The topic of rent abandonment has surfaced recently due to the tough economic situation many commercial businesses are finding themselves in. Under a new proposed California bill (SB 939), commercial landlords would be prevented from evicting businesses during a state of emergency, with business tenants being legally allowed to renegotiate or leave leases early. Under the current proposal, tenants effectively have the upper hand to come to an agreement with landlords or walk away penalty-free from leases.
This proposed legislation, and other initiatives across the U.S., has sparked a debate about the merits of rent abandonment and its effect on the commercial real estate sector. Here's an overview of rent abandonment and what this movement means for real estate investors and their portfolios.
What is rent abandonment and how is it handled?
Rent abandonment is the situation where a tenant stops paying rent and has no intention of occupying that property in the future. There are legitimate ways to end a tenancy as set out in a lease agreement; however, rent abandonment refers to the situation where a tenant departs outside of these stated conditions.
How should landlords handle rent abandonment? Following a suspected rent abandonment and attempts to contact the tenant, here are the general steps landlords should follow:
- Be sure to document everything, from your contact attempts to your entering the property to securing the tenant's physical property. It all must be recorded, and witnesses don't hurt either.
- A landlord has the right to enter the abandoned property and premises to investigate whether or not an abandonment has occurred.
- Following this, best attempts are made to provide the tenant with a notice of abandonment. Check with your lawyer or conduct a Google search for the process and format of abandonment notices in your state.
- Often, a timeline or deadline is set for the tenant to return and make good on their rental payments.
- Once this has passed, the landlord has the right to secure the leased premises, change locks, and find a new tenant.
- The landlord has the legal right to pursue the tenant for unpaid rent and actual damages up until a new tenant is placed in the property.
- Any business or personal property left behind by the tenant may be able to be disposed of or sold by the landlord to help recover the costs of the lost rent.
- Any security deposit can be retained by the landlord.
It is critical that real estate investors consult their legal team member to ensure that they are following the proper state-level guidelines and legislation as it relates to rent abandonment. For instance, in California landlords are required to move a tenant's belongings and property off-site as they attempt to make contact with them.
The idea behind the above process is that the landlord took reasonable steps to contact and inform the tenant of their abandonment. Following this, the landlord has every right to secure their property, find new tenants, and attempt to recoup their lost income from the previous tenant.
So why is lease abandonment a hot topic now? In the past, this scenario occurred when a tenant couldn't pay their lease and simply walked away from the commercial rental unit. During the ongoing pandemic, this maneuver has taken on a whole new legal meaning as legislation now enables this type of departure.
Why does rent abandonment occur?
Rent abandonment occurs for a myriad of reasons: financial trouble, bankruptcy, criminal activity, illness or death, early departure following eviction notice, and the list goes on.
Figuring out why and when an abandonment occurred can be tricky, as it's not always obvious. Be sure to talk with neighbors, inquire at the post office for a change of address submission, and check if the utilities have been shut off. This is also why it's critical for landlords to have a confirmed emergency contact at the beginning of the rental agreement to ensure that they have a point of contact if this situation arises.
California's SB 939
The discussion around rent abandonment has become more controversial as lawmakers across the U.S. attempt to implement measures to help businesses affected by the pandemic. California Senators Scott Wiener (D-San Francisco) and Lena Gonzalez (D-Long Beach) sought to amend SB 939 recently, a bill originally enacted to place a moratorium on commercial evictions during the pandemic.
The new amendment will force landlords to renegotiate leases if their tenants have lost over 40% of their revenue due to COVID-19 restrictions. If the tenant and landlord cannot reach an agreement within 30 days after the landlord receives a negotiation notice, then the tenant has the right to terminate the lease by providing written notice within 10 days after the 30-day negotiation period.
In commenting on this legislation, California Business Properties Association (CBPA) Rex Hime stated that "Most of the landlords in California right now are attempting to work with their tenants to try to reconfigure leases and figure out how to make all this work, [SB 939] does nothing but upend the entire process, and it makes it even more difficult than to negotiate new leases."
Much of the criticism of SB 939, which goes to the Senate Appropriations Committee in June, surrounds the fact that landlords are not receiving equal help from the state government for losses associated with the current pandemic.
NYC rent abandonment movements
Similarly, in New York, Queens Assemblywoman Catalina Cruz introduced the Commercial Lease Efficiency and Resolution (CLEAR) Path Forward Act in late May.
According to Cruz, "The legislation provides a roadmap for landlords and tenants to negotiate a settlement, prevent litigation, and avoid evictions. In such cases where the parties cannot reach a settlement, the bill provides clear criteria for the court to evaluate whether there should be a reduction of the rent or termination of the lease."
Bottom line: Lease renegotiation
One way to avoid rent abandonment situations is to allow for lease renegotiation voluntarily by landlords. Rent abandonment isn't good for anyone involved, so figuring out early a way forward that suits both the landlord and tenant should be paramount. Otherwise, governments may (and are), stepping up to force lease renegotiation with the upper hand going to tenants.
Getting ahead of lease renegotiation is critical to adapt to the current economic environment with some form of reduced rent relief or rent deferment options.