Framed against the background of the AIDs crisis of the 90s, the characters of Jonathan Larson’s hit musical RENT declare in the opening number that, “Everything is rent.” Today, the economic circumstances caused by COVID-19 is bringing this truism to light, as tenants’ financial ability to inhabit the spaces in which they live and work are challenged, portending major shifts in local economies.
The consequences of tenants’ inability to pay rent poses immediate and further-reaching challenges for economic developers. The immediate challenge is that diminished profits can lead to decreased or missed rent payments from businesses. While larger corporations will handle this with legal teams, small businesses have less know-how and will likely default at a higher rate. The ultimate result may be empty storefronts, and property owners struggling to maintain ownership of property.
The threat from residential tenants defaulting on rent is more insidious. In recent years, as property values in metro areas have increased, economic developers and other city leaders have made a dedicated effort to preserve affordable housing for low to middle income households. If workers in the service industry, such as Uber drivers, janitors, and home healthcare workers are not working or receiving unemployment, their ability to pay rent is impacted, and their tenancy is at risk. If low to middle income populations are evicted, it is likely that this workforce will not be replaced, and that these workers will be increasingly unable to find income-appropriate housing near urban centers.
A survey conducted at the end of April, the Marketplace-Edison Research Poll, found 62% of renters are worried about being able to pay rent.
On the federal level, here are some safety nets in place for renters. The CARES Act, provides 120 days of eviction relief for tenants in federally-backed housing. Specifically, renters in these properties may not be served with an eviction notice until July 25, 2020 and the notice must give 30 days to leave the property (making the final date Aug. 24, 2020.
Some local and state governments have also placed temporary moratoriums on evictions. Online trackers, such as this one from Millionacres, provide insight into such policies.
Several online resources exist for renters seeking to negotiate with their landlords. Hello Landlord, an automated tool built by a legal tech company, helps tenants quickly draft a letter to their landlord explaining their situation.
Economic developers can post national, state, and local resources for renters on their website, and, if affordable housing is a priority, spread the word in other ways. For example, and EDO might partner with social service organizations to post fliers (in English or other common languages like Spanish) around apartment buildings.
For commercial tenants, there are less protections, but more leeway to work with building owners. Turnover in tenants is not as high for businesses, and commercial landlords will likely recognize that if a small business shuts down, it will not be easy to replace quickly.
The first thing that businesses should do, if they fear they will be unable to make a rent payment, is do a close read of their lease. Arthur Kats, director of the Microenterprise Project at Volunteers of Legal Service in New York suggests businesses “Take a look through your lease and see if there’s anything in there having to do with suspending rent obligations during an emergency, during a crisis, or during a time when the government forces your business to shut down.”
Unfortunately commercial leases tend to favor property owners, and few allow for suspension of lease. Even the “Force Majure” or Act of God clause that is present in many leases pertains only to natural disasters. Similarly, insurance policies will likely not cover damages from this crisis.
What businesses can do is attempt to work with their landlords to negotiate a deal. The law firm Holland & Knight suggests a thorough review of your lease, and gathering the pertinent information that your landlord might want to see to help them understand your situation, including:
- financial statements and other financial information for 2019 and year-to-date 2020
- projections of financials through the end of 2020
- a summary of governmental assistance that the tenants have applied for or intend to apply for
- some sort of narrative description of the impacts of the COVID-19 situation on the tenant's business
- a description of the tenant's plans and strategies for improving operations over the long term
- a summary of the rent relief requested and a proposed repayment plan
Ideally businesses will also consult an attorney to assist in this negotiation. If they don’t have an attorney, or can’t afford one, there are legal services that do free consultations with small business owners, including small business clinics at many law schools, and non-profit organizations like the Microenterprise Project and Lawyers for Civil Rights, which has a project that matches small businesses with attorneys willing to work pro bono.
In Eater, restaurant lawyer Jasmine Moy cautions restaurants (and all businesses) not to say outright that you will not be paying rent, as within your lease there may be language that allows the landlord to claim you’re in default if there is a “threatened breach” and telling the landlord in advance that you won’t be paying rent would likely qualify as a threatened breach.
Hopefully, economic development organizations have been working with their businesses, doing outreach through BR&E, and know which businesses might be in need of legal assistance. Having a call with these businesses, or putting them in touch with legal assistance can help keep them in their spaces.