As the country continues grappling with the ongoing impact of the novel coronavirus, also known as COVID-19, states continue taking innovative and drastic action to stem the virus’ effect. On April 24, 2020, New Jersey governor Philip Murphy signed Executive Order 128[1] (“Order 128”) into law in an attempt to implement additional social mitigation strategies to combat COVID-19. Order 128’s impact, which applies only to residential leases, on New Jersey multi-family landlords will outlive the effects of COVID-19 and potentially permanently change the landlord/tenant relationship.

Whenever money is deposited with a landlord as security for the tenant’s performance under a lease agreement, that security deposit, as well as any interest that accrues thereon, remains the tenant’s property. The security deposit may not exceed 1 ½ times one month’s rent payable under the lease agreement. The security deposit plus any interest that has accrued thereon less any charges in accordance with the lease agreement must be delivered to the tenant within thirty (30) days of the lease agreement’s earlier expiration or termination. In addition to the net amount of the security deposit due, the landlord must also deliver to the tenant an itemized list of the accrued interest and any deductions.

It is standard practice for a residential lease agreement to include language such as:

(i) stating the amount of the security deposit initially due,

(ii) prohibiting a tenant from applying the security deposit towards monthly rent without the landlord’s prior written consent, and

(iii) requiring a tenant to repay the landlord for any deductions made to the security deposit prior to the earlier termination or expiration of the lease agreement.

These provisions are included to protect the landlord and further encourage the tenant’s performance under the lease agreement.

For example, let’s say the monthly base rent due under a lease agreement including these provisions is $1,000.00 and that the tenant delivers a $1,500.00 security deposit. Assuming the lease agreement permits the landlord to apply the security deposit towards unpaid rent, if the tenant fails to pay one month of base rent due on April 1, 2020, and the landlord applies the security deposit towards the rent, the net balance of the security deposit following the application would be $500.00.

The tenant would then be required to deliver to landlord within a certain amount of days as determined by the lease agreement an additional $1,000.00 to replenish the security deposit. Requiring a tenant to replenish the security deposit prior to a lease agreement’s expiration or termination gives a landlord additional financial security as well as additional grounds to declare tenant in default under the lease agreement if the tenant should fail to replenish.

Order 128 turns this security deposit dynamic on its head.

Under Order 128, a tenant is given the right to direct a landlord to apply a security deposit and any interest that has accrued thereon towards rent payments due from the tenant during the Public Health Emergency established in Executive Order 103 dated March 9, 2020 (the “New Jersey COVID-19 Public Health Emergency”) or up to sixty (60) days after the New Jersey COVID-19 Public Health Emergency terminates. When a tenant applies the security deposit towards rent, the following additional provisions (the “COVID-19 Lease Provisions”) apply for the duration of the lease agreement:

• the landlord may recoup from the tenant any monies the landlord expended that would have been reimbursable by the security deposit and any interest thereon at the time when the reimbursement would have taken place; and

• the tenant shall not be obligated to make any further security deposits relating to the current lease agreement. If the lease agreement is extended or renewed, however, following April 24, 2020, the tenant shall be obligated to replenish the security deposit in full on the later of either

(i) the date that is six (6) months following the end of the New Jersey COVID-19 Public Health Emergency or;

(ii) the date when the current lease agreement is extended or renewed.

Let’s apply Order 128 to the example above.

Assuming the tenant fails to pay the one month of base rent due April 1, 2020, and directs the landlord to apply the security deposit towards the unpaid base rent, Order 128’s language suggests that following the landlord’s application of the security deposit, the landlord would not be permitted to request that the tenant replenish the security deposit under the first prong of the COVID-19 Lease Provisions because the landlord has not expended any out-of-pocket money since the security deposit would still have a net positive balance, and the landlord has not suffered a reimbursable cost.

Furthermore, unless the later of either six months following the end of the New Jersey COVID-19 Public Health Emergency or date the current lease agreement is extended or renewed has occurred, the language of Order 128 suggests that the landlord would not be permitted to request that the tenant replenish the security deposit under the second prong of the COVID-19 Lease Provisions because such a replenishment would qualify as an additional security deposit for purposes of Order 128. This means that the landlord would have only a $500.00 security deposit balance remaining to secure tenant’s performance under the lease agreement.

Order 128 may significantly impact New Jersey’s future multi-family investment market if landlords and investors believe that similar unilateral action impacting lease agreements will be taken by the State or if more permanent measures will be undertaken following the end of the New Jersey COVID-19 Public Health Emergency.

Whether the impact of Order 128 remains following the New Jersey COVID-19 Public Health Emergency’s termination will likely depend on the economic condition of the State at the time and whether the government believes additional tenant protections are necessary.

If you have further questions about Order 128 and how it might impact your multi-family investments or other questions about leasing, contact real estate attorney Michael Haviland at 856-354-7700 or 215-963-9520 or send us a message. Our experienced real estate team at Earp Cohn P.C. can help you navigate the process and make sure your interests are well represented.