation. I would imagine that the governor and the legislature – that’s not their intent either.
“So we need to really narrow future laws to make sure we have common sense solutions, and the best way to do that is to get the landlords to the table,” Miner said.
Resources:
David J. Petersen, partner, Tonkon Torp LLP, 503-802-2054 david.petersen@tonkon.com
Chair of the Real Estate and Land Use Practice Group
William D. Miner, partner-in-charge, Davis Wright Tremaine, 503-778-5477 billminer@dwt.com
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