Rent is generally due at the first of the month. Many landlords are undoubtedly concerned that their clients will not pay rent this month and for good reason. The country has unprecedented numbers of unemployed individuals, and many businesses are closed, from restaurants and bars to after-school programs and malls. Government programs have been enacted, but the money from those programs will take at least a few weeks to be paid to individual and commercial tenants. Dallas-based lawyer, David Ritter, explains what this means for landlords and tenants in Texas.
What are my rights as a tenant and a landlord?
Texas law governs the evictions and the relationship between landlords and tenants. Texas law distinguishes between two types of leases—residential and commercial. In a residential lease, a tenant leases a dwelling, which is used as a permanent residence. There are, of course, different interpretations of “permanent.” Nevertheless, only an individual can be a tenant in a residential tenancy. A commercial lease is simply defined as a lease that is not residential.
Residential tenants have far more rights than commercial tenants.
Texas law recognizes that residential tenants have a very weak bargaining position with their landlords. As a result, Texas law protects residential tenants from abuses that have occurred in the past. For instance, a landlord cannot lock out a residential tenant for not paying rent, nor can a landlord cut off a residential tenant’s utilities. Most of a residential tenant’s property is exempt from a landlord’s lien as well. To remove a residential tenant, a landlord must give notice and file an eviction lawsuit with the justice of the peace court. Eviction suits are tried quickly and are usually resolved within a month.
Commercial tenants do not have the same rights as residential tenants. Although a landlord can and sometimes will file an eviction suit against a business, most commercial leases have contract terms that allow a landlord to lock out a tenant for failure to pay rent. Further, Texas law gives landlords a lien on the tenant’s property inside the lease space, which the landlord can sell to pay the rent due. The contract terms describing the landlord’s lien have to be set forth in a manner required by Texas law, or the lien is ineffective. As a result, there have been many tenants who have not paid rent, and they have arrived at their property to find the doors locked and a sign indicating the need to pay rent to pick up the keys.
COVID-19 and the Emergency Orders
On March 19, 2020, Texas Governor Greg Abbott issued an emergency order that advised Texans to avoid social gatherings in groups of 10 people or more, avoid eating or drinking at bars, restaurants, and food courts, and avoid visiting gyms or massage parlors, among other things. On March 31, 2020 that order was extended to April 30, 2020, and strengthened in many respects. Influenced by the orders of county judges in some Texas counties and mayors of some cities, many individuals have been directed to shelter in place, and non-essential businesses have been instructed to cease operating, except to the extent their employees work-from-home or through some other means of social distancing.
On March 19, 2020, in conjunction with Governor Abbott’s initial emergency order, the Supreme Court of Texas issued its Fourth Emergency Order to address concerns over evictions. In the Fourth Emergency Order, the Supreme Court of Texas prohibited courts from hearing residential eviction trials until after April 19, 2020 and prohibited the execution of a writ of possession on residential tenancies, which allows the sheriff to physically remove a tenant, until after April 26, 2020. As a result, there is no real way to remove a tenant who is behind on rent as of the date the order was issued.
On April 6, 2020, the Supreme Court of Texas issued its Ninth Emergency Order, which prohibits courts from hearing residential eviction trials until after April 30, 2020 and prohibits an execution of a writ of possession until after May 7, 2020. Federal law provisions may provide greater relief to tenants in properties that receive federal subsidies or federally backed mortgages.
Commercial tenants do not benefit from any such orders.
The owners of bars and restaurants and other businesses that lease space from a landlord are not the beneficiaries of any emergency orders. To the extent a lease allows a landlord to lock out a tenant, the landlord can do so. From the landlord’s perspective, the rent money is often necessary for them to make payments to the landlord’s lender. There is currently no relief package for landlords who owe money to lenders. And as emphasized below, commercial tenants have a lot of leverage through the timely and good faith use of the Bankruptcy Code, including Subchapter V.
The use of the automatic stay in a bankruptcy proceeding will prevent a lockout.
A tenant who fears being locked out for failure to pay rent has a few options to address these concerns. One is to file an order with the court to prevent the landlord from locking the tenant out of its place of business. Another option is to seek bankruptcy relief under Chapter 11 or Subchapter V of the Bankruptcy Code with assistance from an experienced commercial bankruptcy attorney. Once a bankruptcy case is filed, the automatic stay goes into effect. The automatic stay is called that for a reason. It is automatic upon the case filing. Once a bankruptcy case is filed, no party, not even the landlord, can take action against the tenant without going to the bankruptcy court and asking to be relieved from the automatic stay.
After the bankruptcy case is filed, the commercial tenant has some time in which to work out the dispute with the landlord, which can happen after the company is back up and running. The business has time to put together a plan, which may help it survive the widespread effects of the coronavirus pandemic.
Commercial tenants have leverage to negotiate with an uncompromising landlord.
A bankruptcy filing under Chapter 11 or Subchapter V of the Bankruptcy Code changes the dynamic of the relationship between a landlord and tenant. A landlord can no longer take any action against a tenant who has failed to pay rent. Further, if the business files under Subchapter V, the tenant may be able to stretch out its required monthly rent payments for up to 5 years as it works on a plan of reorganization. This point needs to be reemphasized: A tenant under Subchapter V may be able to extend payment of a few months of rent for a period of up to 5 years. Landlords will need to consider this leverage when faced with a defaulting tenant and consider whether to enforce all the contract terms in its lease.
At present, we have heard that many landlords are negotiating extended terms with their tenants and with mortgagees on their loans. Given the uncertainty of what will happen to the real estate market at this time, this is the recommended course of action for landlords. There are, however, pitfalls in any negotiated forbearance or extension that tenants and landlords should be aware of.
Tenants who are concerned about their ability to pay rent and landlords who are struggling to plan for the possibility of not receiving rent payments need to work with the Dallas law firm of Ritter Spencer PLLC. Our staff of knowledgeable contract dispute lawyers and commercial bankruptcy attorneys can work with landlords or tenants to develop a financial plan that meets your unique needs. We understand how challenging this time of crisis is for individuals and businesses, and we are here to help. Contact the team at Ritter Spencer PLLC today.