Most commercial evictions will be prohibited through May 31, 2020 under an executive order issued on April 6, 2020 by Arizona Governor Doug Ducey. Under the order, commercial landlords will be prohibited from locking out tenants, issuing a notice to vacate, or otherwise “attempt[ing] to inhibit the operations of a business.” The prohibition applies if the tenant is suffering financial hardship from the COVID-19 pandemic that prevents it from paying rent and will remain in effect until May 31, 2020.

The order does not excuse tenants from paying rent during this time. It does, however, temporarily deprive landlords of most of the remedies that they can exercise against tenants who do not pay rent. For example, many commercial leases allow a landlord — sometimes following a short notice period — to simply change the locks and bar a non-paying tenant from accessing the leased space. This order expressly prohibits such “lock-out” remedies.

This order also temporarily suspends any judicial actions that seek to evict commercial tenants. The only exception is where “a court determines on motion of one of the parties that it is contrary to the interest of justice” to delay the eviction.

This language implicitly modifies the standard applicable to forcible entry and detainer actions, which is the judicial process for commercial evictions. Typically, in such actions, courts are to determine only “the right of actual possession.” A.R.S. § 12-1177. By adding an “interest of justice” standard, the order requires courts to conduct an additional inquiry.

Some are questioning whether imposing such a requirement is within the governor’s powers. If that issue is litigated, tenants will likely argue that the governor was properly exercising authority in an emergency. Landlords will argue that the order effectuates a change in the law without legislative approval and that the governor lacks authority to order the judiciary to act. Given the short duration of the order, it is unclear whether this issue will ever be litigated to resolution.

Exceptions and limitations

  1. Does not apply to tenants that are ineligible for the federal Paycheck Protection Program. This program generally includes businesses with fewer than 500 employees, though some larger businesses may also qualify.
  2. Order requires commercial tenants that seek to delay an eviction or lockout to provide the landlord with supporting documentation of their financial hardship. Those tenants must also acknowledge that the lease remains in effect.
  3. Order does not excuse tenants from their rent obligations. Thus, unless tenants and landlords agree for rent deferrals or forbearances, landlords will likely still be able to exercise eviction or lockout remedies if tenants are in default once the order expires.
  4. Order requires tenants that receive financial assistance from the Paycheck Protection Program or other programs to apply some of that assistance to past or current rent but does not specify the portion of assistance to be used.
  5. Order does not preclude the continuation of eviction actions that predate the March 11 issuance of a public health state of emergency.

In practice, many landlords and tenants are entering into forbearance agreements that will govern the landlord’s ability to exercise these remedies. The order also encourages landlords to consider entering into such agreements. Specifically, it recommends that landlords agree to “defer or adjust rent payments,” “waive late fees, penalties and interest,” and “develop rent repayment plans.” These types of terms are common among the forbearance agreements that we have seen.

Of course, these agreements and the practical reality that many tenants are not paying rent have had a cascading effect on landlord’s own obligations to their lenders. The order attempts to address this by asking lenders to “consider providing an opportunity for a forbearance for any commercial real estate borrower that has suspended any action” under the order. However, this portion of the order is not mandatory. Landlords and lenders should therefore be proactive in working out their own forbearance agreements.

For more information, please contact Jeff Sklar at sklar@lrrc.com or visit www.lrrc.com.