It’s the lease they can do

Certainly, both lessors and lessees must work together to achieve a sustainable and long-term solution.

Not only has COVID-19 posed a significant health risk, it has also severely changed the way we live. Businesses of all sizes and across all industries continue to feel the effects of COVID-19 with many forced to close shop, terminate employment, reduce salaries, and the like.

Among those severely affected by the pandemic are lessors and lessees of real estate. The pandemic has severely affected people’s cash flow such that it has become harder for commercial establishments to justify keeping a leased office space when most of the workforce is on a work-from-home arrangement or for residential tenants to pay their rent.

Even as a lessor, it is often very difficult to collect rental from lessees due to a myriad of reasons. The Philippine government deemed it necessary to ease part of the burden by giving tenants some breathing space when it comes to rental payment.

Republic Act (RA) No. 11469, or the Bayanihan to Heal as One Act (Bayanihan Act 1) was passed into law last March 24, providing lessees rent deferment through a mandated minimum grace period of 30 days, within which they can pay residential rents falling due within the Enhanced Community Quarantine (ECQ), without incurring any interests or other penalties.

To implement the said grace period, the Department of Trade and Industry (DTI) issued Memorandum Circular No. 20-12, which provided concessions not only on residential rents, but also on commercial rents of Micro, Small, and Medium Enterprises (MSMEs) that have temporarily ceased operations within the period of the ECQ.

This was further expanded to include MECQ and GCQ periods in subsequent IATF issuances. Notably, MSMEs refer to any business activity whose total assets, excluding the land where it is situated, do not exceed P100 million.

The DTI issued DTI Memorandum Circular No. 20-29, as amended by DTI Circular No. 20-31, to clarify the applicability of the minimum grace period mandated by law. The DTI further requires that the lessee provide the lessor a signed Promissory Note, stating that it would pay the deferred rent amortized over six months, else it would be due and demandable immediately following the end of the 30-day grace period. These clarifications were then codified and further revised in RA 11494, or the Bayanihan to Recover as One Act, which was enacted on Sept. 11 and published online on Sept. 14 (Bayanihan Act 2).

Under the Bayanihan Act 2, the rules on rent deferment can be summarized, as follows: (1) only MSMEs and cooperatives that have temporarily ceased operations and residential lessees who are not permitted to work are entitled to the minimum grace period of 30 days; (2) the grace period applies to rents falling due within an ECQ or MECQ (unlike Bayanihan Act 1 which included GCQ) or until the ECQ or MECQ is lifted, whichever comes later; (3) from the end of the grace period, all amounts which fell due within the period shall be spread out in equal monthly installments until Dec. 31, 2020, without any interests or other penalties, which amount shall be added to the current monthly rent due; and (4) no increase in rent shall be imposed during the period of any of the declared community quarantines. For rent falling due before the publishing of Bayanihan Act 2 on Sept. 14, the rules on rent deferment under Bayanihan Act 1 should be followed.

To determine if a grace period would apply to a rental payment due, one must see if the area of said property was under a specific quarantine, and whether Bayanihan Act 1 or 2 was in effect at the time that the rent falls due.

A more sustainable and long-term solution, along with more concrete rules, is definitely needed to guide the Filipinos. However, that may be easier said than done considering the ever-changing situation and the fact that such a solution requires striking a delicate balance between the interests of the lessee, as well as the lessor who is dependent on rental income.

One such proposed solution is House Bill No. 7665 (HB 7665), filed by Albay Second District Rep. Joey Salceda, which aims to create more sustainable rent relief measures that are fair not only to lessees but to lessors as well. HB 7665 proposes, among others, that the Social Security System (SSS), the Government Service Insurance System (GSIS), the Pag-IBIG Fund, the Landbank of the Philippines, and the Development Bank of the Philippines (DBP) offer rent financing loans at favorable rates to lessees, payable for at least five years and enough to cover up to one year’s worth of rent (residential rent, in the case of the two government banks). Under HB 7665, there shall also be an eviction moratorium, which prohibits any landlord to evict any tenant for three months upon its effectivity, should it become law.

To help alleviate rental issues during the pandemic, the government passed Bayanihan Acts 1 and 2 into law.

 It remains to be seen whether HB 7665 will get passed, or whether similar bills offering other rent relief measures will be proposed. Certainly, both lessors and lessees must work together to achieve a sustainable and long-term solution. Under the circumstances, contract renegotiations and payment restructuring might be a better option than fighting it out in a court case, which may last for several years. Otherwise stated, to completely heal and recover from the pandemic, lessors and lessees, together with the government, must do so as one.

(Atty. Renson Louise C. Yu is an associate of Villaraza & Angangco. This article is intended for informational purposes only and should not be construed as legal advice. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of Villaraza & Angangco. For comments or inquiries, please email [email protected].)