The state politicizes COVID-19; threatens housing market
Gov. Ned Lamont’s Executive Order 7X issued on Friday April 10, ostensibly in connection with COVID-19, insofar as it relates to residential tenants has little to do with public health and much to do with currying political favor.
This order singles out property owners in Connecticut who rent to residential tenants, assigning extra government-imposed burdens.
In operation, this order is likely to create quite a bit of confusion, and some animosity where, previously, reasonable property owners and tenants had cooperated to make the best of a situation which is challenging for all.
In short, the executive order defers residential rent payments for two months and reduces tenant security deposits.
Lamont’s order No. 7X as it relates to tenants has four essential provisions.
- Evictions. The EO substantially prohibits property owners from starting any lawsuit for eviction of a tenant before July 1, 2020, and extends this prohibition for the duration of the state of emergency. This provision appears to be substantially redundant with Executive Order 7G which deferred all non-essential judicial functions for the duration of the emergency.
In addition, as a result of this EO 7X, residential tenants in Connecticut:
- Have no obligation to pay their April rent for 60 days. Tenants may take advantage of this deferral with no showing of any need or financial hardship.
- Have no obligation to pay their May rent for 60 days. To take advantage of this provision, tenants must advise the owner of their rental property that they are suffering an economic hardship. Property owners, under the terms of the EO, have no right to question or challenge any such assertion
- May direct the property owner to apply a portion of the tenant’s security deposit to the payment of rent for either April, May or June. The property owner has, as above, no right to inquire into the tenant’s reported hardship, and no right to require the tenant to restore the security deposit to its original level during the tenant’s current lease term – even if the public emergency ends in June or July and the tenant’s lease term extends into 2021.
In effect, property owners are told to defer rent payments for up to 60 days and are compelled to reduce the security they hold for a tenant’s faithful performance. Property owners, meanwhile, must continue to fulfill their obligations toward tenants and their properties. Furnace down – get it fixed! Storm door blown off – replace it. Tree down – get it taken away. Mortgage due – figure it out. Taxes due – satisfy the governor that you really are in trouble. No free pass here.
EO 7X effectively modifies hundreds of thousands of private contracts statewide, unilaterally, favoring tenants and burdening property owners.
Contrast this with executive orders relating to food service and retail:
Food and clothing are surely essential, but no restaurateur has been ordered to stand at the door of her shop giving away food with the promise of payment 60 days later.
No shop that sells clothes has been ordered to give away socks, underwear and t-shirts with the promise of future payment.
Executive Order 7X’s treatment of property owners also contrasts strongly with the treatment of insurers in Executive Order 7S.
Paragraph 2 of 7S stipulates that insurers licensed or regulated by the Connecticut Insurance Department must provide policy holders with a 60-day grace period. However, this EO also stipulates that: (a) policy holders must request the deferral; it is not automatic; (b) insurers may dictate the form of the request and may require an affidavit or “other statement acceptable to the insurance carrier.” A separate paragraph of the EO explicitly tells policyholders that the grace period is not a waiver or forgiveness but only an extension of time.
It’s also notable that in EO 7S, the insurer must extend the grace period to policy holders only if they are timely in their payments as of March 10. No such provisions are provided in EO 7X for the benefit for property owners.
While there are certainly unreasonable property owners, just as there are unreasonable and destructive tenants, many property owners and their managers had communicated to tenants their understanding of possible financial hardships and willingness to develop payment plans, if needed, well before last Friday’s release of EO 7X.
EO7X, however, implicitly suggests that property owners would naturally be eager to evict any tenant who fails to make timely rent payments in April or May.
Far from it. Owners of rental properties wish to keep tenants in place and units occupied. Even under normal business conditions, eviction actions are expensive and time-consuming. These actions often exceed in cost the tenant’s security deposit and any other amounts the property owner can recover.
Under current conditions, because any tenant other than the current-in-place tenant is likely to face similar economic challenges , and because prospective tenants generally are not in a good position to go apartment/rental house shopping now – effectively, they are prohibited from doing so — any property owner who succeeded in securing an eviction, would likely face an extended vacancy, increased utility costs, all the risks associated with a vacancy, and also pay a commission to find a new tenant.
Implicit in EO 7X and its structure is policy-makers’ belief that property-owners have a single-minded focus on money which makes them wicked. If, contrary to the facts, this were the property owners’ orientation, the only logical course of action for a property owner would be to keep the tenant in place.
EO 7X’s provision related to security deposits is especially telling. Security deposits are, of course, negotiated between landlord and tenant, and are provided in addition to rent to help assure a tenant’s faithful payment of rent, and that they will leave the rental property in reasonable condition. A tenant pays a security deposit at the beginning of a lease term and not out of current cash flow.
Currently, under Connecticut statutes, residential rental property owners are limited to collecting two months’ rent as a security deposit. For reasons discussed above, this provides property owners with inadequate protection against non-performing or destructive tenants. The legal cost of bringing an eviction action, storing a tenant’s abandoned property, and the inherent delays are often far more than the security deposit. Nonetheless, in last year’s legislative session, there were rumors that the legislature would seek to further limit residential security deposits to just one month’s rent. The proposal went nowhere.
Now we see the governor using an executive order as a back door to do what the legislature couldn’t or wouldn’t, and putting property owners at greater financial risk.
Considering the nature of property-owner and tenant demographic populations in Connecticut gives further indication that the order is an inappropriate salvo to ingratiate this governor with potential voters rather than a reasoned decision related to a health threat.
According to the Department of Numbers, a data aggregator, approximately 30% of Connecticut households are renters. This translates to a large number of people and potential voters.
So, here’s what we know about renters generally and Connecticut renters in particular. Average gross residential rent in Connecticut peaked in 2015; as of 2018 it had declined another .62% from 2017. Residential vacancies in Connecticut stood at approximately 7% in 2017, the most recent year for which data is available. A 5% vacancy is generally regarded as the equilibrium rate, so at 7%, the rental market is slightly more favorable to tenants than property owners. And, of particular interest, according to Harvard’s Joint Center for Housing Studies, the greatest recent growth in renters has been among high-income households, those making at least $75,000 per year. So overall, renters represent an increasingly wealthy segment of the market, enjoying rents that have declined and vacancies that have risen.
What about owners of residential property?
Freddie Mac has documented this extensively. According to Freddie Mac, about 30% of rental units nationwide are single-family homes and 88% of such rental properties are held by individuals or entities with fewer than 10 units. Another 7% of such properties are owned by entities with fewer than 50 units. So overall, close to at least 30% of residential rental owners can be characterized as “mom-and-pop,” owning a few rental properties or very small businesses.
The same type of ownership structure applies to smaller apartment buildings. These buildings tend to be older, offer few contemporary amenities –think fire pits and community rooms – and to be held by individuals or small businesses. Single family rentals and smaller buildings predominate in Connecticut given its lack of large urban centers. In other words, property owners are not a monolithic group of rich folks, any more than renters are uniformly disadvantaged, and property owners may be more at risk than the renters to which they provide shelter and services.
Despite these facts, Lamont wishes to treat each group as a homogenous class, to pit classes against each other, and claim to be a white knight for the alleged underdog. His comments in connection with the order are telling . . . “tenants have rights . . . we are going to make sure they are protected . . “. And what about everyone else the governor is oath-sworn to represent and serve?
Connecticut’s Executive Order 7X appears to be ill-informed, disingenuous and likely to be unproductive. Tenants are better advised to structure payment plans with property owners rather than to rely on the governor’s deferral and face large, lump sum bills in a few months.
When so many are being asked to sacrifice and are giving up so much, we must demand that our elected representatives put aside grandstanding for votes and act as true stewards of all the people.
Marisa Manley is a member of the New York bar. She lives in Westport, leads two commercial real estate firms and owns several rental properties in Connecticut.
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