COVID-19 is surely a global crisis. At the beginning of this storm, New York had become the corona virus hotspot in the U.S, and even the world’s virus epicenter., although New York is faring better recently, the tragic loss of life and upending of life as we know it, will have lasting effects on the real estate industry and the pre-pandemic housing crisis.

At the same time that COVID-19 was devastating lives and putting front line heroes, nurses and doctors at risk, at one point the U.S. stock market triggered circuit breakers twice a day to stem a crash amid the panic and chaos. Governments began issuing shutdown orders and ordered businesses to close, except for those deemed “essential.” Unemployment reached historic levels with millions laid off or furloughed. Tenants who lost their job and wages due to the pandemic were unable to pay rent. To stem a wave of evictions and non-payment proceedings, Governor Cuomo issued several executive orders dealing with what landlords could and could not do. In mid-summer, the Tenant Safe Harbor Act became law. Landlords could not drive out tenants facing economic hardship due to the pandemic. Landlords were faced with unanswered questions, the value of their assets damaged, and the return on their investments fell. As the virus has seemingly prevailed in the spring and on through the summer, landlords and tenants continue to be at a loss not just economically but also at a loss of what the rules are because of a constant update of regulations and orders by the federal, state and local government.

Despite the upheavals to our daily lives from the pandemic, from an investing point of view, investments were originally profitable. The Dow Jones at one point had evaporated about 30% of its market value in late March. By the end of summer, many tenants had not paid since the executive orders and shutdowns began in mid-March. For many landlords this means they had lost half-a-year’s rental revenue from their properties. The price-to-rent ratio is a ratio used to determine whether it is cheaper to rent or own property. It is calculated by dividing the median home price by the median annual rent. So for example, if a home costs $1,000,000 and annual rent is $100,000, it would take 10 years of rent to equal the home price. That’s a pretty good investment and in that example, it is better to buy. Before the pandemic, the ratio in San Francisco, New York and Los Angeles, had reached almost 40. This means that it would take on average 40 years to recover your investment on purchasing a home. A very tight profit margin for landlords to say the least. Of course, it is possible to pay back the capital, but this is still without taking into account any expenses on the landlords. In terms rental property values at this point in the pandemic, if one assumes that landlords have lost half-a-year’s rent, the return on assets will be reduced by about 1.25%, and it seems compared to the stock market, losses are relatively small.

In these unprecedented and unpredictable times, where landlords and attorneys are faced with various orders from the governor, moratoriums, remote work, lock-downs, federal subsidies and the bombardment of budget shortfalls, on top of already stringent tenant protection laws passed in 2019 and the obstacles of housing courts, landlords and attorneys are justifiably feeling anxious.

With courts closed and normal avenues of redress blocked, how should landlords protect themselves, minimize rent losses, and best weather the storm by avoiding unnecessary trouble in the future?

The following is some of this lawyer’s practice experience and recent observations.

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I. Rent arrears:

During these times, many residential tenants and small to medium-sized businesses are facing financial difficulties and are unable to pay rent. Residential tenants face unemployment and salary cuts, and small to medium-sized businesses, such as restaurants and nail salons, are unable to open their doors for business. When landlords are faced with rent reduction requests, what are the proper means to handle the situation?

Although various State governments have issued different eviction moratoriums with various duration, the state governments’ orders do not tell tenants not to pay rent during this period, nor are the tenants exempt from the obligations to pay rent. The reason is clear: if the government’s order waives tenant’s obligation to pay rent, this order would most likely violate landlords’ private property rights. Therefore, it is not likely the state government would completely wipe out tenants’ obligation to pay rent without compensating landlords. Doing so may be an unconstitutional taking.

For commercial landlords, some of their tenants have been affected by state governments’ lockdown orders and have been unable to operate business. The legal theories relied upon by these tenants to seek rent reductions are as follows:

Force Majeure clause in force lease;
The "Frustration of Purpose” defense; and
“Impossibility” or” Commercial Impracticability” defense.

The application of these principles lies in the interpretation of “unforeseen events” that happen to the parties to the lease. Commercial leasing is generally more complicated, and then the assistance of lawyers is often needed. When landlords get rent reduction requests from their tenants, they should also consider the applicability between the aforementioned principles and how they intertwine with the lease terms. Landlords should consider rent reduction or moratorium if the circumstances warrant them. This is especially true if the tenant has performed the lease well in the past. After all, for commercial real estate investors, a good tenant and a good record of rent payment is valuable and more appealing to lenders, which is a factor that landlords should consider when looking at their cash flow.

For residential landlords, the tenants often fall prey to unemployment or salary cuts due to the lockdown, or they cannot afford the rent because of a sizable medical bill. In this case, the author recommends to landlords three steps to deescalate the conflict and to achieve your desired results:

Try to understand the tenants’ real situation and the cause of the financial difficulties. Landlord-Tenant relationship is both a business relationship and a personal relationship. If you can understand the reason why the tenant could not pay rent, chances are you would be able to propose a proper solution. Bear in mind that mutual understanding is always the first step of a good negotiation.
Share with your tenants your own financial difficulties. The mortgage loan and property tax payments are grave pressures that come every month. Communicate to your tenants about your own financial burdens can be helpful to the negotiation later on.
Negotiation. After you laid the bedrocks by taking the two steps above, as a landlord, you can start to negotiate with your tenant and bring possible solutions to the table. Common solutions are permitting the delay of the rent due date for a few months, rent reduction, apply the security deposit and allow the tenant to replenish by installment payments, and to provide useful information on unemployment benefits, loans, or other suitable rent relief programs such as PPP loan, EIDL loan, New York Forward Loan, etc. By helping your tenant financially with these information on various loans or relief program, you are indeed eliminating your tenant’s excuses to not pay the rent.

Here are some common arrangements for your reference:

Within the tenant’s financial capacity, reduce the rent to a lower amount for specific period during the pandemic when the tenant is affected by a government order or shutdown so that tenant can afford to pay the rent. On the one hand, tenants can help the landlord with landlord’s financial burden by chipping in landlord’s costs. On the other, the tenant can show her/his good faith effort to pay the rent and that she/he did not mean to default on the rent payment.
A combination of rent reduction and payment plan of rental arrears. Even after parties agree to a rent reduction, it may still be difficult for the tenant to come up with the rental arrears immediately. Parties can agree to repay the rent arrears by installment payments.
Apply the security deposit to the rent arrears. Parties can then agree that after the pandemic crisis ends or after the government lifts the lockdown, the security deposit should be replenished by several installments. Note that the terms should be as clear and definite as possible without using vague terms such as “when the pandemic ends” as no one knows for sure when that is going to happen.

II. Problems with Moving

Due to the impact of the pandemic, issues with moving have arisen. Many buildings have adopted measures to reduce health risks at the peak of COVID-19, including the restrictions on tenants’ move in/out. Although moving companies are identified as “essential business”, many moving companies have significantly reduced their staff and have operated under limited capacities. Another issue landlords may encounter is that tenants refuse to move out due to health concern. The situation become complicated when the old tenant refuses to move out and hence the new tenant could not move in.

For existing tenants, since is it next to impossible to remove them against their wills due to the eviction moratorium, it is pointless for the landlords to push the tenants to move as that would only destroy the relationship and benefit no one. Oftentimes, if the landlords cannot give possession to the new tenants, a new lease may not be effective.

If the landlord really wants the new tenant to move in, she/he may consider making arrangements with the new tenant to extend the start date of the leas. If it is worth it, sometimes landlord may even consider reimbursing some moving cost to keep the tenant.

Commercial leasing, as mentioned, always operates under a different set of rules and the leases often contain specific terms to handle the situation. Therefore, for commercial tenants, it is always smart to look to the lease and seek assistance from an experienced attorney. Parties should carefully review the terms of the lease and, if the circumstances warrant it, choose to surrender in exchange for an early termination of the lease. If moving becomes an issue, an air-tight, carefully-drafted surrender agreement should be able to address it by treating the premises as a temporary storage and landlords as the bailees.

III. Repair and Maintenance Issue:

For commercial tenants, there are often provisions to govern repair and maintenance issue in the lease. For residential units, however, landlords are often responsible for the repair and maintenance. Due to the lockdown in many states during the pandemic, it is not an easy task to find a suitable professional to carry out the repair required.

Although states have promulgated various eviction moratoriums and housing courts have closed, New York has made exceptions for “unlawful eviction” and “emergency repairs” and has enlisted them as “essential matters” which continue to be accepted in the court during the lockdown.

Landlords should bear in mind, that although general maintenance may be excused due to the pandemic, urgent repairs still need to be done in a timely manner, or it may be considered as a violation of the warranty of habitability and subject landlords to penalties.

Therefore, it is recommended that landlords arrange for emergency repairs within a reasonable time, or permit tenants to hire suitable professionals to do the repair and to deduct the repair costs from rental so long as the tenant can provide relevant evidence (this works perfectly when tenant owes you rent).

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IV. Tenant Passed Away

This topic normally would not have been much of a concern to most landlords and could even be intimidating to talk about. The author, in the storm’s center of New York City, however, did receive some phone calls from landlords inquiring about the unfortunate scenario. It is then when I was shocked to find the level of ignorance of most landlords when it comes to dealing with deceased tenants.

There are two things landlords should pay attention to when handling this matter: the death certificate and the estate executor/administrator. Always be mindful of these two things as they are the keys in this matter.

Can the landlord let the tenant’s family members access the premises to dispose of the deceased tenant’s property?

Not necessarily.

Only “authorized persons” can access the premises. If the landlord allows unauthorized persons to access the premises to remove the deceased tenant’s property, the landlord may expose himself or herself to liability. Even if the individual is a family member of the deceased, he or she may still not be an authorized person authorized to dispose of the properties. Authorized persons are only the following:

If there is a will, the executor/executrix appointed in the will;
If there is no will, then an administrator/administratrix will be appointed by the Surrogate’s Court, who is usually the spouse or an heir of the deceased;
If there is no will and there is no known heirs, then the court will appoint the government ’s public administrator to handle the obligations.

In extreme cases, if the tenant lives alone, the landlord may even consider changing the locks to prevent the deceased tenant’s belongings from being stolen.

An executor and an administrator will be given a document called “Letters Testamentary” or “Letters of Administration” by the Surrogate’s Court. A landlord should ask for this proof before allowing the individual into the premises. Even though a person may be a close family member of the deceased, the person may not have been close to the deceased or there may be other intra-family disputes that may arise. (Family members fighting over the legacy, all too familiar, isn’t it?) Thus, it is always better to be safer than sorry.

What about situations where there is a lease that has not yet expired and/or unpaid rent? What about compensation for unpaid rent or damages?

If the premises is damaged or there is unpaid rent, the landlord must submit a proof of claim to the Surrogate’s court and serve it on the executor or administrator within seven (7) months from the date the court appointed the executor or administrator.

Who has the right to continue living in the premises?

In general, for apartments that are not rent regulated, heirs of the deceased tenant who lived alone have no right to inherit the lease, and co-tenants of the deceased tenants can continue to live in the apartment for the remaining lease term in accordance with the lease.

As for rent-regulated apartments, certain occupants of a rent-regulated apartment may have succession rights to the apartment when the tenant named on the lease dies. That is to say, as long as the occupant of the deceased tenant’s apartment meets certain criteria, they can claim succession rights and become the lawful tenant of the rent-regulated apartment and enjoy rent that is much lower than the market price, and the landlord cannot evict the tenant if the tenant abides by the lease terms. Specifically, in order to claim succession rights, the occupant must have

Lived in the apartment for more than two years (only one year for elderly or disabled persons);
Share a family-like relationship to the deceased tenant (only one year for elderly or disabled persons) prior to the death of the tenant; and,
The apartment must be the occupant’s primary residence.

Can I evict a deceased tenant?

The simple answer is, yes.
If there is an administrator or executor for the tenant’s estate, you can treat the administrator/executor like the tenant and serve all eviction process upon the administrator/executor.

If no administrator/executor is appointed by the court, then you as the landlord would have to wait for 90 days before you can commence any eviction action, at least in New York that’s the case. In that case, you will have to serve the court papers on the deceased tenant’s spouse or heirs.

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V. Conclusion

The sudden outbreak of the pandemic and the various measures taken by the government in response to the outbreak have profoundly affected many people’s lives and economies. Many real estate investors and landlords, therefore, are threatened by potential investment and rental losses.

When investing in real estate, like other types of investments, one can try to protect her/his investment assets by learning more about potential risks posed by laws and regulations and hence realizing long term investment goals. It is also important to understand that real estate investment, like other investments, encompasses risks. In most cases, properly negotiating and communicating with their tenants with up-to-date legal knowledge can help deescalate the situation and help achieve the best results for the landlords.

As Winston Churchill once put,

Never let a good crisis go to waste.

The pandemic may pose challenges to many of us but can also teach us great lessons about risk management in real estate investment. The author hopes, that whether you are a landlord or a tenant, we can all learn to understand and sympathize with the other party to weather this storm and come out the other side.

Still got questions? Consult us today!

Rental Housing Crisis | Strategies During the COVID-19 Pandemic

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