LANDLORDS CAUGHT BETWEEN NONPAYING TENANTS AND INSISTENT LENDERS

| Jun 15, 2020 | Firm News |

Many landlords are concerned about whether they can remain in compliance with their loan documents in a period marked by dramatic declines in rent collection, eviction moratoriums, double-digit unemployment and rampant business failures. Even landlords who have sufficient funds to cover their debt service may find themselves in default under debt service coverage ratio requirements as rent collections decline.

The situation remains very fluid. On June 9, the California Senate Appropriations Committee held a hearing on SB 939, which includes a controversial provision that would allow some tenants to terminate their leases if their landlords do not agree to lease amendments proposed by the tenant. The Appropriations Committee moved the bill to the “suspense file,” which creates a significant procedural hurdle for the bill and was a victory for the bill’s opponents. Moreover, one of the bill’s co-sponsors has proposed amendments to the bill that would among other things eliminate the tenant termination provision.

While the state of emergency related to the COVID-19 pandemic remains in effect, landlords have some protection against foreclosure. Emergency rules added to the California Rules of Court stay all judicial foreclosure proceedings until 90 days after the Governor declares that the state of emergency has ended.

Most lenders generally eschew judicial foreclosures in favor of non-judicial trustee’s sales, but such sales have been temporarily suspended in light of questions regarding the validity of trustee’s sales conducted while social distancing mandates may be chilling the bidding process. However, the steps leading up to a trustee’s sale, such as a notice of default and a notice of sale, can proceed without impediment.

A number of major lenders and smaller state-chartered banks have voluntarily agreed to participate in a program spearheaded by Gov. Newsom to defer foreclosures. The details of the forbearance and the duration of the program vary by lender.

The California Legislature is considering legislation to provide relief from foreclosures, but there are constitutional limits on the extent to which lenders’ rights can be diminished. Litigation regarding the constitutionality of anti-foreclosure legislation adopted during the Great Depression led to mixed results, with outcomes turning primarily on the nature and scope of the restrictions on lenders’ rights.

The best protection for a landlord that is uncertain of its ability to comply with loan documents may be to seek a modification or forbearance agreement from its lender. Lenders have incentives to keep loans in compliance (they have multiple reasons for seeking to avoid carrying REOs on their books) and, depending on the circumstances, may be amenable to modifying provisions in loan documents that are problematic in light of recent developments. If you would like to explore possible solutions to your concerns as a landlord and borrower, please feel free to contact John Lim ([email protected]) or Marc Manason ([email protected]), both of whom have extensive experience representing lenders and borrowers in loan workouts.