By Hugo Dorta, Founder + Principal of Brickell Capital
Unfortunately, Covid19 crisis has impacted every person in the entire world, and as such, the adverse economic consequences has directly impacted all real estate and mortgage-related sectors. The prolonged shut down and uncertainty of any immediate recovery has caused over 630,000 retail locations to shut their doors … and certainly more shall follow.
Due to the uncertainty related to Covid19 and the continuing adverse economic effect on all real estate and mortgage-related sectors, it would be prudent that all developers, lenders, landlord and tenants to re-examine their current legal obligations pursuant to any loan documents, lease agreements, insurance policies and all other related documents.
As the rental payment and other recurring monthly debt obligations become due and owing, it would be prudent for landlord and tenants to seek legal advise regarding all possible alternatives or viable solution during this economic crisis.
Prior to making any decision regarding how to proceed, the parties should really consider the extent of any working relationship, whether litigation or settlement is a viable option, the strength and weakness of the actual lease agreements and any other legal documents, any pre-existing actions or waivers by either party which could lead to any potential affirmative defenses, and whether the covid-19 pandemic crisis is a viable defense to non-performance or non-payment. In this regards, the landlord and tenants should consider the following options:
1. Defer or Postpone Rental Payments. The parties can agree to a temporary postponement or deferral of all (or a portion) of the rental payments. Depending upon the circumstances, the parties could agree to defer (or postpone) the rental payments pertaining to the common areas but not the operating costs, real estate taxes or insurance premiums for a stipulated period of time. The parties could further agree that after the tenant is operating, the deferred amount shall be paid in installments (or in a lump sum).
The main goal of structuring any short-term workout agreement is for the parties to work together and provide an immediate structure whereby they find some common grounds to continue to operate until the Covid-19 crisis is over and all operations can resume to operate under normal working conditions.
2. Rent Abatement/Tolling. The parties can agree to reduce the rental amount (or temporary toll the rental payments) for a set period. With the abatement option, the rental payments to Landlord would be reduced for a certain period of time, and thereafter, the regular rental payments would resume. This option provides the tenant with the necessary cash flow to temporarily meet its payroll, overhead costs and expenses. Another viable option especially when the property is free and clear, is for the parties to agree to temporarily toll rental payments for a set period of time. It should be noted that with either option above, it does not address the landlord’s continuing obligation to meet any debt service payments together with real estate taxes, common area operating expenses and insurance premium issues.
3. Reduction of Rental Payments. The parties can also agree to a short-term reduction of any given rental payments in order to provide the Tenant with the necessary additional capital for the business to continue operating during the crisis. This short-term arrangement which obviously benefits the Tenant can also be coupled with other long-term agreements (i.e. future rent restructuring,etc) in order for Landlord to re-capture some losses in the future.
4. Release the Security Deposit. In order to provide some immediate liquidity to landlord and tenants, the parties could agree that landlord shall have the right to apply the security deposit to the next rental payment (or any pending balances). Under this scenario, it is recommended that agreement should also address the future obligation of tenant replenishing the security deposit by no later than a stipulated date.
5. No Settlement and Seek Legal Action. Unfortunately, not all parties shall view temporary workouts as a solution, and some landlords shall seek to exercise their right to default the tenants for non-payment, and enforce the terms and conditions of the loan documents or lease agreements by legal action. On the flip side, some tenants shall attempt to argue that non-payment is permissible under lease agreement or some other legal doctrine, such as, force majeure, impossibility or impracticability, frustration of purpose, etc.
Depending on the circumstances, proceeding with legal action may be the most advisable. For example, in the event that a tenant is clearly not impacted directly (or indirectly) by the Covid-19 crisis, or in the alternative, where the lease agreement clearly and inconspicuously states that an act of God or pandemic is not a defense to non-performance, then pursuing legal actions maybe the most advisable from the landlord’s position.
Nevertheless, choosing a more aggressive approach may set a difficult tone that impedes discussion between landlord and tenant. It may increase tensions and make the situation more difficult to deal with; considering current court closures, it will be challenging to acquire judicial determination.
6. Other Considerations
A. Realistic Expectations. Agreements must be practical and reasonable in terms of duration, and they must be financially viable, workable, and fair for all parties involved. Although unilateral actions could become necessary, it is in the best interest of both parties to reach a mutual agreement on short-term solutions. This will leave them in better positions after the coronavirus crisis.
B. Transparency. If requested, the party seeking to obtain relief measures must provide evidence of hardship. Nevertheless, although evidence maybe required, it is important these requests for further information are realistic, practical, and easy to provide given the situations of each tenant. Landlords should keep in mind the tenant’s current circumstances and request reasonable evidence that can be provided quickly and without hardship.
In other words, a landlord cannot use these requests as a method to evade rent relief. However, landlords shall need evidence of a tenant’s hardship if they need to substantiate rent restructurings to lenders in order to get their approval or in order to obtain latitude under loan documents to grant rent relief. Similarly, landlords may need this evidence to support their own financial limitations due to financing or other restrictions.
C. Competent Planning. Although the duration of the pandemic is uncertain, any party requesting temporary (or permanent) relief should proficiently demonstrate that they have competent plans to eventually face and overcome the crisis based on realistic assumptions.
D. Lender (or other) Approval. In many cases, in order to restructure or amend the existing lease agreement, approvals from third-parties, such as institutional lenders, could be necessary. Therefore, it would be advisable be to get preliminary approval to restructuring the lease agreement or loan documents at the initial stage.
7. Other issues or Concerns. When discussing the restructuring of lease agreements, parties may also want to address other outstanding issues or concerns regarding amending agreements or increasing relief measures. These concerns include extending the term, certain waiver of rights, acknowledging current issues or anticipated future issues, etc. The degree to which these issues can be leveraged during a crisis, however, should be strategically applied.
8. WorkOut and Restructuring Documentation. In order to avoid future litigation, any workout or restructuring agreements should be in writing and signed by all related parties. This is crucial in order to ensure that both parties are in agreement to all the terms and conditions, and it maintains accountability from both parties.
The Covid-19 crisis has interrupted all aspects of our personal and business life. The crisis has put an incredible pressure and economic strain on many industries; specifically, the retail, office and hospital sectors. As a result, it has put stress on landlord-tenant relations. It is crucial that tenants evaluated their ability to meet their obligations with landlords, employees, consumer and creditors, and landlords and should also re-evaluated their abilities to meet their obligations with existing lenders. The goal should be for the parties to mutually benefit from a temporary agreement that address the impact of the crisis and facilitates a practical and realistic recovery.
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Hugo Dorta, the author of this article, is the Founder and Principal of Brickell Capital.
Brickell Capital is a Florida “private bridge”mortgage lender. We specialize in residential and commercial loans for Self-Employed Borrowers and Foreign Nationals, New Construction Loans for Builders/Developers + Loan Servicing. Brickell Capital also purchases and services distressed mortgage loans. We purchase seasoned performing(and non-performing) first and second mortgage lien loans; sub-performing mortgage loans; mortgages in bankruptcy and foreclosure; investor fallout loans; scratch and dent loans, and aged mortgage loans on warehouse lines.
For the last 3 years, Brickell Capital was voted "Top 20" Commercial Lenders and Brokers by the South Florida Business Journal (South Florida's leading news outlet for residential and commercial real estate, banking, finance and business news).
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