Accommodating tenants in a recession
Lost income for businesses and employees is a hallmark trait of recessions. Adapting quickly, not as much.
Landlording is a business which generates significant income in California. Tenants pay rent from their income, whether they are a business or an individual. Since the occupancy of property is by mutual agreement, landlords, tenants and their agents need to work together to mold acceptable agreements for a continuing occupancy when a weakening economy, well, weakens the tenant and in turn the landlord’s income.
A recessionary period needs to be viewed as likely to bring an occasional instability to both tenants and landlords — occupancy for the tenant, rental income for the landlord.
Commercial and residential landlords and tenants have alternatives at their disposal when the tenant is unable to pay the agreed rent timely and in full. Though the tenant is obligated to pay an amount of rent as set in the rental or lease agreement, instances arise where a landlord needs to consider a reasonable alternative: accepting partial rent payments.
Here, both the landlord and the tenant have an income problem — the landlord has a rent amount now uncertain due to the tenant’s income weakened by a recessionary economy. Classic, and common in a recession.
Neither is at fault. It is the nature of a recession that most people are affected adversely to some degree. Once the recession sets in, it is too late for a tenant to insulate fully against the downturn in their business or employment income. The same goes for a landlord, except the landlord cannot relocate their building and the tenant has mobility.
However, a landlord, aware of the precise steps involved when accepting partial payments, can flexibly deal with delinquent rent.
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Partial payments and noticing procedures
Acceptance of partial payment toward delinquent rent is within the discretion of the landlord.
Exercising that judgment call ranges from belligerence to accommodation when working to sort out a mutually satisfactory result. Landlords might reasonably agree to accept partial payments of rent when:
- the partial payment is equal to or near the rent accrued at the time the tenant makes the payment;
- the tenant is creditworthy — i.e., economically viable;
- the tenant has a decent payment history; and
- the tenant is better retained than replaced.
Both residential and commercial landlords may accept a partial payment of rent. Unless they agreed to the contrary, immediately on receiving a partial payment of delinquent rent the landlord may serve the tenant with a three-day notice to pay demanding payment of the remaining balance of the delinquent rent. [See RPI Form 575-3]
For all multiple unit residential properties and single family residences (SFRs) owned by a real estate investment trust (REIT), corporation or limited liability company (LLC) with a corporate member, a just cause needs to exist to evict a tenant who has occupied the property for 12 months or more.
Further, these corporate landlords use a unique three-day notice to perform to state what the tenant needs to do to cure a breach of their rental or lease agreement, be it the payment of money or other action the tenant is to take prior to expiration of the notice. [Tenant Protection Act (TPA) of 2019; See RPI Form 576-1]
When a notice to perform expires and the breach has not been cured, the corporate landlord prepares and serves the tenant with a three-day notice to quit. [Calif. Civil Code §1946.2(c); See RPI Form 577-1]
Some multi-unit residential property is exempt from using the two separate three-day notices — one to perform, the other to quit — and may use the three-day notice to pay or quit, including:
- those issued a certificate of occupancy within the prior 15 years;
- a duplex when, at all times during a tenant’s occupancy, the other unit was the owner’s principal residence;
- units restricted to or subsidized for households of very low, low, or moderate income;
- dormitories built and operated by a California higher education institution;
- rent controlled units with annual rent increases set at a lesser amount than set by the TPA; and
- hotels and motels. [CC §§1947.12(d), 1946.2(e); See RPI Form 575]
Some SFRs are also exempt from using the two separate three-day notices and may use the three-day notice to pay or quit, including:
- SFR accommodations in which the tenant shares kitchen or bathroom facilities with an SFR owner-occupant;
- SFR real estate which may be sold and conveyed separate from the title to any other dwelling unit, like in a SFR subdivision or condominium project, provided:
- the owner is not:
- a REIT;
- a corporation; or
- an LLC in which at least one member is a corporation; and
- the tenant has been given written notice stating the rental property is exempt from the rent increase caps under the TPA. [CC §§1947.12(d), 1946.2(e); See RPI Form 575]
- the owner is not:
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Partial payment agreement
It may be reasonable for a landlord in a partial payment agreement situation to agree not to serve a three-day notice to pay the balance of the delinquent rent after accepting the payment of partial rent conditioned on payment of the balance by a specific date. [See RPI Form 558 and Form 559]
The partial payment agreement states:
- the amount received is partial rent;
- the amount of deferred rent remaining unpaid;
- a promise to pay the deferred rent;
- the date the payment is due; and
- the consequences of nonpayment.
Residential partial payment of rent
A residential landlord who has served a three-day notice demanding payment of delinquent rent and later accepts any amount of rent from the tenant invalidates the notice. It may not be used to support an unlawful detainer (UD) action to evict the tenant. [CC §1945]
Further, when a residential landlord files a UD action and, prior to an award for eviction, accepts a partial payment of rent, the acceptance of rent nullifies the UD action and the landlord may not continue the action. A new three-day notice to pay needs to be prepared and served on the tenant.
The reason the UD action may not proceed lies in the difference between:
- the amount of rent demanded in the notice to pay used as the basis for the supports the UD action; and
- the amount remaining unpaid at the time of the UD hearing.
In residential UD actions, the amounts in the three-day notice to pay and the amount owed by the tenant are required to be the same. Once the residential landlord accepts a partial payment of delinquent rent, the three-day notice served on the tenant no longer states the correct amount the tenant is to pay to avoid losing the right of possession. However, this rule does not apply to commercial tenancies.
Also, any three-day notice to pay delinquent rent served on a residential tenant which overstates the amount of delinquent rent owed by the tenant also invalidates the UD action. The UD action in a residential eviction based on an overstated amount in the three-day notice fails. It may not be an estimated amount for residential tenancies. [Jayasinghe v. Lee (1993) 13 CA4th Supp. 33]
After receiving partial rent, a residential landlord who does not receive the further payment of rent as agreed prepares and serves the tenant with a three-day notice to pay stating the exact amount of delinquent rent then remaining unpaid. [EDC Associates, Ltd. v. Gutierrez (1984) 153 CA3d 167]
Residential partial payment agreement
The partial payment agreement entered into by a tenant and a landlord to document the acceptance of partial rent memorializes:
- the landlord’s receipt of partial rent;
- the amount owed on the deferred portion of the delinquent rent;
- the tenant’s promise to pay the remaining rent owed on or before a specific date; and
- notification of the landlord’s right to serve a three-day notice on failure to pay the remaining balance as agreed. [See RPI Form 559]
Consider a recently unemployed residential tenant who informs the landlord they will be unable to pay the full monthly rent before the payment becomes delinquent. The tenant offers to pay part of the rent prior to delinquency and the remainder ten days later.
Since the tenant is creditworthy, has not been seriously delinquent in the past and the landlord would rather retain the tenant than locate another tenant and relet the unit, the residential landlord agrees to accept the partial payment.
However, to avoid disputes regarding the amount of rent remaining due and when it is to be paid, the informed residential landlord prepares and the landlord and tenant sign a partial payment agreement to document their understanding. [See RPI Form 559]
Now consider a residential landlord who serves a three-day notice to pay delinquent rent, files a UD action and before the UD hearing accepts a partial payment of rent. By accepting a partial payment, the residential landlord understands the three-day notice had been rendered invalid and no longer supports a UD action.
Thus, when the residential landlord accepts payment of partial rent it is prudent to have the tenant enter into a partial payment agreement stating the balance owed and the date it is due. The partial payment agreement prevents future disputes with the tenant about what amount is owed or when it is due. When the balance is not timely paid, a three-day notice to pay may be served. When payment is not received and the tenant has not vacated, the landlord may then serve a notice to quit and file a UD action.
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Commercial partial payments
Consider a commercial tenant who experiences cash flow difficulties due to business difficulties — sales, inventory, receivables. As a result, the tenant becomes delinquent in the payment of rent.
Discussions between the landlord and tenant follow.
The tenant offers to make a partial payment of the delinquent rent. Further, the commercial tenant offers to pay the balance of the delinquent rent by a specific date, after which the rent is delinquent. A partial payment agreement is entered into to clarify the understanding. [See RPI Form 558]
When the deferred rent is not paid as scheduled in the partial payment agreement, the commercial landlord serves a three-day notice to pay or quit before qualifying to file a UD action to evict the tenant. However, when the landlord has, prior to accepting partial rent payment, served a three-day notice to pay rent or quit on the tenant, the landlord need not serve another three-day notice when the tenant does not pay the balance of the rent due as agreed. [See RPI Form 558 §7]
Here, the partial payment agreement only temporarily delays the commercial landlord’s eviction process previously commenced by service of a three-day notice to pay rent or quit on the tenant.
When the tenant fails to pay the deferred balance of the rent by the date scheduled for payment, the commercial landlord may, without further notice to the tenant, file a UD action based on the three-day notice previously served on the tenant. [Calif. Code of Civil Procedure §1161.1]
Landlord’s reservation of rights clause
On accepting a partial payment of delinquent rent, a commercial landlord does not need to agree to a new due date for payment of the remaining portion of the delinquent rent. They also do not need to enter into any agreement regarding acceptance of the partial payment.
However, the commercial tenant needs to be given notice that acceptance of late rent does not waive the landlord’s right to enforce any remaining breach of the lease. This notice is contained as a provision in lease agreements, called a reservation of rights clause. [See RPI Form 552 §20]
The commercial landlord, on entering into a partial rent agreement stating the amount of partial rent received, the balance remaining due and the due date for its payment, eliminates conflicting claims the tenant might make in a UD action.
The impact of serving a three-day notice to pay rent or quit, then later accepting partial rent from a commercial tenant is vastly different from the protection a residential tenant is provided in partial rent payment situations.
Nonwaiver of rights provision
Consider a commercial landlord who serves their tenant with a three-day notice to pay rent or quit. Later, the landlord accepts a partial payment of rent without entering into any agreements, except to acknowledge receipt of the amount paid as rent. The lease agreement the tenant previously entered into with the landlord contains a nonwaiver of rights provision. [See RPI Form 552 §20]
This provision states the acceptance of rent does not waive the landlord’s right to enforce a breach of the lease.
Without this nonwaiver of rights provision, the commercial landlord accepting a partial payment of rent needs to serve the tenant with another three-day notice to pay rent or quit containing the sum remaining due and unpaid.
When the landlord operating under a lease agreement with a nonwaiver clause does not enter into a partial payment of rent agreement, the landlord may take the money and without further notice, file or continue with an already filed UD action to recover possession of the premises. [CCP §1161.1(c)]
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Form-of-the-Week: Accepting partial rent payments – Forms 558 and 559
Get it in writing — always
On accepting a partial payment of rent after filing a UD action, the commercial landlord amends the UD complaint to reflect the partial payment received and the amount remaining due and unpaid by the tenant. [CCP §1161.1(c)]
Without a written partial payment agreement, tenants may claim the landlord who accepted partial rent:
- treated acceptance of partial rent as satisfaction of all the rent due;
- waived their right to continue eviction proceedings; or
- permanently modified the lease agreement, establishing a semi-monthly rent payment schedule.
When a residential or commercial landlord accepts a partial payment of rent, the evidence provided by a signed partial payment agreement overcomes tenant claims that the landlord waived UD enforcement rights by accepting rent.
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Inducing a tenant to stay
In most cases, landlords desire a long-term tenant who will pay rent as a steady stream of income for a set period of time.
Thus, a landlord has financial incentive for the tenant to stay and continue to pay rent rather than find another tenant to fill a vacant property while incurring turnover costs.
Likewise, tenants also want to stay in the property to avoid the laborious task of finding a suitable replacement property and the expense of moving.
Thus, landlords and tenants have the same objective in mind: having the tenant stay throughout the term of their lease — or longer by extension.
As recessions take hold of the economy, vacancies increase, tending to force rent reductions to induce tenants to occupy a property. For the landlord to induce a current tenant to stay, they need to offer competitive rental rates or otherwise risk the loss of their tenant and thus a stream of income until a replacement tenant is located and accommodated. The adjustment in rent in a recession is the other side of the adjustment in rent in a period of recovery to boom, and for the same reasons: market rates.
A landlord may reduce a tenant’s rent to match market rates by modifying a month-to-month rental agreement or lease agreement.
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Having managed residential and commercial properties for over 30 years in California, my opinion is if you accept partial rent then immediately follow it up with a 3 day notice to pay or quit. A partial payment agreement is a waste of time and might even complicate a UD (if it comes to that). By using a 3 day notice to pay or quit, you don’t have to immediately initiate a UD at the expiration of the 3 day period. Rather you can wait for some time to elapse (maybe the same extra time the tenant has requested). In no case however should you wait past the end of the month because then you are potentially into the next’s month rent. And by the way, non-payment of rent is exempt from the Tenant Protection Act of 2020 (e.g. there are no “just cause” provisions for non payment of rent).