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April 23, 2020

Stroock Special Bulletin

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

In a series of legislative actions taken by the D.C. City Council and signed by the Mayor, the District of Columbia has enacted some of the most stringent regulations in the country regarding commercial rent and mortgage relief, which go beyond the eviction and foreclosure moratoria passed to date. While the legislation was passed on both “emergency” and “temporary” bases, commercial landlords and lenders are struggling to understand the implications. There are a lot of outstanding questions even with the recent amendments attempting to fill in the blanks. Below is a general overview of the legislation as it stands today.

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Overview:

On April 7, 2020, the Council passed supplemental COVID response legislation[1] in the form of the COVID-19 Response Supplemental Emergency Amendment Act of 2020 (as amended, the “Act”), which extended additional relief to residents and businesses impacted by the coronavirus pandemic in D.C. As “emergency” legislation officially enacted on April 10, 2020, the Act will be in effect for no more than 90 days.[2] The Council also introduced a “temporary” version of the legislation that will be in effect for no more than 225 days following the applicable congressional review period once that review is conducted.

The Act expanded upon several areas of relief, and included mortgage relief language requiring mortgage lenders that make or hold[3] a residential mortgage loan or commercial mortgage loan under the jurisdiction of the Commissioner of the Department of Insurance, Securities and Banking (“DISB”) to offer certain borrowers a 90-day deferral of their mortgage payments.

On April 21, 2020, the Council implemented a series of additional resolutions and “technical amendments” to the Act that (i) addressed gaps and ambiguities in the original Act that had been raised by a number of industry and consumer groups, (ii) extended the rent increase freeze (originally applicable only to residential leases) to commercial tenants, and (iii) included mortgage lenders as covered entities, required notice of approved deferral applications, and clarified the amount a landlord could require a tenant to repay following the deferral period. (The Supplemental Emergency Act’s definition of “mortgage lender” specifically excludes the Federal Home Loan Mortgage Corporation, the Federal National Mortgage Association, and the Government National Mortgage Association.)

Mortgage Relief (Deferment Program for Borrowers):

Section 202 of the Act sets forth mortgage relief provisions directing mortgage lenders[4] that make or hold residential or commercial mortgage loans under the jurisdiction of the DISB to develop a deferment program for borrowers that, at a minimum:

1. Grants at least a 90-day interest-free deferment of the monthly payment of principal and interest on a mortgage;

2. Waives any fees accrued during the pendency of the public health emergency;[5] and

3. Does not report to any credit bureau any derogatory information resulting from the deferral.

The deferment program applies during the period of time for which the Mayor has declared a public health emergency[6] and for 60 days thereafter (the “Deferment Period”).  While fees are expressly prohibited, it is unclear if a mortgage lender may charge additional interest on any deferred payment, invoke reserve payments or exercise other rights under a particular mortgage that are not otherwise expressly prohibited under the Act.

Exemption: A property for which a mortgage foreclosure proceeding was initiated, or for which a mortgage lender exercised its right to accelerate the balance and maturity of a loan, on or before March 11, 2020, is exempt.

Applying for the Deferment Program:

Mortgage lenders must make applications for the deferment program available to borrowers online or by telephone, and must approve each application in which a borrower:

1. Demonstrates evidence of financial hardship resulting directly or indirectly from the public health emergency, including an existing delinquency or future ability to make payments; and

2. Agrees in writing to pay the deferred payments within: (i) a reasonable time agreed to in writing by borrower and lender, or (ii) if no reasonable time can be agreed on, five years from the end of the deferment period, or the end of the original term of the mortgage loan, whichever is earlier.

A mortgage lender who 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 (even for applications taken over the phone). The Act does not specify what documentation may be required or may satisfy the demonstration of financial hardship.

 Notice Requirements for Mortgage Lenders:

The emergency legislation requires that a mortgage lender that approves an application for deferment must, on or before May 8, 2020, provide notice of all approved applications to the Commissioner of the DISB (on a form prescribed by the Commissioner), which includes the percentage of mortgage deferment approved for and accepted by each borrower. However, the technical amendments to the “temporary” legislation require that a mortgage lender that approves an application for deferment provide notice of all approved applications to the Commissioner “within 15 days after the effective date of this act.” It is unclear if this distinction was intentional or is inadvertent. To the extent a deferment is granted under the emergency legislation prior to May 8, 2020, it is advisable for a mortgage lender to report the same, assuming that the reporting form is available.

Following the initial submission to the Commissioner of the information noted above, a mortgage lender that has approved an application for deferment must provide the Commissioner with a list of all new approvals in 15-day intervals for the Deferment Period. The Commissioner must maintain a publicly available list of approved commercial mortgage loan deferment applications.

A related provision of the Act (Section 207) prohibits debt collectors from initiating any communication with debtors during the Deferment Period, but specifically exempts debt collectors attempting to collect a debt which is owed on a loan secured by a mortgage on real property. This may be because Section 202 addresses mortgages secured by real property.

Obligations of the Borrower:

The Act defines a “qualified tenant” as a tenant of a property owned or controlled by a person or entity receiving a mortgage deferment that 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.

 A borrower that has a tenant (whether commercial or residential) must, within five days of the approval of a mortgage payment deferment, provide notice of the deferral to all qualified tenants, and:

1. Must provide a reduction in the rent charged to any [qualified tenant] during the period of time in which there is mortgage deferment in place. The amount of the reduction must be proportional to the deferred mortgage amount paid by the borrower to the mortgage lender as a percentage of total expenses reported in the borrower’s 2019 Income and Expense report provided to the Office of Tax and Revenue;

2. May require that a qualified tenant repay the difference in the amount of the rent as stated in the lease and the reduced rent, without interest or fees, within 18 months, or upon cessation of the tenancy at the end of the lease term, whichever occurs first; and

3. Shall not report to a credit bureau any delinquency or other derogatory information that occurs as a result of a qualified tenant’s exercise of and compliance with the terms set forth in the legislation.

Additional Tenant Protections:

Section 203 of the Act amends the DC Rental Housing Act (Section 904 D.C. Official Code § 42-3509.04) to provide that residential rent increases that would have taken effect, or were communicated during, the public health emergency are null and void.

The Act prohibits rent increases for a commercial property while a public health emergency has been declared pursuant to the District of Columbia Public Emergency Act,[7] and for 30 days thereafter.  It is unclear whether this means only base rent or any and all rent that may be applicable under a commercial lease.  The legislation does not specify whether or not the landlord may recoup the otherwise applicable rent increase later during the term.

The Act also specifies that any notice of intent to vacate provided by a tenant prior to the public health emergency being declared is tolled until the end of the public health emergency.  Such tenant shall have the same number of days to vacate remaining at the end of the public health emergency as the tenant had remaining upon the date the public health emergency was declared.

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We expect that there will be litigation challenges to the sweeping legislation and we will continue to monitor this going forward.  Please contact any of the authors below for more information.

______________________________

For More Information

Jeff Keitelman

Kim Pagotto

Lauren K. Swanson

[1] The Supplemental Emergency Act expanded an emergency bill, COVID-19 Response Emergency Amendment Act of 2020 (“the Emergency Act”), which was originally enacted on March 17, 2020.

[2] “Emergency” legislation takes effect following approval by the Mayor (or in the event of veto by the Mayor, action by the Council to override the veto), without the need for congressional approval.

[3] The amendments to the Emergency bill passed on April 21, 2020, change this language to “that makes or holds”, while the amendment to the “Temporary” bill replaces the language with “that makes”.  Therefore the Emergency bill applies to a mortgage lender “that makes or holds” a residential mortgage loan or commercial mortgage loan under the jurisdiction of the Commissioner of the Department of Insurance, Securities and Banking; while the Temporary bill applies to a mortgage lender “that makes” a residential mortgage loan or commercial mortgage loan under the jurisdiction of the Commissioner of the Department of Insurance, Securities and Banking. It is unclear if this distinction was intentional or is inadvertent.

[4] “Mortgage lender” means any person who makes a mortgage loan to any person or who engages in the business of servicing mortgage loans for others or collecting or otherwise receiving mortgage loan payments directly from borrowers for distribution to any other person.

[5] A public health emergency was declared by the Mayor on March 11, 2020.

[6] Pursuant to Section 5a of the District of Columbia Public Emergency Act of 1980, effective October 17, 2002 (D.C. Law 14- 194; D.C. Official Code§ 7- 338 2304.01).

[7] D.C. Law 14-194; D.C. Official Code § 7-2304.01.

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.