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Commercial Eviction Actions Suspended for Small Businesses and Nonprofits

 

Steve Goldstein

 

Joe Keene

 
   

Governor Ducey's Executive Order suspends, until May 31, 2020, commercial eviction actions against tenants unable to pay rent due to financial hardship caused by COVID-19.

On April 6, 2020, Governor Doug Ducey issued Executive Order 2020-21 ("Order"), which postpones until May 31, 2020, commercial eviction actions for Arizona small businesses and nonprofits that have been affected during the COVID-19 pandemic.[1] Below are key details of the Order.

Suspends commercial eviction actions until May 31, 2020

The Order suspends until May 31, 2020, commercial eviction actions against tenants unable to pay rent due to financial hardship caused by COVID-19. A commercial eviction action includes a lockout, notice to vacate, or any other attempt to inhibit the operations of a business.

Applies only to small businesses eligible for the Paycheck Protection Program

The Order applies only to small businesses eligible for the federal Paycheck Protection Program (PPP)[2], which generally means businesses[3] with fewer than 500 employees. This means that any marijuana business is excluded, because those businesses are likely not eligible for the PPP.

Encourages landlords to defer rent payments and work with tenants to waive fees and develop rent repayment plans

The Order encourages landlords to "consider" deferring or adjusting rent payments for tenants who are unable to pay rent due to COVID-19. The Order "encourages" landlords to work with tenants to waive late fees, penalties and interest associated with late rent payments, and develop rent repayment plans.

Encourages lenders to consider a forbearance

The Order encourages lenders to "consider providing an opportunity for a forbearance for any commercial real estate borrower that has suspended any action under the provisions described in this order."

It is an open question whether the Governor has the authority to order lenders to agree to relief for borrowers, but by simply encouraging and not requiring lenders to do so, the Order puts commercial property owners in the difficult position of being unable to enforce lease terms against delinquent tenants while not having any protection against lenders seeking to enforce the terms of any mortgage on the property.

Tenants must notify landlords in writing

The Order requires a commercial tenant who is seeking relief due to COVID-19 to (a) notify its landlord in writing "as soon as practicable" with supporting documentation and (b) acknowledge that the contractual terms of the lease remain in effect.

Tenants must use a portion of federal assistance for rent

The Order requires tenants to use a portion of any financial assistance received (i.e. PPP loans) for rent payments and states that landlords may not require that tenants apply any specific percentage or amount. The CARES Act requires that at least 75% of PPP loan proceeds be used for payroll purposes, and this Order does not supersede that requirement.

Tenant still has obligation to pay rent

The Order is clear that that it does not relieve a tenant "of the obligation to pay rent" nor does it allow a tenant to not comply "with any other obligation that a business may have under a lease or rental agreement."

If you are an owner of commercial rental properties, are a lender with commercial rental properties as collateral for your loan, or have questions about these eviction restrictions, Sacks Tierney attorneys are available to provide advice on these matters.

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[1]For Governor Ducey's Executive Order on residential properties, see Sacks Tierney's article on restrictions on esidential evictions.

[2]The Paycheck Protection Program was passed on March 27, 2020 as a part of the Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act.

[3]The Order includes a list of businesses generally eligible for the PPP program and this list includes sole proprietor, partnership, C-corporation, S-corporation, LLC,  independent contractor, self-employed individual, 50l(c)(3) organization, 50l(c)(19) organization, Tribal businesses.