New York Courts have resumed some of their operations despite the physical closing of most courthouses and a continued moratorium on the filing of new non-essential cases. Proceedings, including conferences and oral argument of pending motions, are now primarily conducted by videoconference through Skype.
As it concerns landlord/tenant matters, the statewide moratorium on evictions remains in place through June and may be extended. The prohibition on evictions by New York City marshals also continues to be effective “until further notice.”
Several bills have been introduced in the New York State legislature concerning landlord/tenant issues. Some legislators have proposed pro-tenant legislation that would: (i) extend the moratorium on evictions until December 2020; and (ii) cancel rent obligations altogether for 90 days. Another proposed bill is favorable to landlords, and seeks to have vouchers sent from the State directly to landlords for payment of tenants’ rent. None of these bills have been voted on as of today.
Many commercial landlords are wondering: what’s next?
The Realities of Future of Landlord/Tenant Litigation
With many commercial tenants not paying any rent, commercial landlords may find themselves planning to litigate at the first opportunity. However, they must keep in mind the practical realities of life in a post-coronavirus world in deciding how to proceed.
When courts resume full operations and the moratorium on evictions is lifted, there will be a torrent of landlord-tenant cases and inordinate delays as a result. Substantial time and money will need to be expended if litigation is pursued. There will also be more risk involved, as judges with equitable powers may favor commercial tenants that were forced to close their businesses during the height of the pandemic.
Landlords who bring proceedings will need to seek discovery of their tenant’s finances to determine if the tenant actually had the financial ability to pay rent. Certain businesses, such as grocery stores, garment businesses that manufacture masks or surgical gowns, and retailers with significant online sales may have had the ability to pay rent due to a consistent revenue stream or, in some cases, revenue growth.
Discovery of this type is time-consuming whether conducted as of right in a plenary action, or after obtaining court approval in a landlord/tenant proceeding. Therefore, by the time documents are demanded and produced, many months will have expired, all while the landlord is not receiving rent and its own financial obligations continue. Given this, what can a commercial landlord do besides wait to litigate?
Alternatives to Litigation
Landlords should consider whether their business plans and financial circumstances would be better served by negotiation and private resolution. Has an entire building of tenants stopped paying rent? If so, reaching resolutions that quickly bring cash through the door might be critically important. How important is your location to the continuing viability of the tenant’s business? If the tenant cannot easily operate from a different location, you may have significant leverage in negotiations. On the other hand, could the premises easily be rented to a different tenant if the current tenant vacates the space? How would the rental rate charged to a new tenant compare to the current rental rate? Depending on the answer to these questions, the landlord may have more or less incentive to compromise.
If you conclude that your business needs are best served by negotiating now rather than waiting to go to court, reach out to your tenants and suggest that accommodations can be made during this time, while reserving your right to later pursue collection of the full amount of rent due. During negotiations, you may ask tenants to prove financial hardship by providing you with financial statements and revenue information. Although such information may be beyond that which is usually exchanged when leases are negotiated, landlords will be justified in requesting it to determine if a tenant actually needs rent relief or is taking advantage of the current situation.
Accommodations that a landlord might make include:
- Rent deferral: Under such an arrangement, a tenant may repay the amount of rent arrears in installments over a period of months or years, together with future monthly rent as it becomes due. If the tenant defaults, all past and future rent may be accelerated and a judgment may be entered. Other potential terms might include an extension of the leasehold term or a landlord’s right to terminate the lease early.
- Temporary monthly rent reductions: Rent may be reduced for a brief period of time to an amount that the tenant can afford.
- Extension of the lease term in exchange for a decrease in monthly rent.
- Use of security deposit for current rent with an agreement that the tenant will replenish the security deposit in the future.
- Addition of a personal guarantor to a lease that did not have one, or that previously only had a “good guy” guaranty, in exchange for a partial rent concession for a limited period of time.
- Rent reduction in exchange for the tenant’s release of the landlord from all COVID-19 claims and a waiver of its defenses to non-payment.
Note that any agreement between landlord and tenant should be reduced to writing. Consideration must be given as to whether to include confidentiality provisions, ratification of the existing lease, an express reservation of existing rights, and estoppel provisions. Further, if there was a guarantor on the original lease, the guarantor should affirm and agree to any modifications or additional terms.
Encouraging the Recalcitrant Tenant to Negotiate
If a tenant is not even receptive to an overture to negotiate, consider:
- Sending a 5-day rent statement, which is required as a predicate for any landlord/tenant proceeding, and should be sent each month during this period anyway to preserve rent claims. Note that the statute requires sending this notice via first class mail, return receipt requested. However, during this time in which tenants may not have access to the premises, the notice should be sent in that manner to meet the statutory requirements, and via regular first class mail to every known address of the tenant, its owner or agent, and any guarantor. You may even consider sending a copy of the notice to the tenant by e-mail to ensure the tenant receives it.
- Serving a 14-day statutory rent demand. However, this can be costly, as a process server will likely need to make multiple attempts to serve the notice before “nailing and mailing” it, given that a business’ premises will likely be closed. Serving this notice is a way to let the tenant know that the rent is still due and that the landlord is prepared to commence a proceeding as soon as the moratorium is lifted. Sending the notice to all additional addresses for the tenant, in addition to the business premises, may be a way to protect against a tenant later defending itself by saying that it had no idea that its business had been served, since it was required by order not to go into its premises and may not even have received business mail.
If a tenant decides to commence negotiations after receiving these rent demands, the landlord should make sure to send the tenant a notice of “reservation of rights”, including a statement that the service of the 14-day notice remains in full force and effect and is not waived by engaging in negotiations.
If all else fails, a landlord should have a petition drafted so that it can be served on the tenant as soon as the eviction moratorium is lifted. This will enable the landlord to file its papers with the court expediently and, hopefully, put its case towards the front of the line of cases on the court’s calendar.
Although it may feel like the world has come to a halt, this is no time for landlords to sit on their hands. Taking a pragmatic but proactive approach to non-paying tenants will help to insulate a landlord from the chaos that will undoubtedly ensue when the moratorium on evictions is lifted.
As governmental orders and legislation can change daily and may alter a landlord’s decision and strategy, staying informed is of the utmost importance. If you need assistance, please contact Steven Schlesinger at firstname.lastname@example.org or Marci Zinn at email@example.com.