Impact of Pandemic COVID-19 on Real Estate Investors, Landlords, and Property Managers

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Contributors: Mack Mayo and Christi Disparte

STATES OF EMERGENCY AND SHELTER-IN-PLACE

COVID-19 (“Coronavirus”) is presenting unique challenges to the U.S. real estate sector.  In Washington State, for example, Governor Jay Inslee declared a state of emergency due to the progression and risks associated with the new virus and ordered a shelter-in-place.

Washington’s Stay Home, Stay Healthy order (“shelter-in-place”) requires everyone to stay at home and only to leave for essential purposes:  if you’re an essential employee or for medicine, food, water, exercise, care, etc.  Most businesses are ordered to close or go “remote-only,” unless essential.  Essential businesses include but are not limited to medical and care facilities, restaurants (take-out or to-go only), grocery stores, and businesses dedicated to home or commercial cleanliness and sanitation.

RESIDENTIAL

Non-compliance and termination notices.

Landlords are virtually banned from issuing any type of notice (including for failure to pay rent, etc.).  This also includes 20-day notices of termination (limited exceptions explained below).

Evictions

  • Generally.

    •   In Washington, there is a statewide moratorium on residential unlawful detainers, most courts are closed to the public, and, in Spokane County, Sheriff Ozzie Knezovich has declared that his department will not execute any writs of restitution until late April 2020.  An exception is made in Spokane where the tenant(s) pose a risk to the property or immediate threat to the health and safety of neighbors (think no-notice type evictions – e.g., drug and gang-related activity, assault plus deadly weapon, etc.).  

  • As related to federally backed housing.

    • The CARES Act (discussed supra) provides 120 days of eviction relief for tenants in federally backed housing, thus precluding service of any eviction notice until July 25, 2020.  During this period, subject landlords cannot charge late fees, penalties, or other fees for paying rent late.

Inability to Pay Rent. 

While landlords are prohibited from issuing eviction notices except in highly limited circumstances, our clients are implementing a variety of strategies to assist tenants in these trying times while also keeping vacancy rates to a minimum:

  • Rent reduction.  Temporarily reducing what is owed per month to keep tenant with reduced income in unit.

  • Rent deferral.  Deferring part of the rent until the end of the lease by lump sum or payment plan in exchange for staying in the unit.

  • Rent abatement.  Waiving past due rent as long as tenant stays current thereafter.

  • Loan conversion.  Converting the past due rent into a payable promissory note with interest. 

All of these options come with risk.  Thus, it is important that you memorialize the terms and consequences in writing mutually executed by the parties, including appropriate termination and damages provisions.  Moreover, if you are a landlord of a federally backed property, you will have more stringent requirements of what type of rent relief you must provide to your residential tenants. 

Late Fees. 

We are advising all landlords and property managers to halt the imposition of late fees for any payments until the moratorium is lifted state-wide and in Spokane County specifically. 

Essential v. Non-Essential Activities for Property Managers.

  • Maintenance

Maintenance needed to maintain the safety, sanitation, and operation of residences is considered essential under the shelter-in-place order. We recommend all maintenance providers take special precaution prior to entering a unit to ensure their own safety, including wearing gloves and face coverings. Landscaping is not considered an essential activity, at least for now (Landscape Professionals are advocating to have this industry deemed essential).

  • Available Units

While social distancing is necessary for the foreseeable future, our clients are implementing a variety of processes to clean, process, and rent available units.

  • Unit Showings. Open houses are prohibited. Virtual tours allow potential tenants to view the until while maintaining proper social distancing. If virtual tours are not an option, viewings should be conducted by appointment only and limited to no more than two people at a time, while exercising social distancing at all times.

  • Lease Signing. All lease signing should occur electronically or remotely.

  • Sanitization. All units should go through a sanitization process prior to move-in to ensure the unit is clean and move-in ready. We recommend hiring cleaning and sanitization professionals when available and possible.

  • On-Site Staff

Staff necessary to maintaining office operations, including back-office personnel, are considered essential under the shelter-in-place order. If possible, staff should be allowed to work from home. If working from home is not possible, all on-site staff should strictly abide by social distancing and appropriate health and worker protection measures should be put in place. We recommend closing operations to the public. We also recommend setting up drop boxes for tenants to communicate with staff.

Following these processes will assist Landlords in avoiding potential liability.

PURCHASERS AND SELLERS OF REAL ESTATE

Residential Real Estate. 

Residential real estate transactions are essential, including sales, appraisers, agents, escrow officers, property inspectors, mortgage loan originators, underwriters, and back-office personnel, such as IT professionals.  

  • Restrictions and Limitations.

    • In-person meetings are prohibited except in cases when necessary for a customer to view a property or siging documents. 

    • Open houses are prohibited.

    • Property viewings, inspections, appraisals, and final walk-throughs should be arranged by appointment and limited to no more than two people on site at any one time while exercising social distancing.

    • New real estate listings shall be facilitated remotely.

  • Shifting market forces increases negotiations. 

    • Perhaps unsurprisingly, we are seeing a slow decline in the residential real estate marketplace.  All reports, however, indicate that the market is still alive and well.  Similar to other contexts, we see the coronavirus as another factor in negotiations.  On the sell-side, sellers are witnessing a shift from their strong “take-it-or-leave-it” bargaining position in a more volatile market.  Buyers now have more leveraging power to create uncertainty in the seller’s mind to allow for more sales price and concessions negotiation.

  • Enhanced disclosure and sanitation clauses. 

    • Another wrinkle is what disclosures need to be made or relied upon for sellers who themselves or a resident living in their home had coronavirus.  We would advise adding sanitation provisions into any sales agreement.  This could give rise to a new wave of litigation in the coming months and into 2021.  It is important to ensure all disclosure requirements are met (along with appropriate venue, jurisdiction, governing law, dispute resolution, and liquidated damages clauses in place) to insulate one’s self from liability post-sale.

  • Virtual versus in-person showings. 

    • Similar to showings for rentals, showings for real estate purchases should be conducted virtually when possible.

Employers and Employees.

Employers have an obligation to take necessary precautions to ensure the safety and health of their employees. Employees should be allowed to work from home when possible. When working from home is not an option we recommend employers take certain precautions:

  • Work stations.

    • Employees’ work-stations should be placed at least 6 feet away from each other.

    • Do not hold in-person meetings.

    • Close lunchrooms and limit access to gatherings areas.

    • Limit visitors, or close to the public entirely.

  • Sick Employees.

    • Have flexible sick leave policies that are consistent with public health guidelines.

    • Make sure all employees are aware of sick leave policies.

    • Do not require a doctor’s note from employees who have been sick. Requiring a doctor’s note can put unnecessary strain on already strained health care providers.

    • Tell sick employees to stay home. This is necessary to ensure the safety of other employees.

      • Employees who contract Coronavirus while on the job may qualify for worker’s compensation.

    • Employees who have a sick family member at home should stay home for at least 14 days.

    • Employees should use paid sick leave, paid vacation time, and paid state family leave, when available.

  • Clean workplace areas.

    • Clean all high touch areas, such as handrails, elevator buttons, and door handles frequently.

    • Use cleaning products registered with the Environmental Protection Agency (“EPA”) labeled for use against Coronavirus.

While the forgoing is meant to provide guidance to employers, it’s important to consult with an experienced legal advisor for practices and precautions specific to your business.

Force Majeure Clauses.  Whether in the residential or commercial context, force majeure clauses are getting more attention than they have in decades.  These clauses offer an escape hatch from performance of the contract in certain events – Acts of God, natural disasters, war, etc.  However, most are very strictly construed by the courts and are considered exhaustive – if you’re item isn’t listed in the series of events, then you have no “out.”  However, these clauses are typically drafted to exclude purely economic events.  In other words, if you hope to escape performance of the contract due to purely economic forces (i.e., “business decisions”) then you may be out of luck.  It’s important to consult with an experienced legal advisor.

FINANCIAL RELIEF FOR SMALL BUSINESSES AND LANDLORDS

Paycheck Protection Program.

As you likely know, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) – a $2.2 trillion stimulus bill - was recently passed.  The Act, as relevant to this post, offers multiple avenues of relief, including $350 billion earmarked for small business grants to cover items such as payroll, rent, industry-specific subsidies.  Dubbed the “Paycheck Protection Program,” the program is attempting to get hands into small businesses (500 employees or less) and incentivize them to keep workers on staff.  The program provides a refundable payroll tax credit for 50% of wages paid by employers to employees during the crisis. Employers and self-employed individuals can defer payment of the employer share of the Social Security tax they otherwise are responsible for paying to the federal government with respect to their employees. To qualify, you must meet be an Employer whose:

(1) operations were fully or partially suspended due to a Coronavirus related shut-down order, or

(2) gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. Credit is based on qualified wages paid to the employees.

You can learn more about the Paycheck Protection Program here:  https://www.sba.gov/page/coronavirus-covid-19-small-business-guidance-loan-resources#section-header-2. 

Relief Specific to Landlords. 

Landlords who do not evict tenants may be entitled to mortgage forbearance under various programs.  The CARES Act is a double win for landlords who are small business owners because it helps tenants pay rent and assists the landlords in paying their mortgage. 

PISKEL YAHNE KOVARIK CAN HELP.

Piskel Yahne Kovarik, PLLC (“PYK”) is an experienced team of legal professionals offering, among other things, comprehensive legal representation to real estate investors, owners, and property managers.  Available for general counsel, transactional, and litigation services, PYK primarily serves clients in the areas of commercial business litigation, construction litigation, real estate disputes, purchase and sales agreements, mergers and acquisitions, general corporate representation, financial workouts, and employment issues. 

Focused on building strong client relationships, we have earned our reputation as aggressive litigators as well as creative problem-solvers.  Contact our legal team today to see how we can assist you in protecting your investment.

Mack Mayo is of counsel at PYK.  His practice focuses on landlord representation, unlawful detainers, contract negotiation, purchase and sale agreements, entity formation and sales, general counsel services, complex real estate transactions, securities compliance, employment law, and complex civil litigation. 

Christi Disparte is an associate attorney at PYK with experience in complex civil litigation. Christi’s practice primarily focuses on employment law, personal injury, real property disputes, landlord/tenant disputes, and commercial and business litigation. Christi is licensed in Idaho and Washington.