Frequently-Asked COVID-19 Questions in the Commercial Real Estate Market
March 31, 2020 — Houston, TX — By now likely everyone in the real estate market has been impacted in some manner by the spread of COVID-19 across the country and the world, and real estate lawyers have begun receiving a surge of questions from panicked tenants, landlords, and lenders concerned about how they will be impacted by the constantly-changing federal, state, and local restrictions and guidelines, as well as the resulting changes in consumer activity. Below are a few of the most frequently-asked questions we have received amidst the pandemic.
Rent
The main issue that is understandably front and center on many minds is rent. Various municipalities have required many businesses to shut down entirely, and others that remain open have still seen a drastic reduction in customer activity as more and more individuals heed the advice from the CDC and other government officials to stay home. Restaurants, bars, retail, and service industries have all been significantly impacted by this pandemic.
Both tenants and landlords are worried about the next month’s rent payment, which for many tenants is due April 1. Parties on both sides of leases have asked what could happen if a tenant is unable to pay rent, and unfortunately there is no easy answer. Many tenants have already asked their landlord for rent deferment or abatement options, and some tenants have gone even further to simply inform their respective landlords that rent will not be paid, potentially risking default. A landlord may have some flexibility on working with tenants to arrange some type of rent relief, though many landlords have their hands tied due to their own loan agreements with their lenders, which often prohibit any form of rent relief or related lease amendments without the lender’s consent. On that level, those
lenders often have their own hands tied based on how the loan is packaged or due to some other restriction. In my experience, local banks can often have a bit more flexibility than their national counterparts to work with landlords on these issues.
Before having a conversation with your lender or your landlord (if you are a tenant), be sure to read your lease or loan agreement, as applicable, to become familiar with your rights and obligations. Admitting that you cannot pay your monetary obligations when due, for example, may by itself constitute a default under some agreements. Courts may ultimately be sympathetic on a defaulting party considering the seriousness of the situation and its national effects, but there are no guarantees and it is always best to avoid litigation if possible.
The answer for many tenants may be the historic $2 trillion COVID-19 stimulus bill just signed into law by President Trump on March 27, known as the CARES Act. The Small Business Administration is being given $350 billion to provide loans and grants to qualifying small businesses in an attempt to provide some relief against the effects COVID-19 has had on the economy. Our firm recently provided a great summary of the CARES Act, which is available here. Many landlords are now asking that tenants apply for assistance from the CARES Act, if needed, in an effort to keep current on rents.
Force Majeure
In many conversations regarding rent payments, the question of force majeure arises. Does it apply to a tenant’s base rent or additional rent payments? Can it apply to a landlord’s mortgage payment? What about contracts to purchase property? This is a case-specific question, as the specific language in any force majeure provision in the party’s agreement will govern. Thus the first step is to confirm whether the applicable agreement even contains a force majeure clause. Most purchase and sale contracts do not, though it is not uncommon in leases and loan documents. If the agreement does contain such a clause, it needs to be carefully reviewed to determine whether it might apply to a party’s monetary obligations. Many force majeure clauses do not include pandemics, and they often specifically carve out monetary obligations. It is highly recommended to consult with any attorney to review any force majeure provisions, as well as the relevant agreement(s) as a whole to determine the party’s full rights and obligations.
Financing
Another emerging concern is the ongoing availability of financing. A number of lenders have temporarily frozen new loans while this pandemic continues to grow. Buyers in commercial deals who plan to finance any part of the purchase or subsequent construction should keep in close contact with their lender to ensure the funds will be available after any contingencies and termination rights in the contracts have expired. A party looking to enter into a new contract to purchase property may wish to consider placing additional focus and emphasis on financing contingencies. Lenders may struggle with how to underwrite new loans based on the current economic conditions. Communication is key here, as it is with most of the issues outline above.
Andrews Myers is monitoring developments to this dynamic situation and will continue to provide updates. For more information, please contact Scott McKaig.
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