The Economic Impact of the COVID-19 Pandemic and How it Can Affect Landlords and Tenants
These are trying times. The economic impact of the COVID-19 pandemic is an urgent concern for many Americans. An estimated 1 in 5 people have been affected by layoffs, temporary closures, and reduced hours. Local and state governments are ordering bars, restaurants, and other businesses to close or drastically reduce operations. Many governments are taking measures to suspend evictions and foreclosures for residential renters and owners.
Nonresidential landlords and tenants also have many unanswered questions. For example, what are a tenant’s remedies if its business is closed due to a government mandate or a landlord’s private decision? How should the parties proceed if a tenant cannot make rent payments as a result of closures? Who should pay for deep cleanings or other remedial measures when a neighboring tenant reports that an employee or visitor tested positive for the virus?
Unfortunately, there is no “one size fits all” answer to these questions. Any written lease or other written agreement of the parties needs to be considered. Force Majeure, quiet enjoyment, casualty and other contract provisions might address the parties’ contractual obligations upon the occurrence of an extraordinary event or circumstance such as the COVID-19 pandemic. Common law doctrines such as impossibility, impracticability, or the implied covenant of quiet enjoyment might also apply. Although restrictions imposed by the police power of the State, not induced or incited by the landlord, will not amount to a breach of the covenant of quiet enjoyment, tenants may be entitled to equitable abatement of rent, or other remedies, when landlords deny access without a government mandate to do so.
Who determines when remedial measures are required to prevent contagion? How is fault determined in these situations? Should the landlord be taking immediate remedial measures? The answers to these questions can also depend on the terms of the agreement, as well as the terms of any insurance policies that might cover these claims.
Business owners may want to know if they can recover damages from the government for their losses caused by governmental orders and regulations that require their businesses to close or reduce their ability to operate. Factors such as the purpose of those restrictions and the length of time they are in place should be considered.
Business owners need to understand the terms of their lease and insurance contracts so that they can be best prepared to address any damages to their operations relating to the Coronavirus.
Impact on Commercial Real Estate Financing
Commercial real estate loans must also be viewed through the lens of today’s uncharted waters. Term sheets and commitments may have clauses which excuse a lender from closing and funding if a material and adverse change has occurred (a “MAC clause”). Even when a loan has closed, a lender may be entitled to invoke a MAC clause to refuse to make further advances, grant a loan extension or even call an event of default and accelerate a loan. On the other hand, force majeure clauses (which are defined in a way that covers pandemics, government restrictions and disruption of labor and materials) may entitle a borrower to additional time to fulfill various covenants, including the completion of construction projects and other milestones, other than the obligation to make loan payments. Even if the loan documents don’t provide clarity, lenders and borrowers frequently work together to address unforeseeable issues, such as the challenges presented by COVID-19, in an amicable manner that protects both parties. In any case, future Federal and/or state legislation may be adopted that limits a lender’s foreclosure and other remedies and, therefore, we strongly suggest consulting a Greenspoon Marder attorney before taking any action to enforce or defend your rights.
Impact On Contracts and Agreements
The Florida Association of Realtors Commercial Contract is used by small and midlevel buyers and sellers and has the following provisions which may be helpful:
Buyer has the right to postpone closing up to 5 days if insurance underwriting is suspended. This clause is designed for hurricanes and similar weather events, and we have no indication that insurance will not be available.
Financing: If the Lender fails or refuses to close without fault on Buyer’s part, the Buyer can cancel and take back the deposit.
This issue of the availability of third party reports is not addressed.
Most of the title underwriters are functioning and advising that they will make special accommodations such as insuring extended GAP periods.
Zoning and other municipal information is largely available online. While it may take more effort than engaging a search service, the information can be accessed in most cases.
Surveyors and appraisers may be able to visit properties, but inside access is questionable.
The Force Majeure clause speaks to ‘availability of services, insurance, or required approvals essential to Closing’.
However, the Force Majeure clause does not include governmental orders, quarantine, or ‘similar circumstances’ which appears to limit the application of the provision.
In looking at a more sophisticated purchase and sale agreement, our team of attorneys would suggest the parties review their existing contract to look at applicable time frames dealing with title, contingencies, closing and other terms that may be affected by this crisis and being proactive to extend or modify those terms as appropriate. Also, for new contracts, we would suggest to craft language that extends time periods for the force majeure event we are experiencing with COVID-19.
Impact of COVID-19 on Parties’ Ability to Perform Under Standardized Residential Purchase and Sale Contracts
1. “Standardized Residential Purchase and Sale Contracts” as discussed herein refer to the two prevailing forms utilized in the State of Florida, to wit, “FAR” (Florida Association of Realtors) CRSP-16 series and “FAR-BAR” (Florida Association of Realtors-Florida Bar)“AS IS” series, of which there are various iterations. The non-“AS IS” versions of the foregoing do not contain any language that varies in substance for the issues discussed herein. Any references to particular sections or paragraph numbers herein make reference to versions Rev. 2/20 and Rev. 6/19, respectively. Comments herein are general in nature and the reader is cautioned that these “standard” forms are subject to modification and careful review of the language of any contract in particular is strongly advised.
2. The FAR has released a “Coronavirus (COVID-19) Extension Addendum to Contract providing for contract deadline extension to several key dates, including Closing Date, Financing Period, Title Cure Period, Feasibility Study Period, Due Diligence/Inspection and HOA/Condo Association Approvals. It is important to note that this Addendum is only effective for contracts that are already in place and does not provide contingency language for potential delays that may be caused by COVID-19 by ordered closures of, or unavailability of, necessary third-party service providers such as home inspection companies (e.g., 4 point inspections for insurance, general property condition inspections, pest inspections, mold inspection), surveyors or remediation contractors as may be required to fulfil pre-closing seller repair obligations as may have been agreed to by the parties or required by non-AS IS purchase and sale contracts. Also, in many instances, certain loan programs (e.g. FHA) will require certain repairs pre-closing that are subject to delay due to COVID-19 closure orders or unavailability of previously hired contractors due to self-quarantine or other circumstances beyond the parties’ control.
Buyers and sellers are well advised to consult with counsel before they execute the “standard” contracts to ensure that these contingencies are addressed as fully as possible. If parties are already under contract, given the current state of affairs, buyers and sellers would be well advised to assess their ability to meet contract dates depending on what stage of the agreement they find themselves in. For example, parties who are currently in the inspection period may find that country ordered closures are affecting the inspection services since the contracting services associated therewith do not concern ongoing construction projects. The same would apply to surveying services, and a survey is an essential part of the buyer’s title review. Since there is currently no contractual language that specifically addresses delays of this nature, parties unable to amicably resolve the potential issues by entering into addenda modifying their rights and obligations may find themselves relying on more general contract clauses such as FAR’s 11(c) “Force Majeur” or FAR-BAR’s “Standard” 18 G.
3. “FORCE MAJEURE” / “Act of God”) [will be referred to as act of God in this section] receives similar definition and treatment in both the FAR and FAR-BAR standard forms. FAR and FAR-BAR both provide specific definitions of typical events that constitute Acts of God (hurricanes, earthquakes, floods, fire, unusual transportation delays, wars, insurrections, acts of terrorism, etc.) and a catch-all, “and any other such causes and which by the exercise of due diligence the non-performing party in unable in whole or in part to prevent or overcome” (FAR), or “other acts of God, which by exercise of reasonable diligent effort, the non-performing party is unable in whole or in part to prevent or overcome.” (FAR-BAR).
The only practical difference between the two standard forms is that FAR-BAR provides a baked-in extension of 7 days after the act of God no longer prevents performance during any particular time period affected by the act of God, but not to exceed 30 days beyond the original closing date (or either party may cancel) whereas the FAR form provides that all time periods, including the closing date are extended for the period that act of God is “in place” but not to exceed 30 days from the initial date the act of God commenced (at which time either party may cancel).
Buyers and Sellers subject to a FAR contract may encounter greater difficulty re-establishing actual due dates for performance since this form seems to “lift” the extension on the day the act of God has ceased, leaving it unclear as to when the parties would actually need to comply with a contractual obligation or deliverable.
Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus
On March 22, the federal financial institution regulatory agencies and the state banking regulators issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications.
The agencies encourage financial institutions to work with borrowers, will not criticize institutions for doing so in a safe and sound manner, and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs). The joint statement also provides supervisory views on past-due and nonaccrual regulatory reporting of loan modification programs.