At the beginning of the COVID-19 pandemic, many state and local jurisdictions across the United States imposed substantial moratoriums, hindering the ability of commercial property owners of retail and office space to exercise eviction against delinquent tenants. The moratoriums (or restrictions) varied in severity from jurisdiction to jurisdiction. While evictions are an option of last resort for owners, more than a year later, some state and local jurisdictions are easing or removing such restrictions altogether, prompting building owners to consider next steps for particularly difficult situations. To determine whether to proceed with eviction of delinquent commercial retail and office tenants, owners will need to consider the laws of the local jurisdiction, the terms of the lease and the owners’ own level of business risk.
The Law
Owners first should consider the applicable law.
While federal restrictions never extended to commercial properties, owners must be cognizant of the various state and local restrictions that exist in the forms of statutes, legislation, executive and court orders, or by announcement. These restrictions vary greatly and include suspensions of commercial evictions (including lockouts and notices to vacate); court closures or prohibitions from filing eviction actions for non-payment of rent; requirements that owners consider deferring or adjusting rent payments; prohibitions against late fees, penalties or interest associated with late rent payments; prohibitions against rent increases; and requiring the implementation of payment plans for tenants, just to name a few. It is also important to note that even if a restriction has been lifted at the local level, a state restriction may still be in effect.
Owners should have a strong understanding of the state and local requirements, as well as the effective and expiration dates, in order to gauge the scope of their options.
The Lease
Next, owners should consider the various terms within the lease, the tenant’s performance and any potential defenses the tenant may be able to raise.
Important questions include: What is the rent amount? Has the tenant been able to make all or any rent payments? Has the tenant been adversely affected by the pandemic? And how much of the lease term is remaining? A tenant who has continuously made partial rent payments and whose business may be able to resume post-pandemic is less of an issue than a tenant whose business folded during the pandemic and did not make rent payments at all. Also, it may be more cost effective to allow the term of a lease to expire rather than pursuing eviction against a tenant whose remaining lease term is relatively short. The opposite may be the case if a significant amount of time remains on the lease.
Other important questions to ask prior to proceeding with an eviction are: Was there an inability for the tenant to perform due to the pandemic? Is there a guarantor? Is there a claim under force majeure? Was the tenant entitled to a rent abatement, rent deferral or any other concession under the lease or provided by law? If any of these answers are “yes,” the tenant may have a defense to the eviction proceedings.
Level of Risk
Owners should consider their own business needs against the potential eviction option.
Various factors may render eviction more or less viable. Owners will need to consider the type of business that currently exists in the space. For starters, what is the location of the property—is it in a shopping center with other viable businesses or is it a stand-alone space? And, what is the market demand for that type of rental space and the ability to find a replacement tenant? Or, what is the owner’s capacity to hold vacant space if backfilling becomes a challenge? Is there a better use for the space than its current use? As the owner thinks through questions like these, they will gain a better sense of whether or not to evict.
After considering the law, the lease and the level of risk, an owner may determine it is best to work with the current tenant as opposed to proceeding with eviction. In any event, staying up to date on local policies and knowing what the eviction process entails will aid building owners throughout the decision-making process.
ABOUT THE AUTHOR
Shanice McClelland is a member of the Real Estate Development and Transactions Group at Ballard Spahr in Washington, D.C.