In an effort to protect small businesses, Arizona Governor Doug Ducey issued Executive Order 2020-21 Prohibiting Small Business Evictions.  While the Executive Order was issued primarily to prevent commercial landlords from evicting commercial tenants, there are other provisions in the Executive Order that are designed to provide financial relief to these small businesses during the COVID-19 crisis.

First, the Executive Order temporarily suspends “a commercial eviction action including lock out, notice to vacate, or any other attempt to inhibit the operations of a business” for tenants unable to pay rent because of the COVID-19 pandemic, unless a court determines otherwise based upon a motion by one of the parties.  Therefore, any lock out would require prior court approval during the period of time the Order remains in effect.

Second, the Executive Order encourages commercial landlords to consider deferring or modifying rent payments, as well as waiving late fees, for commercial tenants that cannot timely pay rent because of the COVID-19 Pandemic.  There is also a recommendation to develop rent repayment plans for those commercial tenants that are experiencing financial hardship during the COVID-19 crisis.  For purposes of the Executive Order, a commercial tenant is defined as any type of business that is eligible for the federal Paycheck Protection Program.  Based upon our experience in dealing with both commercial landlords and commercial tenants during this pandemic, it appears that commercial landlords in Arizona are working with their tenants to provide rent relief in the form of deferred rent that will be repaid beginning in 2021.  In addition, to lessen the financial burden or repaying these deferred amounts, many landlords are allowing tenants to repay these amounts over an extended period of time.  For example, a landlord may defer rent for April, May, and June 2020, and allow for the repayment of the deferred rent over a period of twelve (12) months beginning January 2021.

Third, the Executive Order encourages commercial tenants that are experiencing financial hardship to not only provide landlords with supporting documentation of their inability to pay rent and requiring these commercial tenants to apply a portion of any financial assistance from public programs toward rent that is past due.  Notwithstanding this requirement for commercial tenants to apply a portion of their public financial assistance to past due rent, the Executive Order makes clear that commercial landlords may not require commercial tenants to apply a specific percentage of their financial assistance.  As a practical matter, under the federal Paycheck Protection Program at least 75% of the loan must be used for payroll and employee benefits, and not more than 25% of the loan amount may be used for non-payroll costs (e.g. rent).

Fourth, the Executive Order encourages commercial lenders to consider providing forbearance to their commercial borrowers that have been affected by the COVID-19 crisis.  In an effort to work with their borrowers during this challenging time, some commercial lenders are permitting interest-only payments for a limited period of time (e.g. 3 months) to lessen the burden on these borrowers during the time their businesses are required to be closed.

Finally, the Executive Order confirms that despite the moratorium on commercial evictions, the provisions of the Executive Order do not relieve any individual or business from their obligation to pay rent and other charges under their lease agreement.  The Executive Order expires on May 31, 2020.

Note that this article does not address whether there could be challenges to the validity of the Governor’s Executive Order, which could be addressed as part of the proceedings noted above if a landlord seeks the ability to evict a tenant.

For more information, contact Howard J. Weiss or a member of the Jennings Strouss Real Estate practice.