Relating to Real Estate
What COVID-19 Means for Real Estate
As the United States and the world focus their attention sharply on the COVID-19 crisis, we at Gordon Feinblatt are doing the same. All practice groups have received numerous client inquiries as to how the COVID-19 pandemic will affect them.
This article is intended to make our real estate clients aware of just a few of the issues that might be of concern and relevance to them. It is not a substitute for specific legal advice but may provide context for discussion with counsel. We have posted more articles on our website and compiled content on our information hub. We will continue to update them as events warrant.
Force Majeure Clauses, Impossibility of Performance and Frustration of Purpose
Many contracts contain force majeure clauses. In general, these provisions may delay or excuse the parties’ obligations under various scenarios. This may depend on whether the circumstances were foreseeable at the time in which the contract was entered. Some contracts expressly include epidemics as an example of the kind of event that might trigger the clause; some expressly exclude them; and many are silent, but often acts of God are included.
These provisions typically permit the postponement of deadlines, but they often preclude a party from delaying or avoiding monetary payments. Leases often contain such limitations. Whether relief is available requires a close reading of the document and an analysis under the law of the state governing the interpretation of the document. It is not unusual for such provisions to condition relief on the party seeking that relief to give timely notice to the other party. Thus, a tenant might be entitled to delay of or even forgiveness of paying rent upon a force majeure event, but that tenant might lose that benefit if it does not give notice to the landlord as the lease requires.
There are common law principles that might apply as well. These include impossibility of performance or frustration of the purpose of the contract. Whether or not a building, mall or business is required to close under order of governmental authority may well be relevant in assessing the rights and obligations of the parties in such cases.
Business Interruption Insurance
Property owners and businesses often carry business interruption insurance as part of their property insurance package. Many questions have been raised over the last several weeks as to whether policy holders have coverage for COVID-19 related losses. Often coverage is conditioned on physical damage to the premises or other property. Does a sub-microscopic virus in an office or retail store qualify as physical damage? The answer may depend on the precise language of the underlying policy, applicable endorsements and the particular circumstances.
Policyholders should immediately contact their insurance professional for guidance. If there is a potential for coverage, policy holders should consider providing the insurance company with notice of a claim even though the amount of the loss cannot be quantified at this early stage. The insured can produce documentation to prove loss at a later date, but timely notice of a claim is important. The insurance policy will contain the address to which notices of a claim must be sent.
Loan and Lender Consent Considerations
There are a myriad of issues that may arise between borrowers and lenders that cannot be addressed in one alert. However, we want to caution borrowers to be cognizant of the provisions of their loan documents before making any agreements with tenants or other parties. Many loan documents limit or prohibit various types of actions without the prior consent of the lender. For example, a loan agreement or mortgage may prohibit a landlord from modifying certain leases without the lender’s consent. A borrower must consider whether a lease amendment for a rent deferment requires the lender’s consent. If the lender’s consent is not obtained, such an amendment could constitute a default under the loan. A borrower must also consider whether its actions will violate any “bad boy” carve-outs which can transform a non-recourse loan into one in which there is personal liability for the borrower and any guarantors. The loan documents might provide that the loan becomes fully recourse if the borrower/landlord modifies the economic terms of a particular lease without obtaining the lender’s consent. Possible outcomes will depend upon a close reading of the documents and the circumstances, but one cannot be too careful.
By executive order of Governor Larry Hogan, Maryland courts are currently prohibited from issuing judgments for possession in residential evictions if the tenant can demonstrate loss of income due to the COVID-19 emergency. In addition, the Chief Judge of the Maryland Court of Appeals issued an Administrative Order on March 25, 2020, stating that all residential evictions pending in the District Court of Maryland shall be stayed. New residential eviction proceedings can be filed, but those proceedings are stayed upon the filing of those new actions. Residential landlords should consider the effect of these stays on their leasing activities. Until the stay is lifted (presumably upon expiration of the governor’s declared State of Emergency), even an ordinary tenant turnover situation could be impacted. For example, a landlord may be unable to obtain a judgment for possession against a tenant whose lease has expired and therefore unable to deliver possession to a new tenant.
Rent Abatements and Deferrals
In light of the business slow down caused by COVID-19, many commercial tenants are asking their landlord to abate rent. As mentioned above, a landlord should keep in mind that its lender’s consent may be required for an abatement that constitutes an amendment to a lease. We are seeing a number of landlords and tenants agree to defer rent for a period of time, with such deferred rent and time extension added to the back end of the lease term. Certain tenants may be eligible for financial assistance under the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act), as noted below, and both landlords and tenants should consider how such assistance could impact their respective interests.
Federal CARES Emergency Legislation
The $2 trillion federal CARES Act passed the U.S. Senate and is expected to be passed by the U.S. House on March 27, 2020. It is anticipated that the CARES Act will include an expansion under the SBA loan program [see our business bulletin]. Under the proposed new program, small businesses can obtain loans (capped at $10 million) to be able to continue operations during the COVID-19 emergency with funds being used to retain workers and maintain payroll or make mortgage, lease and utility payments. To the extent that such loans are used for payroll and mortgage, lease and utility payments, those amounts could be subject to forgiveness from the loan amount, subject to reductions for employee cuts and wage reductions. Subject to a number of qualifications, this loan could essentially be converted to a grant if proceeds are properly used to continue operations. This new loan program could be a substantial benefit to small to mid-sized owners and tenants of real property interests.
Of course, we stand ready to be of assistance to help you navigate these or other legal matters that have arisen in this challenging environment. Please do not hesitate to contact us: Searle E. Mitnick, Edward J. Levin, Danielle Stager Zoller, Timothy D.A. Chriss, Christopher T. Magetteand Peter Rosenwald, II.
For additional information on the impact of the coronavirus, visit our information hub for a list of up-to-date content.
Searle E. Mitnick
410-576-4107 • firstname.lastname@example.org
Edward J. Levin
410-576-1900 • email@example.com
Danielle Stager Zoller
410-576-4036 • firstname.lastname@example.org
Timothy D.A. Chriss
410-576-4237 • email@example.com
Christopher T. Magette
410-576-4191 • firstname.lastname@example.org
Peter B. Rosenwald, II
410-576-4193 • email@example.com