In response to the crisis, the state of California, counties and cities in California, and even the California state court system have issued orders protecting tenants from eviction for nonpayment of rent. The orders also create tenant rights to defer rent payment and repay deferred rent over time after the state of emergency is lifted. Tenant financial distress hurts landlords who are struggling to meet financial obligations, including mortgage debt service. Landlords and tenants, as well as lenders, are grappling with how to respond to the multiple impacts of the eviction moratorium.

This article surveys current restrictions on the California landlord's eviction remedy and shines a light on how landlords and tenants are managing rent defaults during the crisis.

California State Action on Residential and Commercial Evictions

California's governor declared a state of emergency March 4 as a result of the COVID-19 pandemic. California's stay-at-home order March 19 forced the closure of nonessential businesses with widespread adverse effects on business and employment, affecting the ability of individuals and businesses to continue paying rent during the mandated shutdowns.

California state law generally limits the right of local jurisdictions to impose substantive limitations on residential and commercial evictions. Therefore, California's governor issued executive orders authorizing local governments to impose restrictions on residential and commercial evictions through May 31. New local restrictions on eviction are authorized when rent is not paid because of a documented substantial decrease in household or business income or substantial out-of-pocket medical expenses caused by the COVID-19 pandemic. Thereafter, California's governor also ordered restrictions at the state level, prohibiting enforcement of an eviction action through May 31 where a tenant paid rent as agreed prior to March 27 and the tenant notifies the landlord in writing during a specified period after rent was due that the tenant cannot pay rent for reasons related to COVID-19. The tenant must retain and provide verifiable documentation of its inability to pay rent. The state orders also provide tenants 60 days to reply to a complaint in an eviction action (an additional 55 days). It is noteworthy that the orders require tenants to proactively seek and satisfy the conditions for rent deferral and retain appropriate records.

State Court System Suspends Eviction Cases

The courts entered the fray when, in early April, the California Judicial Council issued an emergency rule suspending eviction actions. The Judicial Council is the policymaking body of the California courts, the largest court system in the nation. Under the rule, a court cannot issue a summons on a complaint for eviction unless the court finds that the action is necessary to protect public health and safety. The rule restricts the filing of judgments and delays trials in eviction proceedings. The rule applies until 90 days after the governor lifts the state of emergency or the Judicial Council amends or repeals the rule. This means effectively that all new eviction proceedings whether or not related to COVID-19 cannot proceed until 90 days after the emergency is over.

Temporary Eviction Moratorium Orders in Los Angeles and San Francisco

Following the governor's orders, many cities and counties in California announced local orders temporarily suspending enforcement of evictions under varying conditions. The orders enacted by two of California's largest cities provide examples of local response.

In Los Angeles, no residential or commercial tenant may be evicted at any time during the city's local COVID-19 emergency declaration if the tenant is unable to pay rent due to circumstances related to the COVID-19 pandemic. Qualifying circumstances include loss of personal or business income, child care costs, health care expenses related to COVID-19 illness, or reasonable expenditures related to government-ordered emergency measures. Nothing in the ordinance eliminates the tenant's obligation to pay lawfully charged rent. Landlords in Los Angeles must have provided residential tenants written notice of the protections afforded under the ordinance within 30 days after the effective date of the ordinance. Residential tenants will have up to 12 months, and commercial tenants will have up to three months, after the end of the local emergency to repay rent unpaid during the emergency. Landlords cannot charge interest or a late fee on unpaid rent. Tenants can use the protections afforded in the ordinance as an affirmative defense in an unlawful detainer action when courts resume eviction proceedings.

For residential leases in San Francisco, through May 22, a landlord cannot evict a residential tenant for nonpayment of rent due on or after March 13 if the tenant provides notice to the landlord within 30 days after the rent due date that the tenant is unable to pay rent due to financial impacts related to COVID-19. Qualifying financial impacts include substantial loss of household income, layoffs or extraordinary out-of-pocket expenses. Within one week after the tenant provides the required notice, the tenant must provide objectively verifiable information that the tenant is unable to pay rent due to financial impacts related to COVID-19 to receive an additional month to pay the rent. The tenant will have up to six months to repay the rent owed. During the six-month repayment period, the landlord can request additional documentation of the tenant's inability to pay and the tenant must pay if able to do so.

For commercial leases in San Francisco, through May 17, a landlord cannot evict a commercial tenant directly impacted by COVID-19 for nonpayment of rent provided the commercial tenant is registered to do business in San Francisco and its worldwide gross receipts for tax year 2019 were equal to or less than $25 million. The landlord must provide notice of default and an opportunity to cure for one month after notice to the tenant. During the cure period, the commercial tenant can provide documentation of its inability to pay the rent due to COVID-19. Qualifying financial impacts are a substantial decrease in business income, reduced open hours or consumer demand, and temporary closure of the business. If the tenant proves its inability to pay, the cure period will be extended for an additional month. If the landlord and the tenant then cannot agree on a payment plan, the tenant must provide additional documentation of its continuing inability to pay to receive an additional month to cure. The tenant can obtain additional monthly extensions in a similar manner but the landlord will not be prohibited from evicting the tenant for nonpayment of rent more than six months after the rent was originally due.

The San Francisco moratorium for commercial leases is also intended to cover security deposits but it does not prohibit the landlord from drawing on the tenant's existing security deposit to pay rent if the existing allows the landlord to deduct rent from the security deposit, but the landlord cannot require an increase in the deposit. If the existing agreement requires the tenant to replenish the security deposit, the landlord cannot evict if the tenant is unable to replenish because of financial impacts of COVID-19. Instead, the landlord and tenant must follow the notice and cure provisions described above. Failure to replenish the security deposit cannot be the basis to recover possession of the premises until six months after the moratorium ends.

Landlord and Tenant Practices Arising From Eviction Orders

After a wait-and-see period, landlords and tenants are negotiating deals to handle rent payment defaults. The right to rent deferral under the orders depends on the tenant's demonstrated inability to pay rent due to the adverse impacts of COVID-19. Tenants are well-advised to document the circumstances causing the inability to pay as required by the applicable order, and follow the procedures provided for obtaining rent payment deferral. By following the rules, tenants preserve their rights to use the protections provided in the orders as an affirmative defense in an eviction action; and a tenant's failure to comply may weaken the tenant's affirmative defense. Landlords have a right to require tenant compliance to confirm that rent deferral requests are legitimate and supported. If rent remains unpaid and defaulted after the tenant protections expire, a landlord will need to be able to demonstrate that it also complied with the orders to support its subsequent exercise of lease default remedies.

Landlords should respond in writing to a tenant request for rent deferral, outlining the financial and other information required to support the request within the parameters stated in the orders. Landlords typically are not inclined to provide automatic long-term forgiveness or deferral. Landlords are asking for a range of relevant financial information including what governmental assistance and insurance payouts the tenant is seeking or has obtained, and information about the financial strength of the lease guarantor. It can be difficult for a landlord to determine whether rent deferral and other accommodations will actually increase the likelihood the tenant will succeed and continue to perform. Before amending leases to provide accommodations, landlords should check their loan documents to be sure they will not violate loan covenants.

Once a tenant demonstrates its inability to pay and relief is justified, both landlords and tenants can benefit from the certainty of a written agreement. The parties' agreement can be a simple letter agreement between the landlord and tenant and any lease guarantor. For more significant leases, landlords can require a more formal lease modification with the additional elements characteristic of that type of agreement, including relevant representations and warranties, additional covenants, default clause and recitation of default remedies, release of tenant and guarantor claims, confidentiality, and reaffirmation of the lease obligations and lease guaranty.

The agreement should state the amount and the term of rent deferral, any conditions of continuing deferral consistent with the orders, the circumstances under which the deferral may be terminated or extended, and a rent repayment plan providing the payment term and amounts to be repaid consistent with the orders. Instead of or in addition to deferral, some landlords are obtaining the tenant's agreement to first apply the tenant's security deposit against rent payments until exhausted, with an agreed payment plan to replenish the security deposit, all consistent with the orders. The landlord could decide to forgive part of the rent and defer the remainder, or defer only a portion of the rent and require current payment of the rest. The rent deferral or forgiveness should be terminable if the tenant later defaults, subject to the limitations of the orders. The landlord can require the tenant to provide additional financial information during the deferral period demonstrating the tenant's continuing inability to pay rent, with the knowledge that the financial information may or may not be reliable. The landlord may request other concessions on key terms of the lease in exchange for the relief granted to the tenant.

The eviction and rent deferral rules are in flux and landlords and tenants are adapting as well as possible to the developing economic impacts of COVID-19. State orders, judicial rules and local orders are set to terminate at various points and may be amended or extended. Landlords and tenants, and lenders, should monitor the orders and seek guidance from legal counsel to respond to changes and continue to implement best practices in a difficult situation. When the courts reopen for eviction proceedings, the rights of landlords and tenants will be influenced by each parties' substantive compliance with the applicable orders during the emergency.

Gregg J. Loubier and Sue Chang work in Alston & Bird's finance practice group in Los Angeles where clients rely on them to guide, negotiate and document transactions, solve problems and resolve disputes in real estate and real estate finance. The authors thank colleague Diane C. Stanfield of the firm's Los Angeles office for her contributions to the article.