The coronavirus pandemic has played havoc with the music industry. Concert halls aren’t able to accommodate large crowds due to limits on the number of people who can gather at once. Many states have closed non-essential businesses, and no matter how some of us might feel about music, it isn’t an essential business. Besides, stay-at-home orders would keep both musicians and concertgoers at home.
This has put performing arts organizations in a challenging situation. Most have received significant revenues from people who purchased tickets to events that can’t happen now. If the event is canceled, the organization will have to pay refunds–refunds it might not be able to afford. Nonprofit organizers who cancel events may ask ticketholders to convert their refund to a donation, but with a challenging economy, many will opt for a refund.
Other organizations may opt to reschedule the performance. However, it’s a gamble when performances may be able to take place. And depending upon the ticket terms and local law, concertgoers still may be entitled to a refund.
Some organizations, hoping to avoid both the risk of repeated rescheduling and the cost of cancellation and delaying concerts. Under this approach, the concert will occur someday, but the date hasn’t yet been determined.
Landlords face similar challenges to performing arts organizations. Tenants either can’t or under government laws or orders, aren’t required to perform under their leases. The landlords don’t want to give up the revenue forever but are fearful that delay could increase default rates so that the rent is never paid.
Most tenants have heard about the 120-day eviction moratorium and elimination of late fees under the Coronavirus Aid, Relief, and Economic Security Act (CARE Act). The CARE Act only applies to evictions due to nonpayment of rent. The CARE Act doesn’t apply if there is another reason for the eviction.
The CARE Act moratorium only applies to properties that received certain federally-supported mortgages or subsidies. Therefore, tenants may not know whether the CARE Act moratorium applies to their lease.
State and local eviction moratoriums also may not apply to all tenants. Maryland’s eviction moratorium only applies to tenants who suffered a substantial loss of income due to COVID-19 or the state of emergency.
On May 8, 2020, New York state recently extended its eviction moratorium–but not for everyone. Only tenants who can’t pay rent due to COVID-19 or who are receiving unemployment qualify for the New York state eviction moratorium. Yet, in some states, blanket court closures or delays have effectively delayed all evictions for nonpayment of rent.
De Facto Eviction Moratoriums
Some state courts have ordered that civil cases are stayed (delayed). If the courts aren’t hearing evictions, there is a de facto eviction moratorium, because, from a practical standpoint, landlords can’t evict tenants who don’t pay rent.
However, not all evictions are due to nonpayment of rent. A tenant might be evicted under laws that protect domestic violence victims, due to illegal activity, such as manufacturing or selling drugs from the apartment, or because of violent or aggressive behavior.
Courts in Delaware and Kentucky have said they will hear emergency eviction hearings. Other state courts, like those in North Carolina, South Carolina, and Virginia, will hear “emergency” cases. But it’s not clear if the exception covers domestic violence, criminal activity, and other eviction situations where health and safety are involved. In many other states, the status of emergency evictions is unclear.
Whether they are imposed by federal law, state law, or court order, eviction moratoriums have one thing in common–they aren’t rent forgiveness programs. An eviction moratorium only restricts the landlords from evicting tenants for not paying rent during the moratorium. Tenants still are required to pay rent and to pay it on time.
Some landlords may allow tenants with financial challenges to defer rent. But most landlords can’t afford to have who don’t tenants pay rent. Landlords must pay mortgage payments, taxes, utility bills, and payroll. Some smaller landlords may depend upon tenant rent to buy food and pay for other living expenses for the landlord’s families. Plus, landlords may have mortgage provisions, or property managers may have contract provisions that prohibit them from agreeing to rent deferrals.
Assuming a landlord can afford a rent deferral, using the concert example, rent deferral is like rescheduling or postponing the concert. Rent can be deferred until a specific date, meaning that all rent must be paid on that date. This type of rent deferral is like a rescheduled concert.
Less commonly, rent deferrals don’t have a specified end date. Instead, the deferral might continue until the landlord lifts it. This type of deferral is like the concert that postponed without setting a new performance date.
Whether a concert is rescheduled or delayed, the ticketholders expect eventually to attend the performance. Likewise, when rent is deferred, the tenant still will have to pay the rent someday.
Like a concert cancellation means that the performance never will occur, a rent abatement means the rent never has to be paid. A few lenders and landlords have rent support/abatement programs. But rent abatements aren’t the norm. And most landlords aren’t able to afford to delay, much less forgive, rent.
Unfortunately, some tenants aren’t paying rent right now because they can’t afford it. Those tenants may face eviction when the moratoriums expire. Yet, in early May, 80.2 percent of multifamily tenants had paid their rent, a higher percentage than in April, causing speculation that government stimulus payments may have helped tenants remain current with their rent.
What’s Next for Residential Landlords and Tenants?
Now, tenant groups are organizing rent strikes, which encourage tenants not to pay rent, even if they can afford to do so. These tenants, not satisfied with the increase in unemployment benefits and stimulus payments, want the government to cancel their rent.
It will be challenging to craft a state rent forgiveness program. That’s because the Contracts Clause of the United States Constitution prohibits states from passing laws that impair contractual obligations—and a lease is a contractual obligation. Many areas have existing support programs that help tenants pay their rent in emergencies, but those programs aren’t rent forgiveness programs.
Some lawmakers are attempting to find creative ways to abate rent while not running afoul of the Constitution. The California legislature is considering a proposal that would use a combination of tenant debt and landlord tax credits, among other possibilities, to provide rent relief. And in New York, Governor Cuomo has said that tenants can pay rent using their security deposit to pay their rent, apparently without any change in leases or New York law governing security deposits.
Rent strikes and government support aside, as the pandemic and economic downturn continue, it seems inevitable that more and more tenants won’t be able to pay rent. Other tenants, lacking an incentive to pay rent (if they can’t be evicted or charged late fees), won’t pay even if they can afford to do so.
The more time that passes between a concert cancellation or delay and refund of the ticketholder’s money, the less likely it is that the refund will happen. The same is the case with unpaid rent.
Even if a tenant intends to hold off and then pay the rent right before the landlord starts to evict them, life happens. The tenant may lose a job, have an emergency expense, or otherwise find themself unable to come up with the cash to pay months of past-due rent.
The outcome is likely to be catastrophic for some. Some tenants will be evicted. Some landlords won’t be able to make mortgage payments or pay taxes. Some properties will go into foreclosure. And lacking tax funds, some social service programs and local schools will suffer. And some performing arts organizations won’t recover from the lost revenue due to concert cancellations.
Eventually, the economy will improve, and the real estate cycle once again will move upward. Concerts once again will happen. Properties will be renovated, and new properties will be constructed. But a downturn triggered by a pandemic is a once in a century event, and it likely will change some aspects of the real estate industry forever.
© 2020 by Elizabeth A. Whitman
Any references clients and their legal situations have been modified to protect client confidentiality
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