May 22, 2020

In L.A., Crisis Response Leaves Multifamily Landlords with More Risks and Fewer Remedies

Part 2: The Challenges of Collecting Deferred Rents
Holland & Knight West Coast Real Estate and Land Use Blog
Andrew J. Starrels
Breaking Ground: West Coast Real Estate and Land Use Blog

Unlike many other urban areas, most apartment tenancies in Los Angeles last only a year on average before a tenant moves on, and if a tenant leaves with outstanding amounts unpaid, the landlord must decide whether to pursue those amounts. Many landlords find this a fruitless, time-consuming and costly effort even in normal times.

During and after the COVID-19 crisis, the incidence of payment defaults will increase, as the amounts of deferred rent amassed during the pandemic will exceed tenants' ability to pay at the end of the lease term. In addition to having to locate and pursue a former tenant for unpaid amounts, including remaining deferred amounts, a landlord now may also have to defend a civil action for damages (with penalties up to $10,000 per violation) under the City of Los Angeles' recently passed eviction moratorium ordinance. (See Part 1 of this Breaking Ground Blog series, "City of L.A.'s New Ordinance Foretells More Trouble for Multifamily Property Owners," May 15, 2020.) It must be mentioned, of course, that the uncertainty of the courts' ability to conduct business and resolve cases such as these during the COVID-19 crisis will likely delay hearings and cases for many months, if not more than a year. The view among many smaller companies that own multifamily properties– many in the business are "mom and pop" style operations rather than corporate institutions and real estate investment trusts (REITs) – is that the tenants are getting governmental assistance and the banks are likely to get bailed out, but landlords and operators will be left in the middle holding the proverbial bag. In the end, they expect to ultimately pay the real costs of the crisis as they defend lawsuits and lose their properties to foreclosure.

Multifamily industry advocates argue that government efforts to rewrite leases and restrain landlords from enforcing their contractual rights put multifamily owners into the role of an unsecured creditor, an even more untenable position than the typical landlord/tenant relationship into which they willingly entered. These industry groups suggest that a landlord-turned-creditor lacks the infrastructural foundation and skill sets that lenders possess. Unlike national banks or investment companies, small-scale residential landlords do not have governmental support or backstops, and they cannot expect that government will rescue them if deferring tenant performance causes harm. Apartment owners predict that government regulations such as Los Angeles' new ordinance will actually hinder residential landlords from acting as even an unsecured creditor would in a typical debtor/creditor relationship.

Critics of attempts to protect residential tenants from eviction allege that some of these moratoria place landlords in the role of extending credit to tenants who cannot pay their rent as a result of the COVID-19 crisis. Without eviction or enforcement, however, the landlord-as-creditor must maintain this new status without its most common remedy against default. In most other instances of government regulation of lenders and credit providers, the lenders' remedy has not been taken away.

In Los Angeles, some lawmakers have sought to go even further by preventing landlords from engaging in underwriting evaluations that most lenders find customary. Los Angeles City Councilmembers have described requesting information about sources of income, government assistance and ability to pay as examples of tenant harassment. These instances of credit review, now deemed "harassment" by some, could also give rise to the tenant lawsuits that the ordinance allows. In essence, multifamily operators argue that landlords must now be lenders, but without effective remedies, while they wait for tenants to repay deferred rent amounts. In a traditional lending relationship, a lender could not imagine being prohibited from asking borrowers about their ability to repay a loan. In this context, the ordinance raises these other questions:

  • Is the effort to rewrite lease agreements constitutionally permissible?
  • Where does the "civil penalty" envisioned by the ordinance go?
  • Why is there a private right for tenants to enforce rather than enforcement being handled by the City Attorney?
  • Is there any substantive justification for the accusation that landlords are evicting tenants in bad faith? Are rampant violations really occurring citywide?

The answers to these questions are yet to be determined. 

In Part 3: A New Regulatory Climate Threatens the Feasibility of Residential Investments and Further Impairs Housing in California

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