Thinking smartly and strategically about tenant buyout agreements in the age of COVID
In every time and season, missed rent is a cause for concern but before COVID-19 reared its ugly head, our offices would field calls for dollar amounts of rent debt that weren’t too astonishing.
Pre-pandemic, most landlords would heed our advice by serving notices as soon as rent went unpaid and didn’t allow a mountain of debt to accumulate. Other rental property owners, perhaps being conflict avoiders or empathetic to their tenants, didn’t reach out to us until many months of rent were missed.
Prior to COVID-19, we’d occasionally get a call from a client who is owed $5,000, $10,000, $15,000, or more and our initial reaction was, “why have you been sleeping behind the wheel for so long?”
What was once an exception is now the norm.
In these days and times, the huge dollar amounts of rent owed that were traditionally seen with landlords who fail to act quickly are now commonplace. Because of state and local eviction moratoriums, landlords and property managers could not use the standard protocols of demanding rent and filing an unlawful detainer action if the rent goes unpaid.
All is not lost. Tenants can still transition tenants out of the unit.
Bornstein Law continues to broker legal, ethical, and enforceable tenant surrender of possession agreements in order for our clients to effectuate a vacancy. Although new laws and ever-extending moratoria have come at a dizzying pace, there is no government edict that prohibits two parties from entering into a private contract.
As Daniel Bornstein explained in an earlier webinar, the key is to have a leveraged discussion with problematic tenants. Some of the procedural requirements have changed since we first aired this presentation, but the core strategies to approaching buyout agreements are timeless.
You can potentially pay nothing out of pocket to cajole a tenant out of the rental unit but instead, forgive COVID-related rent debt.
We have always reminded landlords that while the rental unit is their property, it is the tenant’s home. Landlord holds the title, but clearly, the tenant has a very real and substantial interest in the property - the right to possession.
There are limited ways for the landlord to reclaim that right under a long litany of state and local protections and especially during a health crisis when the public policy is all about stabilizing tenancies. Reclaiming possession will come with some sort of price.
How much will the payout need to be in order to transition tenants out of the unit? How can the landlord accomplish the goal of having an unoccupied unit?
The easy answer, of course, is to hand over a lot of money, but this is an excruciatingly painful answer. Instead, landlords can use a mixture of carrots and sticks to entice the tenant to move out.
Incentives to voluntarily move out might include cash handed over to the tenant, but it might also include a waiver of rent, a return of the security deposit, forgiveness of all or a portion of the rent debt that has accrued during the pandemic, or any combinations of motivators. A tenant buyout agreement doesn’t have to be too painful. A good landlord attorney can make it less painful.
In other words, we do not want our clients to be afraid of tenant buyout agreements because of a misplaced notion that the tenant has to be paid a huge sum of money.
Seems grossly unfair and adds insult to injury, we know.
A cash-strapped landlord who has been getting little if any rent money during COVID is asked to pull out their wallets and pay the tenant a chunk of cash to move out. Depending on the cost/benefit analysis, sometimes we recommend it and sometimes not. But paying money is not the only answer.
Bornstein Law has found that there are many tenants who want to preserve their credit and do not want the blemish of a court judgment on their record. The possibility of starting over with a clean slate by voluntarily leaving the premises with no consequences can be very attractive to distressed renters.
A word about rental assistance and buyouts - we’ve fell in and out of love of buyouts.
We have been vacillating at times on the appeal of tenant buyout agreements, depending on what phase of the pandemic we were in. At first, we were big proponents of tenant buyout agreements simply because there was little prospect of creating a vacancy through other, more conventional means in light of eviction moratoriums.
Our initial reasoning was that it is better to have a vacant unit than to have one that is generating no rental income because the tenant is chronically behind on his or her rent.
At least if the unit is unoccupied, the landlord can find a new tenant and raise the rent to market rate, perhaps with renovations that would be impossible to perform with a tenant occupying the premises. We also know that when properly staged, a vacant building will sell for more than one that is tenant occupied.
We suspected that with maddening regulations and a shortfall of rental income, many rental property owners would just get fed up with playing landlord and look to sell their investment properties. Sadly, this premonition came to pass.
Act two: The prospect of rental assistance funds
By passing Senate bill 91, lawmakers promised that the government would pay up to 80% of the rent debt that was amassed during the age of COVID. We became tepid on buyout agreements because it was appealing to recover 80 cents on the dollar before giving residents the boot.
We recommended that landlords collect governmental assistance before seeking a voluntary vacancy because, at the time, landlords could only tap into relief dollars if the tenant was in possession of the unit.
A bird in the hand is always worth two in the bush so and so we became less enamored by tenant buyout agreements. If the tenant wasn’t occupying the premises, the landlord would get a big fat zero.
Act three: Enter Assembly Bill 838, the final edicts out of Sacramento relating to rental assistance
With $5.6 billion in the coffers, California pledged to pay 100% of rent arrears. This sweetened the pot, but lawmakers went a step further and said that landlords could be reimbursed for COVID-related rent debt even if the tenant no longer lives in the unit.
So, as you can see, we have come full circle. As the law has evolved, so has our stance on these voluntary agreements.