By Steve Richman & Matt Viola
Earlier this month, Gov. Mike DeWine signed an executive order in an effort to breathe a sigh of relief into Ohio’s small businesses. The Order includes the following “advice” to commercial landlords and tenants:
- Landlords are requested to suspend, for a term of at least ninety (90) consecutive days, rent payments for small business commercial tenants in the State of Ohio that are facing financial hardship due to the COVID-19 pandemic;
- Landlords are requested to provide for a moratorium on evictions of small business commercial tenants for a term of at least ninety (90) consecutive days; and
- Lenders are requested to provide commercial real estate borrowers with a commercial mortgage loan for a property located in the State of Ohio an opportunity for a forbearance of a term of at least ninety (90) consecutive days for said mortgage as a result of a financial hardship due to the COVID-19 pandemic.
Lt. Gov. Jon Husted said the Order is important and seeks to put in place a 90-day pause and control the spread of economic hardship in the mortgage and rental industry.
Is this an edict or advisory?
In other words, must Ohio commercial lenders and landlords now remain at a “standstill” for 90 days? Should they?
The answer to the first question seems a lot easier to answer than the second. The Order appears to be a hope, a plea, an ordered request, but not an edict. In fact, the Order expressly provides that it shall not be construed to (i) negate the obligation of a small business commercial tenant to pay rent; (ii) restrict a landlord from recovering rent at a future time; (iii) negate the obligations of a borrower in a commercial real estate loan; or (iv) suspend any federal or state law. Additionally, there are no enforcement provisions for failing to adhere to the requests.
As far as commercial landlords and tenants are concerned, should they stand still for 90 days? What are the alternatives?
For tenants, some now want to just rely on the Order and do nothing for 90 days. However, as discussed above, the Order is a request and not an automatic right to “pass go” for 90 days. Tenants doing nothing will likely run afoul of lease notice provisions that almost always govern how the parties are to legally communicate with each other. Some tenants have officially notified their landlords, but have taken an “ego-centric” approach and have named-dropped “force majeure” in such notices and stated that they will not pay rent until the pandemic is over, period. A lot of these tenants have surmised that there are eviction moratoriums and a lot of empty buildings and have guessed landlords will just agree for fear of losing the tenant. The danger with this approach is two-fold. First, as discussed in our previous article, “force majeure” may or may not be a valid defense, depending upon the specific lease language. Second, Ohio case law permits commercial landlords to avail themselves of “self-help” eviction measures, if done without “breaching the peace.” So, if a landlord came into a tenant space stating it was repossessing the premises and tenant employees on site said no, but the landlord forcefully moved persons or property out, that would likely be held to be a breach of peace. But, on the other hand, we believe deactivating access cards or other similar measures could be considered lawful landlord measures of self- help, without breach of the peace. The lead Ohio case on this subject can be accessed here, if you wish to review. While it seems that few landlords would resort to these measures, from a practical perspective, the risk is real – especially if the space is ideal for an “essential business” that can pay rent on time.
Do landlords need to just “take it?”
Again, our initial interpretation of the Order, based on the Lt. Governor’s public commentary regarding same is that landlords are requested, but not required to stand still. Some landlords have taken ego-centric measures of their own, and have just said no to tenant pleas, and delivered default notices. Of course, the danger of this approach is that while landlords may be successful in getting rent payments at some point in time, the long-term landlord-tenant relationship may sour, and landlords could end up with more vacant space and less income in the long run. Other landlords have just ignored tenant notices, but in being silent, they run the risk of waiving legal rights, or at least contract time periods they have come to rely on in order to be current on their obligations. Most landlords we have spoken with say, to the effect, “we understand and sympathize with our Tenant’s issues but we cannot afford to absorb them-we have issues of our own.”
What can/should landlords and tenants do during this “Catch-22” pandemic?
There is no easy answer because at the end of the day, the relationship is still governed by the lease agreement, which is a contract (and subject to contract law), and so few leases are alike. Additionally, the parties are different, the properties are different, some leases are guaranteed by individuals, some properties will be secured by mortgages and, of course, lenders and loans are different. There is no “one size fits all.” But, just because the “glove does not fit everyone,” you don’t have to quit your landlord or your tenant. Generally, the key is communication. Landlords and tenants (and lenders) need to simply talk to each other and work out a solution to a problem not caused by either.
Specifically, the following steps are bound to help bring landlords and tenants to the “e-table” and eventually, an amicable resolution:
- Secure legal representation to identify and interpret the local, state, county and federal moratoriums, regulations and executive orders. Some regulations apply to only residential real estate. Other regulations are more universal. Some are dependent on whether or not a federally insured mortgage is on the property. Regulations are changing daily, and consequently, they need to be analyzed daily.
- Review and analyze your lease and/or mortgage with your legal team and know the strengths and weaknesses these documents provide. If you are a landlord, for example, is your loan a non-recourse loan? Even if non-recourse, will you applying for a “PPP Loan” trigger any exceptions (or “carve-outs”) within the loan documents that result in full-recourse liability? If you are a tenant, for example, do you have any early termination rights, or a force majeure clause that mentions governmental regulation and does not exempt late rent payments? Also, if you are a tenant, did you personally guarantee the lease agreement? Knowing the legal strength of your situation will always help resolve it.
- Follow your notification provisions to preserve your rights under your lease/mortgage. If you are a tenant, for example, claiming that you have a right, per the lease agreement to delay rent; or a landlord required to give its tenant notice of default; give that notice.
- Communicate beyond the legal notice. A cover letter and/or “notwithstanding clause” and/or phone call can help deliver an important and friendlier side message to the effect that while you must issue the attached notice to legally preserve your rights, you would like to try and open a dialogue to discuss deferment, etc.
- Trust but verify. While it is important to be flexible and sympathetic, it is equally important to ask, and even volunteer verification if, for example, a tenant claims to be unable to pay rent due to COVID-19; or a landlord says it cannot defer rent because of its mortgage. Financial statements, copies of lender demand letters and other documents can all help prove why relief is needed, or cannot be granted.
- Evaluate and apply for loans and other financial relief. Paycheck Protection Program (“PPP”) Loans, Economic Injury Disaster Loans and other relief may be just a few forms away and give landlords/tenants all the forgivable loan dollars they need to pay employees, rent, utilities and more.
- Talk to lenders. Many lenders are agreeing to deferrals or refinancings, or additional loans – but do your homework and talk their language. Tell them exactly how much money you’ve lost due to this pandemic, give them a breakdown of your monthly expenses and let them know what it will take to avoid defaulting.
- Make an insurance claim. While the jury is still out as to whether or not business interruption claims due to COVID-19 will be successful, dust off that policy and ask your legal and insurance advisors to make a claim.
While Ohio landlords and tenants may neither be obligated to stop their clocks for 90 days, nor be in a position to do so, hopefully, the Governor’s request will get everyone to the table and accomplish the same goal: “control the spread of economic hardship in the mortgage and rental industry.”
If you have questions or would like to discuss further, reach out to Matt Viola at email@example.com or 216.736.7253 or Steve Richman at firstname.lastname@example.org or 216.736.7203, or contact any of our Real Estate professionals.