Real Estate Concerns in the Time of CoronavirusMarch 28, 2020 – Article
The Coronavirus has been spreading across the globe. However, until recently, its impact on businesses in the United States has largely been a result of circumstances occurring elsewhere in the world, such as disruptions in supply chains. Many consulting groups recently opined that the economic impact of the Coronavirus will be most dramatic during the first half of 2020, and that the U.S. should begin to recover during the second half of the year. Since that time, major cities, such as Los Angeles and New York, have shut down all “non-essential” business, and have directed their residents to “shelter-at-home.” Whether our federal government will do the same is unknown, but it’s fair to say that we are entering yet another “new reality.”
Our tenant clients want to know if they must continue to pay rent to their landlords, and our landlord clients want to know what to do if their tenants stop paying. Can a landlord evict a tenant for non-payment at this time? Landlords and tenants should review their leases to determine whether they contain a so-called force majeure provision. If so, it is important to review those provisions carefully to understand their terms. For example, does the applicable provision include a common exclusion which might require a tenant to pay rent regardless of whether a force majeure excuse might otherwise exist? If the parties’ lease does not contain a force majeure provision, then the parties need to look to California law, such as whether Section 1511 of the California Civil Code might excuse performance.
Parties also need to understand that the City and County of Los Angeles (and many surrounding areas) have barred both residential and commercial evictions. Those emergency orders all have twilight dates, but most courts are closed, so the practical reality is that many landlords may have no current remedy. Our clients want to know whether the courts will allow for a permanent waiver of rent accruing during this time, or will rents only be deferred such that a tenant will have to pay the amount in the future (and, if so, on what terms)? The existing governmental orders do not provide much guidance here, and there are strong arguments for both results.
What about commercial loans? Will a borrower’s obligation to pay its mortgage be abated during this time, or does a borrower have to continue to pay its mortgage? Even for those few borrowers who can cover their mortgage payments during this time, many commercial loan documents trigger loan defaults based on other factors, such as reductions in property value or net operating income and/or one or more project tenants going dark (i.e., ceasing operations). These later circumstances are obviously completely out of a borrower’s control.
The federal government has directed that Fannie Mae, Freddie Mac and HUD not pursue residential foreclosures, but I am not aware of any federal or state relief for commercial borrowers at this time. Even if that relief comes, will it only bar foreclosures? Or will it also prevent lenders from imposing late fees, default interest rates and other fees? Even worse, can a lender trigger hard lockboxes effectively separating their borrower from all cash-flow?
Given the uncertainty in all of this, parties should be proactive and communicate with one another regarding how the Coronavirus and its accompanying restrictions are affecting their businesses and properties. Likewise, parties entering into contracts now should address possible Coronavirus protections from the outset. By seeking to resolve (reasonably and fairly) how this world-changing event will affect an agreement before a dispute lands in front of a judge, parties can hopefully avoid much of the unpredictability that will surely accompany pandemic-related litigation. As we have seen from the recent news, pretending it isn’t happening leads to the worst of all worlds.