The COVID-19 Response And Its Impact On Commercial Lease Payment Obligations

04.24.2020

Following the State of Emergency that was declared in California on March 4, 2020, myriad protective measures have been issued by both state and local governments in response to residential and commercial tenants struggling to pay rent due to the COVID-19 pandemic, to different and varying degrees. This has led to some confusion, particularly for commercial tenants, as some protections may be applicable only to residential tenants — leaving some commercial tenants unsure of what standards or laws apply to their lease agreements.

Commercial tenants should begin with Executive Order N-28-20, issued by Governor Newsom on March 16, 2020. This Order authorizes local governments to impose substantive limitations on commercial evictions through May 31, 2020, if: (a) tenants are unable to pay rent because of a substantial decrease in business income (caused by, for example, a reduction in opening hours or consumer demand) or out-of-pocket medical expenses; and (b) the decrease in business income or out-of-pocket medical expenses were caused by the COVID-19 pandemic, or by any local, state, or federal government’s response to COVID-19, and is documented.

In response to the Governor’s Executive Order, dozens of counties and cities across California have adopted and issued varying local orders and ordinances limiting evictions and deferring rent under a patchwork of requirements and qualifications specific to the jurisdiction. Accordingly, commercial tenants should look to the laws of their local government to see what substantive limitations to evictions may apply, if any. For example, in Los Angeles County, commercial tenants of properties located in unincorporated areas of the County can look to the Executive Order of the Chair of the County of Los Angeles Board of Supervisors for guidance, while commercial tenants of properties located within incorporated cities in Los Angeles County should look to their city municipal code or any applicable ordinance or executive order.

The City of Long Beach

While several cities in Los Angeles County have adopted ordinances or issued orders affecting commercial leases in response to COVID-19, this alert highlights the Long Beach Ordinance and analyzes the city’s layered ordinances governing commercial property rights as an example. Real property located in Long Beach is controlled by the Long Beach Municipal Code. The City of Long Beach adopted Emergency Ordinance No. ORD-20-0010 (the “Ordinance”), effective as of March 25, 2020, which amended the Long Beach Municipal Code to prohibit any action by an owner to evict a commercial tenant for not being able to pay rent due between March 4, 2020 to May 31, 2020 (and only for this specific reason); which delay was due to a substantial decrease in business income or out-of-pocket medical expenses caused by COVID-19 or by any local, state, or federal government response to it; and which was documented and communicated to the owner pursuant to the terms of the Ordinance. The Ordinance requires that a tenant must perform both the following pre-conditions before the expiration of any pay-or-quit notice: (a) notify the owner that the tenant may not be able to make its rental payment (or some portion of it); and (b) provide documentation supporting and/or evidencing the substantial decrease in their business income or out-of-pocket medical expenses.

The Ordinance does not relieve a tenant of the obligation to pay rent, nor does it restrict an owner’s ability to recover rent, except that an owner may not demand “late fees” for payments delayed under the terms of this Ordinance. This means that rent must still be paid — eventually. However, any pay-or-quit notices dated between March 25, 2020 to May 31, 2020 must include the following (or substantially similar) language:

The City of Long Beach has declared a state of emergency in response to COVID-19. If you cannot pay your rent due to a loss of income or medical expenses resulting from COVID-19, you need to notify and provide supporting documentation to [provide owner or agent contact information] immediately. You may qualify for protections against eviction and you may have a right to delay your rent payment and to repay such delayed rent over a six-month period.

The Long Beach Ordinance also clarifies that tenants are protected against eviction through May 31, 2020, and shall have until November 30, 2020 (i.e. approximately six months) to pay delayed rent without any associated late charges; provided that all such delayed and unpaid rent will become immediately payable should a tenant fail to make a regularly scheduled monthly payment after May 31, 2020, and such failure to make a regularly scheduled payment persists after the expiration of an applicable pay-or-quit notice. That is, only those rent payments due before May 31, 2020 may be delayed. Any rent due after May 31, 2020 (beginning June 1, 2020) must be paid timely, and a failure to do so in the face of an applicable pay-or-quit notice will waive a commercial tenant’s protections under the Ordinance.

Moreover, such protections under the Ordinance are to be asserted as an affirmative defense in unlawful detainer actions, which means that a commercial tenant may still be forced to suffer the costs associated with representing and defending itself in an unlawful detainer action if they do not timely pay rent. Accordingly, proper documentation and communication with one’s property owner remains essential.

Other orders may vary in key respects. For example, the City of Los Angeles allows for a broader definition of a tenant’s inability to pay rent due to circumstances related to the COVID-19 pandemic. The City of Los Angeles also allows the repayment of any rent due for up to three months following the expiration of the “local emergency period.”

Conclusion

Due to the authority of local county and city governments to directly address the issues created by COVID-19 in their own communities, a patchwork of protections for commercial tenants has resulted. This patchwork of laws, and the constant flux of the COVID-19 pandemic, has created an exceedingly fluid situation as both state and local governments struggle to address the economic impacts of the still-developing COVID-19 pandemic. The protections for commercial tenants may be further extended or modified as the need arises.

AALRR has a team of commercial litigation attorneys who will be able to assist you to navigate tenancy issues, ranging from rent abatement and obligations due to business interruption, force majeure, impossibility, impracticability, and frustration of purpose doctrines, and commercial evictions. The rules and protections for your commercial lease may be subject to change by the local governing body and the application of the various rules are highly fact-specific and may or may not apply to your business. If you have any questions about which substantive limitations or protections pertain to your specific commercial lease agreement, contact the authors or your usual business law counsel at Atkinson, Andelson, Loya, Ruud & Romo for a thorough analysis of your lease and the impact of any rules or protections in your jurisdiction.