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FAQs: Impact of Covid-19 On Commercial Real Estate

2020 Coronavirus Guidance header 2

By Phillips Murrah Directors Sally A. Hasenfratz and Bobby Dolatabadi, and the Real Estate Practice Group 

The impact of COVID-19 on the commercial real estate industry is unprecedented. We have been asked a broad range of questions as a result of the pandemic, some of which include:

What if a tenant cannot pay rent?

Many landlords and tenants are seeking counsel about what happens if a commercial tenant cannot pay rent. Some considerations include:

Are commercial transactions being closed?

  • Many commercial purchase and sale transactions have reached a screeching halt, with buyers terminating agreements and lenders having underwriting concerns. Often buyers are terminating during an inspection period where they are entitled to a return of earnest money. In instances where an inspection period is not available or has expired, buyers are looking for conditions precedent to closing, such as a material adverse change, which would excuse performance. Otherwise, on a unilateral termination, buyers may face a loss of earnest money or trigger a default under the agreement.
  • For some transactions that appear to be moving forward, there remains uncertainty as to whether the County recording offices will be open at the time of closing for the filing of deeds, loan instruments, and other closing documents. Accordingly, parties should consult with their title companies and underwriters in order to determine if and how the title company will facilitate a closing in the event of a shutdown of the recording office.  Also paramount will be issues relating to “gap coverage” as a result of potential delays between closing and recording documents, as well as use of online remote notaries and other logistics for closings.
  • Most purchase and sale agreements contemplate a specific list of closing deliveries for each party, together with a “catch-all” requiring such other documents as are reasonably requested by the other party and/or title company. In light of the uncertainties regarding whether a recording office will be open or shut-down on the closing date, title companies may require new, additional indemnities and covenants from the parties at closing in order to achieve closing, which documents may prohibit, for instance, a seller (whom still may appear in the real estate records as the fee owner) from executing any other conveyances concerning the property. Parties should consider expanding the “catch-all” clause accordingly.
  • For transactions that are teetering, sellers and buyers should consider agreeing to extend the inspection period or the time to close to let the pandemic subside prior to any such closing. Any such extensions should be in writing.
  • In lieu of closing or extending, buyers may move to the sidelines, waiting for values to decline and proceeding after the pandemic is resolved.

How are lenders and borrowers handling the consequences of the pandemic?

  • Bank regulators have provided guidance encouraging financial institutions to cooperate with customers dealing with the adverse economic effects of COVID-19.
  • For borrowers unable to make debt service, we are seeing short-term accommodations, such as interest only or reduced payments for 3 months, with full payments continuing after that time.
  • Should the pandemic prove to have more long-term effects, we would expect to see forbearance agreements, workouts and bankruptcies. Time will tell whether these more drastic measures will be necessary. If so, the tax consequences of these arrangements should not be ignored.
  • Prior to exploring any of these options, it is prudent to thoroughly review all loan documents, with emphasis on restrictions on transfer, default, notice and cure and force majeure provisions.
  • For non-recourse loans, documents should be thoroughly reviewed so as not to inadvertently trigger recourse liability. For example some non-recourse loans have “bad boy” carve-outs which trigger full or partial recourse liability to borrowers and guarantors where a borrower (i) admits in writing the inability to pay its debts as they come due; or (ii) makes a “transfer” which is not permitted by the loan documents. A “transfer” is often broadly defined as including making amendments to lease agreements without the lender’s consent. Accordingly, borrowers should exercise caution in taking actions to renegotiate loan documents or compromise lease obligations, which in certain circumstances, could trigger recourse liability.

Are Force Majeure clauses available to delay or terminate performance obligations?

  • Force Majeure clauses are contractual clauses that extend or in some instances terminate performance obligations when “acts of god” or other named events prevent or delay a party’s ability to perform their obligations. Force Majeure clauses appear in many, but not all, types of real estate contracts and such clauses are limited to the exact language, which may not be standard from agreement-to-agreement and in most cases don’t appear broad enough to include the current pandemic situation. For example, Force Majeure clauses are typically not in short-term agreements such as purchase and sale agreements, but may be included in loan agreements, leases, construction agreements and the like.
  • Each Force Majeure clause should be carefully reviewed to determine whether it applies in this situation and if so, whether any notices need to be given to the parties under the agreement.
  • Use of Force Majeure clauses in the future should be considered, with expressly including references to epidemics, pandemics or other health related crises beyond the control of the parties.

What else should be considered in light of the pandemic?

  • Business interruption insurance policies should be reviewed to determine whether there may be coverage.
  • For property management, responsibility should be evaluated to identify whether there are special duties to maintain health and cleanliness.

For more information on how the COVID-19 pandemic may affect your business, please contact:

Portrait of Sally A. Hasenfratz

 

Sally A. Hasenfratz
Director
405.552.2431
EMAIL

 

 

Portrait of Bobby Dolatabadi

 

Bobby Dolatabadi
Director
405.606.4742
EMAIL

 

 


Keep up with our ongoing COVID-19 resources, guidance and updates at our RESOURCE CENTER.

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Commercial lease covers it all – right?

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on April 20, 2017.


Jennifer Ivester Berry is a member of the firm’s Transactional Practice Group as an Of Counsel attorney. Jennifer represents individuals, privately-held and public companies in connection with a wide range of commercial real property matters.

By Phillips Murrah Of Counsel Attorney Jennifer Ivester Berry

For those involved in leasing commercial real estate – whether new to leasing or a seasoned industry pro – signing a lease can be a daunting endeavor.

The devil is in the details, and, more often than not, many standard forms omit critical considerations. Accordingly, a close examination of the terms is essential for a quality commercial lease.

Below are five important points to consider when leasing commercial property. These items are not intended to be exhaustive, but rather a starting point for the purposes of evaluation.

• Experience – Knowing the background and temperament of the other party is important. Is leasing commercial property the landlord’s primary business? Will a management company operate the property? Is the tenant established or just starting out? A knowledgeable, cooperative working relationship is imperative for a successful commercial lease.

• Type of lease – Details of what costs are covered and how they are apportioned should be carefully reviewed. For example, leases often described as triple net, meaning that the tenant is responsible for all costs associated with the leased premises other than structural repairs, can actually be a blend of two types of leases, triple net and gross. A gross lease splits the structural repairs and operation expenses between the landlord and tenant.

• Identification of leased premises – Often the outline of the space and delineation of its parameters is an attachment that does not make it into the lease until the end of the negotiations. It is important to verify up front that what is provided meets both parties’ expectations.

• Costs – Payments under a commercial lease can be categorized in several different ways, including rent, common area maintenance, assessments and dues. Awareness that a lower rental rate might be counterbalanced by a monthly fee for maintenance of the property, which is set to automatically increase each year, is essential. The ultimate focus should be on the full monthly cost, regardless of what it is called under the lease.

• Insurance – Insurance coverage requirements will vary based on lease type. It is important to identify two things: what the lease requires and whether such coverage is available, and whether the cost associated therewith is factored into the overall lease costs.

Jennifer Ivester Berry is an attorney at Phillips Murrah who specializes in commercial real estate property and energy-related matters.

Hasenfratz: Commercial real estate development is a team effort

This column was originally published in The Journal Record on August 4, 2016.


Sally A. Hasenfratz is a Director and a member of the Firm’s Real Estate, Tax and Family Wealth and Business Succession Practice Groups.

By Phillips Murrah Director Sally A. Hasenfratz

Commercial real estate development is a complex undertaking and must be managed with precision.

Taking a project from land acquisition to a sale or lease requires time, money and expertise. To ensure the project runs smoothly, accurately and on deadline, a team must come together and function at a high level.

The purpose of this column is to identify key players and examine their responsibilities.

  • Developers. The developer is the team leader with an overarching visionary concept and the ability to control each stage of the project in order to move it to completion. Without developers, there are no projects.
  • Title agents and surveyors. Developers work with title agents to ensure the property is clear of unintended encumbrances and to identify easements and other documents that may be recorded against the property. Surveyors then survey the land and create a graphic representation that shows the location of the project, including the structure’s orientation, access ways, boundaries, easements and related matters.
  • Architects and engineers. Architects and engineers translate developers’ vision into detailed plans by which the project will be constructed. They create the instructions on how to accurately bring the project into physical existence.
  • Builders and contractors. Builders and contractors start the process of construction. Guided by plans created by the architects and engineers, and led by a general contractor who oversees the day-to-day construction site, these team members physically build the project.
  • Regulators. Though not necessarily part of the team, regulators are important components of a project. Select team members work with regulators to make sure the property is zoned for the intended use and all necessary approvals are obtained, including building permits and the like.
  • Lenders. Lenders play a vital role on the team by funding the project. To ensure funds are properly utilized, lenders have a certain degree of oversight in the construction process.
  • Users. Typically, commercial projects are developed for sale or lease to meet the specific needs of users and occupants of the project.
  • Coordinators. Many of the team’s activities overlap or occur in a sequential fashion. Attorneys work with developers to help coordinate the process and make sure that the necessary contracts are in place.