In spring 2020, the CARES Act placed a partial moratorium on residential evictions across the country. The order prohibited residential landlords nationwide from evicting certain tenants. On Sept. 1, 2020, the Centers for Disease Control and Prevention issued an Agency Order extending the residential eviction ban through Dec. 27, 2020. The ban was subsequently extended to June 30, and then to July 31.

Landlords in several states challenged the latest CDC order; but on June 29, the U.S. Supreme Court ruled that the eviction ban could stay in place through July 31.

There was a good social policy for the rent eviction moratorium, stimulus payments, and extended unemployment benefits. Those behind on rent are overwhelmingly low-income households who experienced job and income losses during the pandemic. According to a Federal Reserve Bank of Philadelphia report dated March 2021, however, these benefits appear to be insufficient to address all back rent accrued since March 2020.

Relief Not Reaching Landlords and Tenants

According to the Census Household Pulse Survey for the week of June 9-21, an estimate 7.8 million households were behind on rent payments and the total estimated rent debt was just under $26.5 billion.

Although relief from the Treasury Department is on the way, of $47 billion Congress appropriated for renters, just $1.5 billion has made it to landlords and tenants through May 31. These are funds that property owners would otherwise have for debt service and operating expenses.

Despite the moratorium, landlords have had to continue providing their service. That left many landlords financially squeezed; still required to make mortgage payments, still required to pay local property taxes, and still required to do maintenance.

Although this article addresses bankruptcy issues, it also is necessary and appropriate for state courts take into account the (presumably temporary) effect of the eviction moratorium on landlords’ cash flow and on property values in granting relief to foreclosing impatient mortgages.

Remedy One: Suspend SARE Provisions of Bankruptcy Code

Under the Bankruptcy Code, the definition of single asset real estate (SARE) includes the apartment properties. But, a typical SARE debtor cannot promulgate a confirmable reorganization plan that gives the lender a large deficiency claim, because the lender would then hold a blocking position on votes.

Also, the interest payments must be made from rents generated from the property—which were depleted due to pandemic and the eviction moratorium. Further, the interest payments at the non-default contract rate must be on the value of the lender’s interest in the real estate—which must be kept high in order to avoid the lender having a large deficiency claim.

Access to the bankruptcy court by SARE debtors simply does not make sense. Providing only 90 days within which to recover tenants’ missed rental payments or restoring the property to normal rental income is unreasonable. But SARE’s definition does not give any discretion to bankruptcy courts.

To make the eviction moratorium fair to landlords, the SARE provisions of the Bankruptcy Code should be suspended so that residential real property owners have greater access to the breathing spell of Chapter 11.

The bankruptcy court has the ability to ensure that there is no abuse of lenders by debtors, while at the same time giving debtors a reasonable period within which to reorganize. In addition, the bankruptcy court has the expertise to distinguish between debtors who are victims of the eviction moratorium and those seeking Chapter 11 relief due to mismanagement, obsolescence, and excessive leverage.

Remedy Two: Judges Must Consider Social, Macroeconomic Factors

The automatic stay is intended to provide a breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor’s financial situation. Property owners typically are confronted with stay relief motions when they are unable to make the contractually agreed to principal and interest payment and when the mortgagee believes that there is an insufficient equity cushion.

But the rental eviction moratorium has devastated revenue for many residential property owners, and that revenue will not be made up with the flip of a switch when the moratorium expires. Furthermore, since property values are a function of rental income, valuation may be artificially depressed as a result of the eviction moratorium and those values may not be restored so fast if tenants need time to get back on their feet. Finally, for many landlords, the eviction moratorium has largely depleted cash reserves because they were used for debt service and operating expenses.

To make the eviction moratorium fair to landlords, bankruptcy judges must take into account the social and macroeconomic factors that were the cause of a property owner’s Chapter 11 when deciding stay relief motions. Bankruptcy judges are quite capable of filtering out Chapter 11 debtors whose plight is a direct result of the eviction moratorium from other debtors.

Help for Small Landlords

The Small Business Reorganization Act of 2019 (SBRA) provides a streamlined process for small business debtors to reorganize in bankruptcy. But, the definition of a small business debtor in Section 101(51D) of the Bankruptcy Code excludes SARE debtors. Therefore the remedies that we have proposed are not just for big landlords. They would help small landlords too.

The federal and state governments were justified in granting relief to renters given the socioeconomic impact of the pandemic. However, this has placed an undue burden on lessors because they are still subject to paying debt service and operating expenses despite reduced cash flow. The answer is to make bankruptcy relief more available and hospitable to lessors when mortgagees are unwilling to be patient or understanding of the landlords’ predicament.

Reprinted with permission from the July 15, 2021, issue of Bloomberg Law. © 2021 The Bureau of National Affairs, Inc. All Rights Reserved. 

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