Landlords Are Accepting Partial Rent Payments. Ruling Shows This Might Be a Mistake

Landlords, beware.

The economic downturn amid the COVID-19 pandemic has caused some to accept partial rent payments from struggling tenants.

But a nugget within a new ruling in a landlord-tenant lawsuit suggests potential unintended consequences.

“Landlords have to be careful when they take lesser payments, especially during COVID, that they are not entering into a new agreement,” said Roy D. Oppenheim, co-founder and senior partner of Florida-based Oppenheim Law, who was not involved in the litigation.

That’s precisely what happened in a dispute before the Court of Appeals of Georgia, in The Hatchett Firm v. Atlanta Life Financial Group—a case involving law-firm tenants and their landlord.

In it, the court sided with the law firm litigants, finding that by accepting reduced and irregular payments for an extended period, plaintiff Atlanta Life Financial group had created a quasi-new agreement. It ruled that by accepting 16 months of initially reduced rent, and then non-payments outside the scope of the initial contractual agreement, the landlord had waived its rights to collect rent.

“I always get concerned where a contract can be changed by a course of conduct,” said Harold Lewis, co-founder and co-managing partner of Pathman Lewis in Miami, who reviewed the decision by Judges Amanda H. Mercier, Sara L. Doyle and Kenneth B. Hodges III of the Georgia Court of Appeals. “If you enter into a course of conduct over a longer period of time, and there’s nothing being done to reserve your rights to the original agreement, there could be a quasi-new agreement created.”

“Because of COVID, you have a lot of situations where landlords have tenants that aren’t doing that well,” said Kelley Kronenberg partner Jim Silver in Florida.

The attorney said he had seen Fort Lauderdale restaurant clients struggling amid the pandemic with leases they can no longer afford.

“In most instances, landlords are going to require personal guarantees with smaller renters,” said Silver.

But as the ruling in The Hatchett Firm v. Atlanta Life Financial Group shows, landlords opting to take what they can get for now might be setting themselves up for more loss.

“By accepting anything other than the terms agreed upon in an initial agreement, you run the risk of inadvertently renegotiating and subsequently creating a new agreement,” said Oppenheim.

Lewis, who heads his firm’s finance and real estate departments, agreed.

“You can’t sit on your hands, even if you have a written agreement,” he said. “Have systems in place to make sure that the contract is being followed precisely. Send timely notices of late payments, and protect your rights.”

The attorneys also offered guidance to help protect tenants.

When negotiating initial leases, especially with the economic pressures of the COVID-19 era, Silver suggested tenants strategize by omitting personal guarantees altogether. If not, he suggested limiting the term limits or total liability exposure under the guarantees.

“It’s becoming more of a renter’s market and the people that are leasing the space have more leverage,” said Silver, who handles complex commercial litigation.

And from Lewis, a tip for tenants unable to satisfy lease conditions due to governmental limits on the business: Consider mounting defenses based on “frustration of purpose or commercial impracticability.”