This is part of our ongoing coverage of renting during the COVID-19 quarantine of 2020. Visitors to this article after quarantine has ended should keep this context in mind before acting on any advice contained within.
In this era when renters often wind up obtaining housing that costs far more than they can actually afford, many face a dilemma each month as to what must be sacrificed in order to pay rent. Will it be food? The cell phone? Child care? Car payments? Will they have to take out another payday loan or borrow money from family? Many homeowners face the same issue when dealing with their mortgages, which may have been obtained during different points in the owners' careers when their earnings were higher. However, given the massive hit that the US labor force has endured over the past month due to COVID-19 related shutdowns, far more renters and owners will be facing this crisis choice for April 1 and May 1 of 2020.
I've seen a lot of calls for rent strikes, freezes and suspensions in my Twitter feed lately. I've also seen calls to lenders and banks to provide some sort of recourse for mortgage holders. There are a lot of renters and borrowers who are contemplating whether or not they should make a rent or mortgage payment next week. As this is at its core a corporate blog I cannot tell you to violate your contract. However, I can lay out some talking points to help you decide.
Will your landlord lose their building if you don't pay rent?
Your Landlord probably has a mortgage on the property where you live. This means that they borrowed money from a lender to purchase the property, and that they must make monthly payments to their lender to repay their debt. If they fail to do so, the lender can take over the property in a process called foreclosure. Most banks will evict all current tenants when they foreclose on a property.
Most residential mortgages are backed by one of the four biggest loan providers in the country, Fannie Mae (FNMA), Freddie Mac (FHLMC), the Veterans' Administration (VA) or the Federal Housing Administration (FHA). For the purposes of this article I'll be calling them the "financing four". Different banks will handle the servicing (billing and collections) on behalf of the financing four, but they only serve as collection points. They pass most of what they collect from borrowers on to the financing four, with the exception of what they keep in escrow for property tax payments and what they keep as a fee for the work they are doing on behalf of these agencies.
All four have all established similar COVID-19 responses. Borrowers may request up to 12 months of mortgage forbearance if needed. This means that their payments would be paused for up to a year. Most banks who service loans backed by these four groups will be able to follow suit. It stands to reason that landlords would also be able to take advantage of this opportunity. For owners of small rental properties (1-4 units) this is probably the case. If you stop paying rent, they can request forbearance on their loans. Chances are slim that they will lose the property to the bank, although they may have some issues with their property tax bills in the second half of the year if they're not somehow tending to their tax escrow fund.
However, apartment buildings with more than 4 units are not considered to be part of the residential market. They are considered to be part of the commercial market along with office buildings, warehouses, hospitals, shopping malls and storefronts. Some of them may still have loans backed by Fannie or Freddie. If this is the case they may request forbearance under the condition that they do not evict any tenants affected by COVID-19 quarantines. They will not lose their properties and as a bonus they cannot evict you if you stop paying rent until you can return to work.
But landlords of larger properties obtain the money to buy those properties from a huge number of sources. Landlords may purchase buildings using lines of credit. They may negotiate a portfolio loan with a bank directly, which means that they borrow from the limited pool of money that a bank has to offer which isn't backed by the financing four. They may work out a private mortgage directly with the seller of the property at the time of purchase. They may pay in cash with no loan at all. While all lenders are being encouraged to offer some sort of mortgage forbearance, there is no guarantee that they will do so, especially since some of them aren't lenders at all.
If your landlord bought the building with cash they will not lose the property to the bank but they may still evict you if you stop paying.
If your landlord bought the building with borrowed funds from any source besides Fannie or Freddie, there is a high chance that they could lose the building to foreclosure if you stop paying rent.
If you live in Cook County and would like assistance in determining how your landlord funded the purchase of your building, feel free to contact Rentconfident as we have the means to look up this information for you.
Should landlords and their employees be exempted from the national income shortfall?
There is a moral issue here. The cash flow of businesses in nearly every industry has been negatively impacted by COVID-19 quarantines. If workers aren't getting paid, they aren't paying anyone else either. Groups advocating for rent freezes and rent strikes are framing this as an issue between tenants and landlords only. They argue that there is no reason why the multifamily housing industry should be spared the impact of this crisis that has struck the entire commercial landscape of the world. But your rent payment doesn't only go to landlord income or mortgage payments. This isn't just a landlord-tenant matter.
If your lease includes any utilities such as water, heat, power or cable service, the landlord also has to pay utility companies for those services as well. Most utility companies are offering some sort of leniency at the moment, or at least the ones in the Chicago area are doing so. The water department will not be issuing late penalties or expecting any payments until May 1. ComEd is not providing any blanket leniency for power bills although consumers can request new payment arrangements if needed. People's Gas has suspended disconnections for non-payment. Comcast will not disconnect cable users for non-payment although they have to contact Comcast first. AT&T has suspended disconnections for 60 days. So if you do not pay your rent for the next two months, the utilities provided by your landlord will probably still continue to function in your home.
However, it is important to remember that as a renter you are not only paying for use of the property, but also for maintenance of that property. Property management is included in the list of essential services that are allowed to keep operating during "stay in place" shutdowns. The people who keep your apartment building running every day need to keep coming into work, entering apartments of potentially infected people, and they're probably dealing with more work than ever since everyone is at home right now. In the modern apartment industry it is difficult to untangle property management from property ownership. It is impossible for a renter to know how much of their rent payment is going towards loan servicing, utility payments, property taxes, building maintenance supplies or worker payroll. If you stop paying rent, it is possible that your landlord will stop paying their employees.
So if you choose to participate in a rent strike for April or May, that's up to you. But if you do, consider directly paying the maintenance staff a reasonable hourly wage for every service call they have to make to your apartment.
Is it illegal to break a contract?
When you stop paying rent you are violating the terms of your lease contract. This is an illegal act but it is not a crime. What is the difference? A crime is an illegal act against the state. Police work to stop crimes. Crimes are prosecuted in criminal court and convicted criminals can be punished with fines or jail time.
By contrast, breach of contract is a civil illegal act. The police don't get involved in civil matters. They are handled in the civil court system. Offenders are not punished with jail time but they can be fined and lose control over the property at stake in the contract.
Sometimes civil court cases have specific names. A civil court case dealing with the breach of a lease contract is called an eviction. A civil court case dealing with the breach of a marriage contract is called a divorce. A civil court case dealing with the breach of a mortgage contract is called a foreclosure.
So if you stop paying rent you are committing an illegal act. If you cheat on your spouse you are also committing an illegal act. If your landlord stops paying their mortgage without a forbearance agreement in place they are committing an illegal act. But none of these cases are crimes.
Is COVID-19 an "act of God"?
Many apartment leases and other contracts include a clause which determines what happens should the property at stake be destroyed or rendered unusable due to "acts of God". Insurance policies also provide specific instructions for what sort of coverage is offered should the insured items be affected by acts of God. In this case, an act of God (or if you prefer a more neutral term, "force majeure") is a generic, non-religious catchall term used in reference to large scale disasters like tornadoes, hurricanes, earthquakes and floods. This is in contrast to damage caused by human error, negligence or deliberate harm.
If your lease has a force majeure clause, it may define specifically which acts of God would allow the landlord or tenant to invoke this clause. However, leases are written largely to protect the landlord rather than the tenant. Act of God clauses in apartment leases very rarely take into consideration what happens if the act of God affects the tenant's ability to pay rather than the landlord's ability to provide suitable housing.
But the questions remain: can COVID-19 or the government response to it be considered as acts of God? If so, can a tenant use a force majeure clause in their lease as justification for suspending rent payments?
Law firm DLA Piper offers a good article on the matter, although it dates from February 13 when the virus was largely still confined to Asia. The National Law Review has a more recent article on the matter. Of particular interest in the latter article is their almost offhand inclusion of "war" as a case where force majeure clauses may be invoked, while epidemics and pandemics might not be. It is somewhat debatable whether or not the government response to the pandemic can be considered as a kind of war against a microscopic enemy. However, I would not want to be someone involved in the first few lawsuits that try and run that one past the court systems.
As this is an evolving matter and depends heavily on the contents of your lease, I would advise you to consult with an experienced attorney before including the words "force majeure" or "act of God" in your discussions with your landlord about a potential rent strike. No matter how many outside forces are pushing you in one direction or another, the decision to honor or ignore your lease contract is between you and your landlord. Consistent, earnest communication with your landlord is far more important than escalating the matter by throwing around legal terms, particularly without an experienced lawyer to back you up.
What does it take to get an eviction sealed in your state?
Now we come down to the crucial matter. If you stop paying rent, your landlord may try to evict you. In a worst case scenario, they will succeed and you will have to leave your housing. While evictions have been suspended for 30 days in Illinois and courts have suspended cases in similar fashions across the country, they will eventually resume. Tenants with evictions on their record have traditionally had a very hard time finding housing for years afterwards.
Unlike payment problems such as bankruptcies and foreclosures which fall off of your credit history after a few years, evictions are never removed from public records unless you have them sealed. Even if your case is dismissed, the very fact that a landlord filed the case in the first place is a matter of public record. These cases will follow you forever even if you are declared innocent of any wrongdoing.
In Illinois if you are evicted because your landlord lost the building to foreclosure your case is automatically sealed. This means it is removed from the public record and will not impact your future attempts to find housing. In all other situations you must request that your eviction be sealed at your courtroom hearing. You cannot go back afterwards and request that the case be sealed, with very rare exception. There are bills before the Illinois General Assembly that would allow all eviction cases to be sealed automatically in the months leading up to the courtroom hearing and then again after a certain number of years, but elected officials have been trying for years to get these bills pushed through with no success.
Policies on sealing eviction cases will vary between states. Before you stop paying rent, you have to check the laws for your own state. Give some serious thought as to whether or not you'll be able to deal with an eviction lawsuit on your record not only for three or seven years, but for the rest of your life. If your history is stained by an eviction, some landlords and mortgage lenders may still be willing to work with you. But future landlords may require payments of up to six months of rent before they will let you move in. Mortgage providers may not offer you the best rates when you're ready to buy a house if they see an eviction on your record.
Given the events that have led us to this point where a huge number of renters who are normally financially secure will be unable to pay rent for the next two months, we have to assume two things. The first is that some renters will inevitably get evicted over the matter. The second is that a large number of those evictions will be due to extenuating circumstances beyond the tenants' control. In an ideal world those tenants should most certainly be granted a sealing of their case should they request it of the courts, but this is not an ideal world.
So before you decide that you're not going to pay rent, take a moment to look into the protections that your state may offer for you to help you deal with the impact of that decision further down the line. Bear in mind that some new escape valves may be introduced in court system the wake of the COVID-19 shutdowns.
The decision of whether or not to pay rent next week and on May 1 is a very personal one which must be considered from both emotional and logical perspectives. You may have a lot of voices in your ear nudging you in one direction or another but many of those voices are taking extreme stances in the interest of persuading others to join their larger causes. These groups cannot know of your unique financial situation, your building, your relationship with your landlord and your housing history.
If you have had an unblemished housing record and credit until this time, anyone looking at the fallout of the quarantine on your history will probably see the date and understand exactly what happened. However, if you already have a really rocky history when it comes to paying debts you might want to use this as an opportunity to prove that you do have a sense of priorities when it comes to honoring contracts.
If you have a really good, personal relationship with a landlord who lives downstairs from you the decision will be a very different one from a renter in a huge apartment block owned by a faceless international investment corporation. If you live in cooperative housing or a condominium even further issues will cloud the matter, since now everyone in the building will be affected by your decision as well as the landlord, the banks and their employees.
But at the end of the day, quarantine is a matter of protecting yourself, your family, and the healthcare workers upon whom we are all depending right now. Nothing else matters more. As you make your choice about paying rent in the coming months, know that you are not alone in making the choice, but that the choice in the end has to be your own and made with the full picture in mind.
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This was such a HELPFUL article, I truly appreciate it.