The Mandatory Rent Repayment Plan: No Good Option for Tenants

Tuesday afternoon city council will consider modifying the urgency ordinance that sets the terms for the moratoriums on eviction for non-payment. The agenda item A–2 is titled ‘Consideration of Modifications to the City’s Urgency Ordinance 20-O–2808.’ We could have missed this important discussion had we not read through each of the five meeting agendas on the council calendar that day. Good thing we noticed: up for discussion is a proposal to make a rent repayment plan mandatory for tenants who delay paying the rent.

By way of background, this ‘modification’ discussion is the latest in a series that has established the terms of the Beverly Hills moratorium on eviction for the non-payment of rent. First enacted in mid-May, the moratorium allowed residential tenants affected by COVID–19 emergency measures to delay the payment of rent. Tenants claiming hardship were allowed six months to repay it.

Then before tenants had even gotten in touch with their landlords about April’s rent, a successor urgency ordinance was adopted and it required tenants to use a city form to ask the landlord for forbearance. The replacement ordinance also required the tenant to provide financial documentation to the landlord. (The form was also filed with the city.)

Neither urgency ordinance required the tenant to agree to a rent repayment plan precisely because it is impractical to ask a tenant needing forbearance to commit to a payment plan when uncertainty is greatest: at the peak of a pandemic. Millions have been sacked and household budgets have been decimated by emergency measures.

Other cities do not demand a rent repayment plan agreement as a condition for forbearance. Should Beverly Hills?

Landlords Seek Certainty at the Tenant’s Expense

Landlord associations like a repayment plan because it commits the tenant to repay the rent under penalty of default. That provides the landlords some certainty about rent to come. For example the agreement template offered to landlords by the California Apartment Association (CAA) puts a fine point on the landlord’s interest to get a tenant to formally commit to repaying the rent.

Informal Resolution in Lieu of Litigation. Landlord will not sue Resident for the amounts listed in Section 1 above, if the payment plan is adhered to. In the event that Resident(s) fail(s) to conform to any of the payment requirements above, even if late by a single day, all outstanding amounts shall be immediately due and payable and Resident(s) shall be served a Three- Day Notice demanding all past due amounts. If the sum demanded is not paid within the required time period, Landlord has the right to begin Unlawful Detainer proceedings to recover possession of the premises, rent, damages, attorney fees and court costs, as applicable. — CAA [PAYMENT PLAN AGREEMENT](( section 6

That agreement template accomplishes another piece of legal business for the landlord: indemnification should the dispute go to trial.  The instructions along with the template say,

In addition, the form requires the Resident to represent that the condition of the premises is good, which will likely decrease delays [in collecting back rent] due to habitability claims should an unlawful detainer action become necessary. — Form CA–263 Payment Plan Agreement Instructions

That’s a twofer for landlords who can get tenants to agree: concrete repayment terms not specified in any city’s moratorium and shelter from tenant claims even if the landlord has not properly maintained the property. (Read more in our post, Property Maintenance in the Era of COVID: Cleanliness Matters!)

Landlords have been able to step in with repayment agreements like this one because guidance from our rent stabilization office didn’t tell tenants that the ordinance does not require a rent repayment commitment. Undoubtedly tenants will have signed on to commit themselves to repay back rent over and above the regular rent without knowing what the future holds.

The city council discussion scheduled for this Tuesday afternoon could find council agreeing to make the rent repayment agreement mandatory for any tenant seeking rent forbearance.

Why is a Mandatory Repayment Plan on the Council’s Agenda?

We can only speculate. But ever since the moratorium was discussed on March 16th, Councilmember Julian Gold has repeatedly expressed concern about the effect on landlords — particularly small landlords — who have rent delayed. Delayed rent could drive some small landlords into foreclosure, he has said, and that is a valid concern.

However there is no evidence to support such speculation. Many Beverly Hills residential landlords are longtime owners; indeed many inherited their properties. These longtime owners enjoy operating margins (revenues minus operating expenses) estimated (by a city consultant) to average 70 cents on the rent dollar. Taking 70 cents on the rent dollar as personal income is a pretty good gig.

Gold also wondered whether tenants would depart at the end of the 1-year repayment period without repaying the back rent Aside from the presumed bad-faith in that question, policymakers should consider the implication of the 1-year repayment period. It may be that some tenants do take the opportunity to beat the landlord on the rent. However we don’t see this posing a significant problem.

Nevertheless the city staff report tees up for council discussion a change in terms to the moratorium with a series of framing questions that seem intended to lean toward a strict — and potentially punitive — rent repayment plan mandate.

Question #1: A person who is not working now may begin to work in some fashion during a phased opening. Should they be required to pay some or all of the monthly rent?

The question concerns a mandatory partial monthly rent payments. That is not to be confused with a voluntary partial rent payment because the latter does not lock-in any obligation to continue to make partial rent payments. Today the moratorium does not mandate any partial payment in consideration for rent forbearance. City council instead made that it option. It is a line to the city’s forbearance request form but is not mandatory.

Additionally, loss of employment is but one of the criteria identified for qualifying a tenant for rent forbearance. Other factors are health impacts or extraordinary expenses arising from COVID–19. Making rent repayment contingent on some unspecified return to the workplace but can’t meaningfully address the variety of situations a tenant will face.

Question #2: Should a residential tenant begin repaying the forborne rent over a period of time rather than paying all of the rent during the twelfth month?

This is the key question. How city council answers this question will make the difference between retaining the current moratorium’s terms or changing the terms to require of the tenant a continuing repayment obligation that could put the tenant in violation for missing even one scheduled back rent payment on top of the regular rent. (Don’t take our word for it: the CAA says it right on the repayment template.)

Question #3: If the answer to question (2) is yes, how long should the period of time be before the payments begin on forborne rent?

This staff report question asks city council to suggest an appropriate grace period before required scheduled rent repayment begins. According to the current terms of the ordinance, a tenant who has delayed rent has one year to make restitution to the landlord. And that is on a schedule of the tenant’s choosing. We can’t see the value of a grace period given the uncertainty for tenants concerning employment during and after the emergency declaration period.

Question #4: At what fraction of the total amount of forborne rent should be paid by the tenant on a per month basis leading up to the twelfth month? Should it be in equal payments over the 12 months or a graduated repayment?

This begs a one-size-fits-all approach at a time when none of us know when the COVID–19 emergency will end. This is a one-size-fits-all approach despite the uncertainty faced by qualified tenants in the months ahead. The key variable under this proposed modification is how many months of rent was delayed. Under an ‘equal payments’ approach, each additional month for which rent was delayed would add another 1/12th of the contract rent to the tenant’s monthly rent payment during the repayment period. Three months delayed rent would of course mean for the tenant a 25% rent repayment on top of the regular rent starting the month after the emergency ends.

Question #5: Similar to commercial tenants, when a date is selected for the forborne rent to be due, and the tenant cannot make that payment, does the landlord get to charge late fees and interest from the date the forborne rent is due or from some earlier date such as April 1 or May 1 when it would have been originally due?

The current moratorium holds in abeyance late fees on owed rent until the rent obligation goes into default. Two months delayed rent if it is paid within the year after the emergency ends would not trigger a late fee. (No late fee can be charged by a landlord during the emergency period or within one year afterward.) However if the tenant fails to make the landlord whole for that delayed rent, the late fees kick-in — and that adds up!

Let’s take an example drawn from the real world: a tenant signs a lease at a rent of $1,800 per month. The late fee is identified in the lease as $110. The tenant delays one month’s rent until the end of the 1-year repayment period, which comes a month after the rent was due. The tenant cannot make the payment within the year repayment period. That triggers a default according to the terms of the memorandum. The tenant will then owe $1,800 plus $1,430 in late fees. Why? The May 1st rent is delayed and the emergency ends on June 1st. The tenant does not repay the rent by May 31st 2021. At that point the late fee would be calculated for 13 months (inclusive of both May months).

A better solution would be to cancel late fees completely. Late fees are often disproportionately large relative to the rent; invariably the late fee does not reflect the law’s expectation that the late fee be “a reasonable estimate of costs that the landlord will face as a result of the late payment.”

With that in mind let’s look again at the above example. That $110 late fee is 6% of the monthly rent. On an annualized basis that percentage is equivalent to a 72% return if the landlord were to go without that rent for the full month. Indeed over the course of a year the aggregate late fees assessed on $1,800 in delayed rent amounts to $1,320 or about 73% of the rent owed.

That’s a spectacular return to the landlord for effectively lending his tenant the rent money for a year! And it’s payable if and when the tenant defaults at the end of the 1-year repayment period.

Question #6: Does a missed payment trigger the entire rent to be due or just the rent that was due on that date?

We call this the ‘sudden-death’ clause. It is the capper on a series of framing questions that suggest a policy modification that would be punitive for the tenant who requests rent forbearance.

Let’s put sudden-death in perspective with an example. The tenant paying an $1,800 rent delays two month’s worth of rent. She agrees, under duress, to commit to a mandatory rent repayment plan and pays back the owed rent with 12 equal payments after the emergency ends. (See question #4.)

Each repayment on the $1,800 rent would be $300 over and above the regular rent (plus any rent increase she may face once the moratorium on rent increases ends).

In month number one — the first month after the emergency ends — the tenant will owe her $1,800 regular rent plus the $300 repayment for two months’ delayed rent. That totals to $2,100 due that month. Under the scenario envisioned by question #6, if the tenant fails to make even the $300 rent repayment, that month or any month, it would trigger an obligation to pay the entire arrears immediately.

Say, six months after the emergency ends the tenant’s employment situation due to the emergency measures is still precarious. She had been paying the regular rent for that time plus the $300 rent repayments but in month number seven she can only muster the regular rent; she cannot make the $300 rent repayment. What happens? The landlord can move to have this tenant declared in default, then evict the tenant and still go to collect the back rent and late fees owed.

At that seventh month to stave off default, the tenant would have to come up with $3,230 over and above the regular rent that month or face an unlawful detainer. Why? What became immediately payable is the remainder of the delayed rent (six installments worth plus late fees up to that point). Late fees pile up: seven months’ worth for the first month’s rent delayed and six months of late fees for the second and subsequent month’s rent delayed.

Let’s add it up: 6 remaining rent repayments of $300 each ($1,800 for the back rent) plus seven months of late fees for the first delayed rent ($770) plus six months of late fees ($660) for the subsequent month delayed. It makes for a grand total of $3,230 payable immediately if the tenant misses the 1st of the month deadline.

Again that payment would be on top of the regular rent of 1,800 (which the tenant would be foolish to pay when facing default on the $300 payment). It seems like a potential hole that a vulnerable tenant could never climb out of.  That’s why we call it sudden-death. A tenant faced with an obligatory mandatory repayment plan should think hard about signing. The better bet may be to walk away from the apartment.

So Why is a Rent Repayment Plan Necessary?

Landlords like the prospect of conditioning rent forbearance on a signed rent repayment plan because they like the certainty. And at a time when COVID–19 emergency measures have totally upended the economy, few certainties abound. So locking a tenant into to a rent repayment plan lets the landlord know what rent he will likely collect over the months ahead.

More important, an obligatory rent repayment plan agreement could offer a shortcut to a new, paying tenant if the current tenant defaults. That’s why the California Apartment Association “strongly recommends” that every adult occupant of the apartment sign the rent repayment form: dotting every ‘i’ and crossing every ’t’ is essential if the landlord is to prevail on the landlord’s terms when the dispute moves to the courthouse.

The advantage of certainty to the landlord means a flip-side disadvantage for the tenant who may have no certainty about her economic prospects in the near future. Signing on the dotted line may be too big a price to pay for forbearance.

Renters Alliance recommends that no tenant should sign onto a rent repayment plan in this uncertain economic climate. That is, if they have an option, and we hope that city council keeps the option open.

But really, what problem is solved by enacting a draconian rent repayment provision anyway? We see it as a solution in search of a problem. Have you been pressured to sign a repayment agreement? Please get in touch with Renters Alliance and share your experience.

Call in to the Tuesday city council meeting with your perspective. You may offer a comment by dialing 310–285–1020 shortly after the tele-meeting begins at 2:30 p.m. You will have three minutes to comment. (Please refer to the staff report for agenda item A–2.)