Making Sense of Rent and Mortgage Obligations Amid Confusing Times

Below is the text of an alert that we sent to our clients. We are re-posting on our blog.

Dear Clients and Friends,

Last week we sent an email about preserving your commercial lease.  If you missed the email it has been reproduced on our blog and is available here: https://www.coopersmithandcoopersmith.com/2020/03/13/preserving-your-commercial-lease-through-covid-19/ 

There has been a lot of confusion in the market regarding mortgages and leases in New York State especially as Governor Cuomo has announced “New York State on PAUSE” where all non-essential workers are to stay home.  We will address the current state of residential lease obligations, mortgage obligations, and commercial lease obligations in this email.  Conditions are, of course, subject to change at any moment. 

For residential leases (houses and apartments for residential use) in New York State, you are still obligated to pay your rent.  As a result of the Housing Stability and Tenant Protection Act of 2019 (HSTPA), the maximum penalty a Landlord can impose is $50 or 5% of the monthly rent, whichever is lower.  Therefore, any penalty or fee above $50.00 per month is illegal.  There is currently a moratorium on evictions, but that does not mean there is a moratorium on paying rent.  If you fail to pay rent for the balance of the lease term, your Landlord can sue you for your rent obligations and could collect attorney’s fees once the moratorium on evictions is over. 

Is there a moratorium on mortgage obligations?  No.  Governor Cuomo’s announcement on Thursday about mortgage forbearance created a lot of confusion.  The guidance issued by the New York State Department of Financial Services in response to the Governor’s announcement is not binding on banks.  We also note that the guidance only applies to residential mortgages and does not apply to commercial mortgages.  This means that commercial mortgagors (commercial borrowers) must still pay their mortgages.  

Full text of the guidance available at: https://www.dfs.ny.gov/industry_guidance/industry_letters/il20200319_coronavirus_mortgage_relief

Residential mortgages must also still be paid during this time. However, if you are not in a position to  pay your residential mortgage, and importantly will be able to demonstrate that you were not in a financial position to pay your mortgage during this time, New York State is signaling that you will have a defense.  Again we note the Governor’s announcement is a signal and not binding at this time, but hopefully it will prompt banks to begin issuing new programs for mortgage restructuring.  Further, mortgage forbearance does not mean mortgage forgiveness.  Mortgage forbearance is the equivalent to hitting the “pause” button. 

Do you still have to pay rent for commercial lease obligations (office/retail store/ showroom/ restaurant)? At this point the answer is yes.  If you are a tenant that is part of an enclosed mall or privately secured (open aired and guarded) shopping center and the Landlord has provided notice that it has closed access to the space, you likely do not have to pay rent but you should confirm in writing with the Landlord.  The general rule is that if a tenant has access to a commercial space, it is still obligated to pay rent.  At this point in time it is ambiguous how a tenant is supposed to pay rent when it is a “non-essential” service listed by the government, but generally speaking the obligation to pay commercial rent continues.   

Full list of essential services available here:  https://www.governor.ny.gov/news/governor-cuomo-issues-guidance-essential-services-under-new-york-state-pause-executive-order   

Note which category your business falls under. Restaurants and bars for take-out and delivery are considered essential. 

It is important to remember that a commercial landlord: must still pay the mortgage on the building; likely cannot refinance without penalty; and may have restrictions on rent abatements and deferrals imposed by a lender.   While government leadership in this area is sorely needed, these are the proactive steps you can take:

1.    Evaluate the current position of your business and future business prospects.  What are revenue projections as conditions deteriorate?  Will there be any pent-up demand once conditions stabilize and what are future revenue projections?  Make no mistake, these are hard questions and require serious attention and thought.  How you approach about these questions will have important ramifications for the future.

2.    Understand any guaranty obligations.  Simply because there is a limited corporate or a “good guy” guaranty does not mean you can walk away from a lease.  We can assist you in understanding what the guaranty and lease obligations mean for you and your businesses.

3.    Have an open and honest conversation with your landlord about the structure of your lease and how you can meet rent obligations moving forward.  Your landlord likely has the same concerns about their business as any tenant has about their business.  What we have been seeing is that proactive tenants who have done the hard work required in our first point, and have open conversations with their landlords are faring the best.  The same goes for proactive landlords. Again, the situation remains very fluid, and we will continue to provide updates about your real estate obligations.  Should you have any questions please feel free to respond to this email or call us at (212) 625-8505.

Additional resources:

New York City Small Business Services Assistance and Guidance: https://www1.nyc.gov/site/sbs/businesses/covid19-business-outreach.page

US Small Business Administration Loans: https://disasterloan.sba.gov/ela/

5 Ways to Support NYC Restaurants During the COVID-19 Pandemic via Thrillist: https://www.thrillist.com/eat/new-york/support-nyc-restaurants-coronavirus