With a wealth of experience in tenant buyout agreements during every era and in every Bay Area locale, Bornstein Law is uniquely positioned to survey a patchwork of rules related to tenant surrender of possession agreements.
In a tenant buyout agreement or tenant surrender of possession agreement to be proper, the tenant volunteers to voluntarily vacate the premises in exchange for compensation, a waiver of rent, or both.
At first, these agreements were unregulated by Big Brother. During this period of laissez-faire, our offices were doing several tenant buyouts a week. Then politicians and regulators said that these contracts didn’t pass the smell test.
Fearing that tenants were bamboozled into handing over the keys without knowing the true value of their rental unit and wanting to keep track of how many buyouts were being inked in the shadows, rules were enacted to require landlords to provide a statement of rights to the tenant and give them the ability to mull over an offer and change their minds, even if they initially agree to the buyout agreement.
Have a willing taker that accepts the bait? Hold on.
Tenants also now have ample opportunity to consult with a tenants’ attorney or counselor to discuss their options and no means no – when a tenant turns down a buyout agreement, the owner has to wait a long time to broach the topic again. And localities want to know that the conversation is taking place, requiring owners to file paperwork with cities to bring these agreements into the light of day.
After new regulatory regimes were put into place, Bornstein Law continued to effectuate ethical, legal, and enforceable buyout agreements, but with onerous new rules, considerably less. Now with COVID upon us, we have been busy drafting these agreements because they are one of the few vehicles landlords have to transition tenants out of the unit.
So, it seems we have come full circle.
We were the engine of a lot of buyout agreements at first, only to see a decline after regulators put a damper on them, and now we are experiencing a surge. With buyout agreements back in vogue, Daniel Bornstein will be hosting an August 12th webinar on this topic. Some points to be discussed:
The confluence of factors in managing landlord-tenant relationships during the pandemic and in what circumstances a tenant buyout agreement might make sense.
Myriad disclosure requirements, rules and timeframes tenants have to rescind the agreement, taking time to explain the nuances in cities throughout the Bay Area
From start to finish, how to broach the topic of a tenant buyout agreement and negotiate the “just right” dollar amount and why, whenever possible, we like to stay behind the scenes of these negotiations and take more of an advisory role.
Why we often prefer tenant buyout agreements over owner move-in or relative move-in agreements (OMI/RMI) and why buyout agreements are sometimes mistaken for “cash for keys.”
We don’t say this in a braggadocio way, but we know of no other law firm that can explain tenant buyout rules across multiple jurisdictions in an easily digestible fashion. Our hard-won experience has given us the specialized knowledge to speak authoritatively on this subject, and we look forward to imparting our insights in this online event. To our knowledge, this is the first webinar of its kind and we invite you to join today.
Taking away a property owner’s right to evict is unconstitutional, it is being argued in the courts, and the law is on their side.
The pandemic has been incredibly difficult for everyone. Although the cunning virus doesn’t discriminate against anyone and doesn’t care if you are a property owner or a tenant, or what political persuasion you may have, somehow landlords have been asked to bear the brunt of these tough times.
Fearing catastrophic unemployment and a tsunami of evictions, it seems that lawmakers got together to enact measures that protect tenants at risk of displacement, but comparatively little protections have been put in place for landlords. Now, owners are starting to speak up and commence litigation.
Bornstein Law has said now is not the time to raise rents. Many localities have a wholesale ban on rent increases, but even in the case when a rent increase is permitted under Costa Hawkins, or when owners can use “banked” rent increases, we have said the optics of raising rents now are not attractive. Nor is it the time for municipalities to rewrite state law by depriving owners of their unlawful detainer rights, but that is exactly the goal of some lawmakers who have used the COVID outbreak to usher in sweeping new protections totally unrelated to the crisis. We are encouraged that by filing lawsuits, landlord groups have ensured that owners will get their day in court and there will be checks and balances.
In commensurating and empathizing with our clients, we have regretfully said we can’t see the light at the end of the tunnel. In our last webinar, Daniel gave some grim predictions that but for the most egregious of circumstances, landlords cannot expect to recover possession of the rental unit until far-flung in the future.
The light at the end of the tunnel may now come in the form of a barreling freight train of litigation we’ll examine here.
Christensen v. California Judicial Council
The California Judicial Council has a valuable role to play, for sure. The stated mission of the policymaking arm of the judiciary is to ensure “consistent, independent, impartial, and accessible administration of justice.” This 21-person panel composed of trial judges, state bar representatives, legislative representatives, appellate court judges, and the state supreme court is tasked with administrative duties. They set procedural guidelines to keep the courts operating efficiently, but it is far beyond their purview to legislate or weigh the interests of society. The judiciary cannot step on the toes of the legislature and make law, but it appears that is what the Judicial Council did in issuing emergency rule 1.
An imbalance in the separation of powers is at the heart of litigation filed by the Pacific Legal Foundation. One of the plaintiff attorneys embroiled in the case, Michael Spoon, explains all of their constitutional concerns in this webinar hosted by the Apartment Owners Association.
One of the most compelling arguments being made is that under the fiat of the Judicial Council, unlawful detainer actions are suspended for 90 days after the state of emergency is lifted. Surely, the Emergency Services Act gives the Governor extraordinary police powers to temporarily suspend certain statutes, but this authority ends when the state of emergency is lifted – all statutes must be restored when Governor Newsom’s Executive Order is rescinded. How, then, can the Judicial Council deprive rental property owners of their unlawful detainer rights under state law for 90 days after the emergency declaration expires? They cannot, submits the Pacific Legal Foundation.
“All of us are endeavoring to balance justice against this overwhelming contagion in order to minimize illness and death… We are at this point truly with no guidance in either history law or precedent, and to say there is no playbook is a gross understatement of the situation.”
California Supreme Court Chief Justice Tani Cantil-Sakauye
We applaud the good intentions of the judiciary to get ahead of a health crisis, but public policy cannot be made by this branch of government. At any rate, the unlawful detainer rights of owners should not be a casualty of the pandemic.
Evidence that the judiciary is making law is clear to see
The Judicial Council recommended on June 10 that the eviction ban should be lifted, but the top legal umpire, chief justice Tani G. Cantil-Sakauye, took exception. According to the Pacific Legal Foundation, she explained that she took the matter into her own hands because the legislature was not in session and there was no other functional arm of government to address a pending housing crisis.
As reported by the California Globe, Cantil-Sakauye’s refusal to lift the ban was influenced by low-income housing advocates and a UCLA study that warned of mass homelessness if landlords were allowed to evict. We can only conclude by the chief justice’s own remarks that the judiciary has seized the moment to not just set procedural rules for the court but to create their own laws to deal with the impacts of the pandemic.
The plaintiffs express confidence they will prevail when the case is heard in September. At issue, though, is whether the government appeals and whether the eviction moratorium is put on ice during the lengthy appeal process. Let’s cross our fingers.
San Francisco given an inch, takes a mile
A recurring theme we have seen throughout the pandemic is municipalities pushing the envelope by exploiting the pandemic to not just preserve housing in a time of adversity but advance a larger agenda of tenants’ advocates. A case in point is San Francisco, and we can draw a parallel with the separate lawsuit lodged against the California Judicial Council. That is, rules or ordinances cannot conflict with state law that gives owners certain rights to recover possession of their property.
In San Francisco, any rent that has gone unpaid during COVID cannot be used as a reason to evict. Instead, it is reclassified as consumer debt. In an earlier post, we mentioned that several landlord groups balked at this ordinance and filed suit, claiming that once emergency declarations are lifted, the City cannot usurp the unlawful detainer rights of rental property owners. The landlord’s right to evict is sacrosanct under state law. Granted, the Governor can temporarily suspend these rights in a state of emergency, but once orders are lifted, localities cannot deny owners their rights afforded under California law.
The lawsuit brewing in San Francisco will come to a head on July 30. The Judge initially refused to issue an injunction that would strike down the ordinance but set a later date to hear the case on its merits. We will keep you informed on the progress.
Landlords have been asked to make an inordinate sacrifice for the community, and they have not been as vocal as tenants’ advocates. We recommend you join a trade group, contact your elected representatives, call the radio shows, or otherwise let your voice be heard in this exercise we call democracy. Contracts matter, and when landlords and tenants enter into an agreement, that agreement should be honored. Please speak up and say so.
Bornstein Law is in the business of answering tough questions, but after taking a survey gauging the impact of coronavirus on the real estate industry, we were especially intrigued by one query, which essentially asked if there were any “unidentified opportunities” for property managers in the COVID crisis or lessons to be learned. This prodding gave us some pause, but before we impart advice, some background is in order.
First and foremost, rental property owners have shined through.
We have seen dramatic images of tenants protesting in the streets, and this makes for a sensational story. The rhetoric and images of tenants’ advocates you may see in the media serve to drown out a more optimistic narrative we have witnessed firsthand.
We can attest through our law firm and property management arm that tenants are paying rents and if they are short on the full amount, the vast majority of tenants are communicating with owners. In turn, studious landlords are, by and large, working out mutually agreeable payment plans.
It is the nature of the media – and perhaps the human brain – to fasten onto what is wrong and not pay attention to what is right. A visual fire of a residential building is much more interesting than a building sitting there nicely with residents in harmony and walking their dogs outside. The inferno will make the news, while the humdrum will not. Rent strikes are the proverbial burning building.
What goes unreported are the countless acts of owners who are exercising compassion in giving leeway to cash-strapped tenants. These landlords are not studying the patchwork of local ordinances that specify what documentation is required for a hardship. What documentation of hardship is required, and when it should be produced is largely irrelevant – they are not bogged down in legalese; they simply have a “heart to heart” conversation with tenants.
Internally, we haven’t polled our clients but for that, we turn to our friends at the Small Property Owners of San Francisco. In their May newsletter, the results are in for the pointed question of the month – how has the pandemic affected property owners? We are encouraged that these tales are being told, and what they reveal is not a wave of protest or conflict, but cooperation and empathy.
Let’s get to the root of the question: Are there “unidentified opportunities” amid the pandemic, and what can we learn?
In a word, it is retention. Clearly, rental property owners and operators do not want a revolving door of tenants, but responsible ones who reside for the long haul. Retaining good tenants is good for business in every season, but even more imperative now.
For the time being, the courts have essentially been grounded to a halt, and so barring egregious acts of rogue tenants who pose imminent threats to health and safety, it is not realistic for landlords to believe tenants can be transitioned out of the rental unit anytime soon.
It is the prerogative of the owner to commence an unlawful detainer action, but it will fall on deaf ears because of court closures. Keep in mind, owners will lose their unlawful detainer action if rent is accepted after the action is commenced. Accepting rent in the midstream of an eviction action is a cardinal sin that made our top five reasons owners falter.
Better to work out a payment plan and condense the understanding in a rent forbearance agreement, a document we will gladly assist in preparing.
It’s been said that a bird in the hand is worth more than two in the bush, but aside from receiving much-needed cash flow, now is a good opportunity to build rapport with tenants and ensure longevity with those who are temporarily distressed. We would be naive to say that all tenants will be appreciative of their landlords’ latitude in making payments, but a great many will.
And so, with long-term tenants even more valuable today, it’s vital to hold on to the residents you have. Communication has always been important in every season, but doubly so now. Whether by phone, email or text, communicating with them in the way they prefer to be communicated with is yet another signal you are trying to be a fair landlord or property manager.
Early on in the public health emergency, many rental property owners felt left to the wayside. With newfound police powers, many municipalities ushered in sweeping tenants’ protections and this patchwork of new regulatory regimes culminated in our Governor issuing a statewide moratorium on evictions for non-payment of rent cases.
While there were five-alarm fire bells going off for renters, would there be any reprieve for owners?
Forgotten landlords argued that while tenants face job loss and substantial reductions in income as the result of COVID-19, owners face financial obligations of their own. Mom and pop landlords are especially vulnerable without the cash or credit availability to cover their costs when rents aren’t paid. Daniel Bornstein told KPIX Five that penalties that arise when owners are late on their mortgage should be proactively waived across the board.
The collective moan of financially strained owners and operators were eventually heard in a patchwork of relief we’ll go over now.
Fannie and Freddie were prophetic in averting a large-scale crisis in the making by offering mortgage forbearances
Holding or backing approximately 48.6% of outstanding multifamily mortgage debt according to recent data, Fannie Mae and Freddie Mac were one of the first to throw a life preserver to landlords, but with a caveat. Owners could benefit from a mortgage forbearance on the condition that they suspend all evictions for renters who cannot pay their rent because of the coronavirus.
These government-sponsored enterprises understood that since they had no contact with individual renters, the only way to provide genuine relief to renters was to provide relief to the kings of the castles. Missed rent payments translate to an owner’s inability to pay the mortgage, all but guaranteeing the entire property would go into foreclosure. Rental property owners are encouraged to contact their mortgage servicer to inquire about what relief is available.
Governor Newsom brokers a deal with lenders for 90-day mortgage payment relief
On March 25, Governor Newsom announced that many financial institutions have signaled their intention to work with owners who are unable to fulfill their mortgage payment obligations. Onboard is Citigroup, JPMorganChase, U.S. Bank, and Wells Fargo, along with nearly 200 state-chartered banks, credit unions, and servicers.
Specifically, the deal would defer mortgage payments for three months, although borrowers have the opportunity to request additional relief. There is also a pledge not to initiate foreclosure sales or evictions for the next 60 days. Another promise: not to report late payments to credit reporting agencies. Late fees will also be waived.
Select lenders have also implemented deferral plans during this declared emergency, allowing borrowers to put a hold on their payments for up to 120 days. These deferred payments will be applied at the end of the borrower’s loan period. Bank of America was a bit of a pariah – it would only agree to 30 days.
If owners are experiencing a drought in rental income, they are well-advised to reach out to their mortgage servicers regardless of who they are or where they fit into the scheme of the Governor’s deal. After weathering the foreclosure crisis of yesteryears, Bornstein Law can attest that lenders are generally willing to work out a solution with borrowers falling on tough times, as there is no upside for a bank to foreclose on a property. Communication is key.
Landlords attempt to find Uncle Sam to benefit from the federal stimulus package
PPP is a $350 billion tranche designed to divert an employment crisis by helping businesses maintain their payroll. Run through banks and credit unions, PPP infuses up to $10 million in loans to companies with 500 or fewer employees. If businesses avoid layoffs, some or all of the loan could be forgiven.
Many rental housing providers, however, have been left on the sidelines because of the interim final rule, which essentially says the payroll of third-party contractors is not calculated in the size of payroll. This is problematic because clearly, although landlords rely heavily on management companies and independent contractors, Section 1102 of the CARES provides that the maximum amount available under the PPP is equal to the lesser of $10 million or 2.5 times the “average total monthly payments by the applicant for payroll costs incurred during the 1-year period before the date on which the loan is made . . .”
Multifamily hasn’t been cut out completely so much as it has been seriously limited by provisions of the SBA Paycheck Protection Program. Many sectors of the industry, such as residential property management companies with multiple physical locations, passive owners, apartment buildings and those who contract third parties for property management are currently ineligible per SBA guidance.
We hasten to say that while landlords cannot include payments to certain third parties as payroll costs for the purposes of a PPP application, they do benefit indirectly through PPP loans obtained by their tenants. With owners and operators limited in their ability to obtain direct relief through PPP, let’s move onto a more advantageous, less-publicized program for landlords, namely the Economic Injury Disaster Loan.
Economic Injury Disaster Loan, or EIDL.
Section 1110 of CARES significantly expands this program, which permits the Small Business Administration to grant loans of up to $2 million at a statutorily-capped interest rate of 3.75% and a term of up to 30 years. One component of the program is a shot in the arm of up to $10,000 in immediate funds “within three days” that, under most circumstances, doesn’t have to be paid back. This effectively makes it a grant, versus a loan.
These funds can be used for mortgage payments and other debts and so a hypothetical landlord who does not employ many people but has a substantial real estate portfolio can benefit greatly from an EIDL and receive a forgivable cash infusion to pay their mortgage, utilities, and other operating and maintenance expenses, without regard to the size of payroll.
These dual programs are not exhaustive
SBA Express Bridge Loans are meant to give quick cash of up to $25,000 to small businesses that have a business relationship with an SBA Express lender. The agency is also advertising a financial reprieve through debt relief afforded to businesses who already have an SBA loan and have suffered a financial impact in the wake of the pandemic.
The early report card is in, and it is one of frustration among owners and operators competing with many other businesses clamoring for funds. The East Bay Times tells the stories of many owners who are running into one brick wall after another in the application process.
This exercise is worth pursuing, however, with the same patience and discipline that is already the order of the day. Any red tape, delays, or lack of guarantees only serve home to drive home our advice to communicate with the tenant about their circumstances and work out a mutually agreeable payment plan. Bornstein Law stands ready to facilitate in that dialogue.