Strategies to Mitigate COVID-19 Consequences in Certain Commercial Real Estate Transactions - Client Newsletter
The coronavirus pandemic has caused a great deal of uncertainty in the commercial real estate market. There is no doubt that relations between landlords and tenants will be subjected to a perhaps unprecedented degree of stress in the coming months. Pending transactions will also be adversely affected. The time to start thinking about strategies to mitigate the inevitably harsh consequences is now. Below are some suggestions to help develop and implement those strategies.
Landlord/Tenant: On the tenant’s side, assess your cash flow and determine if you will be able to continue to pay your rent each month. Review your lease to ascertain whether you may be entitled to a rent abatement if the building closes. Consider having a candid conversation with your landlord about the potential for defaulting. It may be advisable to request a rent deferral agreement, allowing you to defer some or all of your rent payments for a period of time, without being deemed in default. Reasonable landlords may be receptive to this. They will understand the unique circumstances and should be inclined to work with you, given the unlikelihood of finding a replacement tenant in the near term.
On the landlord’s side, open lines of communication with your mortgage lender. Discuss the potential for deferring mortgage payments or re-structuring your mortgage loan. Lenders will be inclined to work with you to try to keep the loan viable, rather than initiating foreclosure proceedings and perhaps triggering a filing for bankruptcy protection. Interest rates are very low and you may be able to re-structure on favorable terms. Talk to your insurance consultants and review your rent insurance and business interruption policies. In buildings that are net-leased, make sure your tenants are keeping the premises secure, including maintaining minimum building temperatures.
Pending Transactions: On-going construction projects will likely cease. Review the force majeure clauses, if any, in the applicable contracts. Force majeure clauses vary and may not mention epidemics or pandemics. However, they typically do include government shut-down or a break in the supply chain.
Be aware that a purchaser that has already secured financing may not be able to close due to the lender withdrawing the loan commitment based on a material change of circumstances.
Difficult times are ahead. Having a plan to survive them is essential.