In the world of Residential Care Facilities for the Elderly (RCFEs) and Adult Residential Facilities (ARFs), long-term leases—often five years or more—are common. But what happens when a tenant stops paying rent? The answer isn’t just about eviction; it’s about protecting the value of the property, the license, and the business itself.
Lease Default: The First Domino
When a tenant fails to pay rent under a commercial lease, the landlord has several options:
Issue a Notice to Pay or Quit: This is the first formal step. In California, the landlord typically serves a 3-day notice demanding payment or surrender of the premises.
File for Unlawful Detainer: If the tenant doesn’t comply, the landlord can initiate eviction proceedings through the court.
Terminate the Lease: Depending on the lease terms, non-payment may trigger automatic termination clauses.
But here’s where things get nuanced in the RCFE/ARF world.
The License Complication
RCFEs and ARFs operate under licenses issued by the California Department of Social Services. These licenses are tied to both the operator and the physical location. If the tenant is evicted or vacates, they may:
Sell the Business: With landlord approval, the tenant may find a buyer to take over the lease and the license. This can be a win-win, preserving continuity of care and avoiding vacancy.
Relocate the License: The tenant may choose to move their business to a new location, effectively removing the license from the property. This leaves the landlord with a vacant, unlicensed facility—a major setback in a market where licensing is everything.
The Risk of an Unlicensed House
Without a license, the property loses its operational value as a care facility. The landlord must either:
Find a New Licensed Operator to Perform a “Change of Location” to your Property, or Get Property Relicensed: This can take months, even years, especially with licensing delays. The landlord must become or appoint a certified Administrator, as well, to get facility licensed.
Reposition the Property: Convert it to a different use, such as standard residential or group housing, which may not yield the same returns.
Best Practices for Landlords
To protect your investment:
Include Assignment Clauses: Your lease should require landlord approval for any business sale or license transfer.
Monitor License Status: Stay in communication with the Department of Social Services and ensure the license remains active and tied to your property.
Build Relationships with Operators: A collaborative approach can lead to smoother transitions if a tenant wants to sell or relocate.
This situation underscores why RCFE/ARF leases aren’t just about rent—they’re about the business, the license, and the long-term viability of the property. If you’re a landlord in this space, proactive lease structuring and strong tenant relationships are your best defense.
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