On April 1, 2020, Ohio Governor Michael DeWine signed Executive Order 2020-08D, which requested commercial landlords to suspend rent and evictions for 90 days and requested commercial lenders to forebear mortgage payments for 90 days. My first impression of the order was that it had no teeth. For various reasons that were understandable, the Governor made a request to landlords and lenders, but there was no requirement to the order. Nonetheless, I suggested in early April that clients provide copies of the order to their respective landlords and lenders as persuasive evidence that rent deferral or mortgage forbearance was reasonable and should be granted. Landlords and lenders who were in a position to grant deferral or forbearance and that had the mindset that the crisis would pass, and when it did, wanted a good relationship with its tenants or borrowers, entered into amendments to their contracts. Those landlords whose lenders refused accommodation were less likely to grant accommodations to tenants.

Commercial real estate is a delicate ecosystem. Without customers, tenants cannot pay rent. Without tenants paying rent, landlords cannot pay lenders. Governor DeWine’s order implicitly acknowledged this system, but without any enforcement mechanism, the impact was limited.  

A bill pending in California’s Senate gives some tenants the ultimate bargaining power, the right to walk away. Senate Bill 939 has been through several rounds of amendments, which have narrowed its application and scope. But the current form of the bill, as amended on May 22, 2020, still tilts the scales to the side of the commercial tenant to the detriment of landlords. Section 1 of the current bill provides relief to all commercial tenants by making it unlawful for a landlord to serve a notice requiring payment of rent or replenishment of a security deposit; retroactively voiding a previously delivered request for rent payment or service of a three day eviction notice; permitting a tenant to move to set aside previous eviction judgments; and banning late fees.

Section 2 of the current bill has received the most attention and push back by landlords. As drafted, the bill gives certain small businesses operating an “eating or drinking establishment, a place of entertainment, or a performance venue,” the right to terminate their leases and pay up to three months’ past-due rent incurred during California’s state of emergency if the landlord refuses to negotiate a lease amendment. The bill would also release lease guarantors from liability. It does not address landlord’s obligations to their lenders. While Ohio’s order had no teeth, the California bill gives some tenants absolute power to terminate their leases. What to do if you are a landlord with a CMBS loan whose special servicer is unlikely to quickly approve a lease amendment and entering into an amendment without such approval will trigger bad-boy non-recourse carve-out liability?

Several federal programs have been developed in the wake of the COVID pandemic. The Ohio order and California bill highlight why patch-work state orders do not work. DeWine’s hands were tied in interfering with commercial loans that may have been made by out-of-state lenders and governed by the laws of other states. California’s Senate bill tries to fix the woes of hospitality tenants to the detriment of landlords and lenders and seems to forget that federal law provides a mechanism through bankruptcy for a tenant to terminate its lease liability. Congress’s instinct to pour money into the hands of businesses as fast as possible to allow them to stay in business and pay obligations was the right instinct. However, most of the relief payments were not aimed to help tenants pay rent or landlords pay mortgages. The Paycheck Protection Program (PPP) provides incentives to use at least 75% of the loan proceeds for payroll purposes. PPP itself is being beta tested on businesses as regulations for the program are rolled out and revised. There is no federal program aimed to help shopping center landlords pay their mortgages. The next relief package needs to come from the top and needs to recognize that commercial real estate players are all dependent upon one another.