Modifying Collection Practices Amid the COVID-19 Pandemic

By Ryan J. Fishman

The coronavirus crisis has unleashed serious wreckage unto the American economy, with businesses both large and small suffering the consequences. As discussed in our previous article, commercial real estate has been on the receiving end of much of the economic destruction the U.S. has seen as a result of the coronavirus pandemic. As commercial tenants are handcuffed in their ability to operate by new regulations in light of this pandemic, their revenues have nosedived while the bills have kept piling up. Many landlords across this country now find themselves waiting for late rent payments which may never even come. It seems there is little possible recourse in such a desperate situation. However, there are steps which commercial real estate firms can and should take in light of this crisis to protect their commercial rental income and protect the viability of their properties.

Supporting Your Tenants

As an owner of commercial properties, maintaining a strong relationship with your tenants is undoubtedly already part of your company’s procedure. But the robustness of this association has never been more critical to the success of both the tenant and your firm, as the crisis has added new dimensions of problems that should be addressed. Certain actions can be taken by your firm to reinforce to the tenant that you are in their corner throughout this crisis, and can help them get the resources they need to remain operable.

Making calls to your tenants and asking about their experiences throughout this crisis is the first step. Checking in on the wellbeing of your tenants and their employees can go a long way in expressing your sympathy for the struggles they’re facing. It’s also important to check in on their game plan (hoping they have one) for this crisis. Do they plan on cutting areas of their business? Are they looking at laying off employees, or have they done so? Do they have plans to find short-term cash infusions if need be? What are their long-term operations plans if the “stay in home” orders drag on or are reinstated? Asking these questions helps fortify the symbiotic relationship between landlord and tenant, but it also benefits you in your strategy to combat this crisis. Based on the information given in the phone call, you can probably reasonably discern how hard that tenant has been hit by this crisis, and what the chances are that they may miss their payment at the end of the month. You’ll be significantly better off basing your strategy and planning off direct information from your tenants than on hunches based off anecdotal information from the media.

Another key action to take in regard to your tenants is ensuring that they’re utilizing the resources available to them. The CARES Act’s Paycheck Protection Program, discussed more at length in the previous article, is an outstanding resource for your small business tenants who are eligible. If the tenant has not already applied, direct them through the application process and ensure they are maximizing their potential benefit. Their benefit is yours as well. The forgivable loans provided by the PPP program can be the difference between them making rent at the end of the month and not doing so, thus helping you avoid an uncomfortable situation.

Staying Above Water

If after your conversations with your tenant it is evident that they are extraordinarily struggling financially, proposing a forbearance plan would help the tenant avoid financial calamity and work to protect your commercial rental income as well. The typical route when tenants are missing payments-eviction-may not be an option in this case, given new statutes at local, state, and federal levels which create eviction moratoriums. This payment plan would come as a signed addendum to the lease, so if you did not previously have a personal guarantee in place, this is your chance to include it in a signed contract. By showing your tenants your willingness to adjust your expectations for their benefit, they will likely be much more cooperative with you in the future.

If it comes to the point where you need to pursue eviction, be sure to consult a landlord-tenant attorney, given how perilous the fluctuating legal circumstances can be. Post-eviction, though, there is the question of what to do with the remaining balance on the tenant’s account? There are multiple options available. Collection agencies are perhaps the most oft-opted for alternative, but they have many deficiencies that pose a risk to your firm’s bottom line, in the forms of ineffective practices and liability-inducing mistakes. With an “industry standard” collection rate of about 5% for agencies, it should be no wonder why many businesses are abandoning collection agencies and hiring collection law firms instead.

Collection agencies have very dull tools in their ability to collect on your behalf. They will typically call the tenant and ask for payment, but how fruitful can this be when you’ve done that repeatedly? It won’t help that this time, the source is more distant and unfamiliar than before, as they have no relationship with the agency. The agency may end up tossing the delinquent payment onto the debtor’s credit report, but there will probably be a long line of creditors waiting to collect before you. The debtor probably allowed many other payments to go into delinquency before they stopped paying rent and had to close up shop. Adding one more credit derogatory does not give the debtor much incentive to make the payment now. Collection agencies also represent a danger to your firm because of their often irresponsible actions. The collection agency industry isn’t exactly known for its scrupulous legal compliance and ethical standards. When you consider the increased body of regulations due to the crisis along with a greater focus on ethics in a sensitive time, your firm cannot risk a lawsuit or reckless damage to its image.

An alternative that far exceeds the collection agency in its effectiveness in collection and security is the debt collection law firm. Collection law firms have real legal tools they can use to collect on your behalf. With your guidance, the collection law firm may try to put together a payment plan with the debtor, or go directly to filing a lawsuit. From there, they obtain a judgement from the court, allowing them to pursue garnishment of new wages, bank accounts, state income tax refunds, compel the appearance of your debtor in court, or seize assets to satisfy the debt. Especially in the recessionary times we live in, adding an extra source of cash flow by collecting on these delinquent accounts is what can keep your firm above water and maintain your properties’ viability. Beyond the numbers, collection law firms are also far more cautious in their actions as they have a better understanding of the law than most. They deal with oscillation in laws regarding debt collection on a constant basis, so their actions are measured to comply with legal boundaries, along with maintaining ethical constraints.

Conclusion

The situation, as of now, seems bleak, and it may continue to appear that way for quite some time. But the solution to that is not inaction- in fact, far from it. To ensure your firm’s survival in the coronavirus crisis, you must be proactive in your strategy and conscious of your options every step of the way. Otherwise, you could be left in an even more strenuous financial situation in the future with unpaid rent stacking up and unfilled units as well. The bright side, though, is that these changes could be beneficial as long-term practices for your firm, thus exposing you to an upside benefit in your response to an unprecedented time.