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May 27, 2020

Stroock Special Bulletin

By: Jeffrey R. Keitelman, Kim Pagotto, Lauren K. Swanson

In April, we released a bulletin about D.C.’s sweeping commercial rent and mortgage relief legislation, noting that the D.C. City Council was receiving input from several constituencies and making clarifying changes.[1]

On May 19, the Council adopted additional COVID-19 emergency legislation,  the Coronavirus Support Emergency Amendment Act of 2020 (the “bill”), created to consolidate and clarify the Council’s previously enacted legislation and provide relief to residents of the District during the COVID-19 public health emergency. The bill will be in effect for 90 days upon approval and signature by the Mayor.[2] Although the bill is largely a consolidation of the Council’s prior COVID-19 emergency legislation passed on March 17, April 7, April 21 and May 5, several of the provisions have been substantively revised, including those pertaining to mortgage deferrals and rent payment plans. The Council has acknowledged that some provisions may see further modifications prior to the Council’s next meeting, scheduled for June 9; this update discusses several of the bill’s provisions as they stand today.

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Mortgage Relief

For the duration of the public health emergency (which is currently in effect through June 8), and for 60 days thereafter, a mortgage lender that makes or holds a residential or commercial mortgage loan in the District must develop a deferment program for borrowers. During their May 19 legislative hearing, the Council clarified that the mortgage relief provision of the bill applies to any lender who makes or holds a commercial mortgage loan in the District, with the exception of national banks and federally chartered credit unions. This change was incorporated into the bill through an oral amendment, and differs from the Department of Insurance, Securities and Banking’s previously published guidance on the Council’s earlier emergency legislation.[3] The consolidated bill further clarifies that the mortgage deferral requirement does not apply to federally backed mortgage loans or federally backed multifamily mortgage loans. Also explicitly excluded from the definition of “Mortgage Lender” under the bill are the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association and the Government National Mortgage Association.

Under the bill, the mortgage deferment program must:

1. Grant the borrower a 90-day deferment of the monthly payment of principal and interest on a mortgage;

2. Waive any late fee, processing fee or any other fee accrued during the public health emergency; and

3. Provide that the lender will not report to a credit reporting agency as delinquent the amounts subject to the deferral.

A lender must approve each application in which a borrower (a) demonstrates financial hardship resulting from the public health emergency (including an existing delinquency or future inability to make payments), and (b) agrees in writing to pay the deferred payments within a reasonable time period agreed upon in writing by both parties, or three years from the end of the deferment period or the end of the original term of the loan, whichever is earlier.

Further, the Council removed language from previously enacted legislation with respect to mortgage relief, deleting the requirement that a borrower receiving a deferral notify all tenants within five days of approval and subsequently reduce the rent for qualified tenants.  The Council acknowledged that tenants remain entitled to relief under Section 402 of the bill (see “Tenant Payment Plans” section below), which requires residential and commercial landlords to develop a rent payment program for eligible tenants. Therefore, a borrower receiving mortgage relief would not automatically need to provide relief to tenants, but rather provide an application process to tenants for rent payment plans, as set forth below.

The bill also specifies the following requirements for lenders with respect to the mortgage deferral program:

• A lender must establish application criteria and procedures for borrowers to apply for the deferment program, and must make the application or a summary of procedures available to borrowers by telephone or online.

• A lender that receives an application for deferment must retain the application (whether approved or denied) for at least three years after final payment is made on the mortgage or the mortgage is sold, whichever occurs first. Further, upon request, a lender must make any application for deferment available to the Commissioner of DISB.

• A lender may not request or require a lump sum payment from any borrower making payment under the deferment program, subject to investor guidelines.

• Lenders must adhere to the notice requirements set forth in the bill, which include providing the Commissioner of DISB with a list of all new approvals in 15-day intervals for the duration of the public health emergency and for 60 days thereafter.

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Rent Increase Prohibition 

The previous prohibition on rent increases for the duration of the public health emergency, and for 30 days thereafter, has been revised in the new legislation to specify that rent increases for a commercial retail property, or any commercial property that is less than 6,500 square feet in size are prohibited. In its legislative hearing, the Council acknowledged its intent to ensure that small businesses occupying less than 6,500 square feet are included in the rent increase prohibition. Given this specification, commercial office tenants that occupy less than 6,500 square feet would be included in the rent increase prohibition.

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Tenant Payment Plans

For the duration of the public health emergency and for one year thereafter (the “program period”) landlords must develop a rent payment plan program for eligible residential and commercial tenants. This requirement will apply as of May 19, 2020 – a revision made by the Council to ensure that landlords will not be in automatic violation of the law if they have not yet instituted a payment plan retroactively as of March 11, 2020. The current requirement that a residential landlord have five or more residential units to fall under the rent payment plan requirement was removed by the Council via an oral amendment adopted during the Council’s May 19 legislative hearing. The Council noted that this amendment was put forth to ensure that tenants of residential landlords with fewer than five units were not inadvertently excluded from the legislation.

The bill defines an “eligible tenant” as a tenant of a residential or commercial retail property that: (1) has notified the landlord of an inability to pay all or a portion of the rent due as a result of the public health emergency, and (2) is not a franchisee, unless the franchise is owned by a District resident. Therefore, the bill apparently excludes commercial office tenants of any size from the rent payment plan requirement.

Under the rent payment plan program, a landlord must:

1. Make a rent payment plan available to eligible tenants for the payment of gross rent that comes due during the program period and prior to the cessation of the tenancy, with a minimum term length of one year (unless a shorter payment plan term length is requested by the tenant);

2. Waive any fee, interest or penalty that arises out of an eligible tenant entering into a payment plan;

3. Not report to a credit reporting agency as delinquent the rent subject to the payment plan;

4. Provide that a tenant does not lose any rights under the lease due to a default on the monetary amounts due during the lease period (provided that the tenant does not default on the terms of the payment plan); and

5. Notify all tenants of the availability, terms and application process for its program.

While the bill specifies that a landlord must allow applications for the rent payment plan “to occur” online and by telephone, the new language provides landlords with the flexibility of utilizing existing procedures or, if necessary, establishing new procedures governing how tenants apply for the plan (which includes requiring tenants to submit supporting documentation).

Under the proposed legislation, a landlord must approve any application for the rent payment plan in which a tenant:

1. Demonstrates evidence of a financial hardship resulting from the public health emergency that: (a) is in addition to any delinquency or future inability to make rental payments in existence prior to the public health emergency, and (b) that would cause the tenant to be unable to qualify to rent the unit or space based on utilization of the same qualification criteria that were applied to the tenant at the time he or she was approved to rent the unit or space; and

2. Agrees in writing to make payments in accordance with the payment plan.

Tenants entering into a payment plan must make payments in equal monthly installments for the duration of the payment plan, unless a different schedule is requested by the tenant. Unless a landlord has offered and approved a rent payment plan, the landlord is prohibited from filing any collection lawsuit or eviction for non-payment of rent during the program period, provided that the tenant does not default on the terms of the payment plan.

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We anticipate further clarification to the language included in the bill, and will continue to monitor legislative changes going forward. Please contact any of the authors below for more information.

______________________________

For More Information

Jeff Keitelman

Kim Pagotto

Lauren K. Swanson

[1] See “DC Passes Sweeping Commercial Rent and Mortgage Relief,” Stroock Special Bulletin, April 23, 2020.

[2] The provisions of the legislation will be retroactively applicable as of March 11, 2020 (the date on which a Public Health Emergency was declared in the District of Columbia), except where otherwise provided in the bill.

[3] The Department of Insurance, Securities and Banking’s (DISB) guidance with respect to the applicability of the program was originally published on May 4, 2020.

This Stroock publication offers general information and should not be taken or used as legal advice for specific situations, which depend on the evaluation of precise factual circumstances. Please note that Stroock does not undertake to update its publications after their publication date to reflect subsequent developments. This Stroock publication may contain attorney advertising. Prior results do not guarantee a similar outcome.