Hard decisions on managing relationships with tenants paying partial rent

There is a confluence of factors when communicating with cash-strapped tenants and making a strategic decision when it comes to rents, payment plans, and potential rent waivers during states of emergency. We provide a 360-degree view in this two-part series inspired by our recent webinar dedicated to landlording on the other side of COVID.

In an earlier article, we spoke about the plight of the landlord who has no rental income whatsoever. That is, there are scenarios when a tenant has no ability to pay (or refuses to pay) rent during the eviction moratorium. 

We have said the recourse for rental property owners and operators for non-payment of rent cases is severely limited unless there is an accompanying threat to health and safety. This led us to conclude that a tenant buyout agreement might be worthy of exploring because other things being equal, we would rather have a vacant unit than having a tenant who has not paid rent for months on end and is unlikely to pay rent in the future. A tenant buyout agreement might not be prudent when a tenant is paying some rent - perhaps it is better for landlords to welcome whatever rent they can get with open arms, rather than letting a unit languish vacant with no rental income. 

In this article, we’ll discuss what’s possible with the vast majority of tenants who are paying the full amount of the rent, partial rent, or have recently gotten their job back or otherwise are bouncing back and have regained their ability to pay the rent. 

What is the long-term profit potential of a tenant?

A quintessential question for rental property owners and operators to ask themselves is how valuable the current tenant is worth in today’s rental market and beyond. Through a cost/benefit analysis, landlords must determine whether concessions should be made, if not waive rent debt or reduce the base rent.

These are difficult decisions to make, but ones that should be based on some considerations we will briefly touch upon here.

First off, there are market forces at play. These times are different.

If you’ve followed us for any length of time, you know that Bornstein Law has always kept a pulse on rents throughout the Bay Area, but we have never really dwelled on the fluctuating numbers, much less predicted where they would be heading. Yet, the numbers are starting to really matter as there is a seismic shift in rents. The Bay Area has increasingly become a renter’s market for the first time in long memory. 

People are leaving, there has been an exodus of roommates with remaining tenants left to make up the deficit and, to add fuel to the fire, short-term rentals are upsetting the supply and demand equation as Airbnb and other temporary housing are becoming longer-term stays.

What this means is that favorable, responsible renters who have religiously paid their rent have more options in a renter’s market. Landlords need to put a finger on whether a rent reduction or waiver and/or additional amenities might be advisable to retain the best of tenants. With reduced rents and increased inventory, it is prudent to evaluate how much your existing tenant is worth to you. 

With shelter-in-place orders, many tenants are taking stay at home seriously and look to extend their leases rather than being uprooted

Whether to extend the lease is a decision that should be made on a case-by-case basis, and should take into account the quality of the tenant and what the market rate for the unit is. One thing we want to point out to landlords who are not already exposed to more restrictive local ordinances is that you can enter into shorter-term leases to escape statewide eviction and rent controls. State law says once a tenant is in possession of a unit for 12 or more months, he or she is protected by AB-1482.

Landlords bite their nails as they see debt accrue

Landlords throughout the Bay Area are looking at their ledgers and getting nervous as rent debt begins to pile up and, more likely than not, the debt cannot be covered by the security deposit. Any unpaid rent accrued during the pandemic cannot be used as a ground for an unlawful detainer (eviction) action. 

We can make an emphatic statement that regardless of locale, as the proverb goes, a bird in the hand is worth two in the bush. Keep in mind, the courts are not hearing unlawful detainer actions but for the most egregious of circumstances and so we are unable to proceed with a nonpayment of rent case now anyways. If you have a tenant who is willing to pay a portion of the rent, accept it with some caveats. 

Change the base rate of rent?

Since rent is deferred and not waived, the landlord should not make a hasty decision to change the base rate. Instead, we recommend that landlords accept partial rent money and keep track of debt.

For example, since it’s an easy number, let’s say $1,000 is the base rent but the tenant can only pay $750. There is no need to lower the base rent to $750 but rather, gladly accept the $750 and document the $250 owed. Rather than risk losing everything, if tenants are willing to pay part of the rent, efforts should be made to work with them. 

What happens to accrued rent debt after we return to normal?

The answer to this question will depend on the local rules. In San Francisco and Alameda County, any back rent accrued during the pandemic is reclassified as consumer debt. This unpaid rent cannot be used as the grounds for an unlawful detainer action, although the landlord has recourse to pursue collecting the debt by suing in court. 

In other locales, although the tenant is afforded a grace period to pay back rent accrued during the states of emergency, this does not become consumer debt and the landlord can indeed use the unpaid back rent in a non-payment of rent case. 

You can download PowerPoint slides of a recent webinar we hosted to learn the nuanced rules in your jurisdiction, although we hasten to say this is a fluid situation with rules changing on a monthly, if not weekly basis. Of course, Bornstein Law is committed to keeping you in the know.

In parting thoughts, these times may be a blessing in disguise as landlords have the opportunity to strengthen bonds with tenants. By increasing retention rate, owners and operators can avoid the expensive and time-consuming proposition of having a revolving door of tenants go in and out of a unit.

If you have any questions or encounter bumps along the way, you can certainly contact our offices for informed advice.