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Landlords and Lenders COVID-19 Reality Check: Is that check in the mail?

Jane Carlene Rankin and Raul Carreras, Jr. | August 19, 2020

This article outlines the many issues and considerations that landlords and lenders will face in dealing with the effect of the COVID-19 Pandemic on their borrowers, tenants and properties.

Evictions & Foreclosures

There are currently no moratoria on commercial evictions in effect under either federal or Florida law.

The federal moratorium on residential mortgage foreclosures and evictions expired on Friday, July 24, 2020. The federal moratorium, while in existence, was limited in scope. It only applied to residences where the landlord is receiving a federal subsidy (such as Section 8 housing and VA programs), or properties that have a mortgage which was made, insured, guaranteed, purchased or securitized by any federal agency (HUD, VA, Department of Agriculture) or any of the various Government Sponsored Enterprises such as FNMA, FMAC, GNMA, etc.

The GOP proposed next round of coronavirus relief would extend the federal moratorium. Furthermore, various administration officials making the “Sunday Shows” rounds last week stated that the new relief bill would include extension of the federal moratorium. As we know, negotiations over the new relief bill broke down and President Trump issued four executive orders on various subjects, none of which reinstated the federal residential foreclosure and evictions moratorium. One of the executive orders directs various federal agencies to make funds available as temporary financial relief to renters and homeowners facing eviction or foreclosure caused by COVID-19. The order further directs the Department of Health and Human Services, and the Centers for Disease Control to consider whether measures to halt residential evictions for failure to pay rent are reasonably necessary to prevent the spread of the virus from one state to another. To say that there is a lack of clarity and guidance from the federal government on this issue would be a big understatement.

Meanwhile, the moratorium on residential evictions in Florida continues, “solely as it relates to non-payment of any rent by residential tenants due to the COVID-19 emergency.” Fla. Exec. Order No. 20-94 (Apr. 2, 2020). The moratorium has been extended various times, most recently on July 29, 2020 and is now in effect until September 1, 2020.

The latest Executive Order on this issue, Fla. Exec. Order No. 20-180 (Jul. 29, 2020), defines what “affected by the COVID-19 emergency” means. It is “loss of employment, diminished wages or business income, or other monetary loss realized during the Florida State of Emergency directly impacting the ability of a single family mortgagor or a residential tenant to make mortgage payments or rent payments.”

While there is no moratorium on commercial evictions, until June 30, 2020, Sheriffs in the entire state were not allowed to serve Writs of Possession pursuant to an Administrative Order of the Florida Supreme Court. However, on July 2, 2020, the Supreme Court ended this prohibition by administrative order. This leaves the issue to be controlled by the Governor’s Executive Order No. 20-94, as amended and extended. Certain circuits have supplemented the Supreme Court’s order with administrative orders of their own. For example, in the Fifth Judicial Circuit of Florida, the Chief Judge issued Administrative Order No. A-2020-15-D, which prohibits the Sheriffs from posting and executing Writs of Possession in evictions which come within the limited scope of the Governor’s Executive Order No. 20-94, as amended and extended.

Due to the constantly changing landscape, landlords should seek advice as to whether or not their properties are located in jurisdictions that permit some Writs of Possession to be issued and enforced.

Best course of action – Residential Tenancies

Due to the fact that landlords cannot obtain writs in those cases within the scope of the Governor’s Executive Orders, a landlord’s best, and perhaps only alternative, is to find creative solutions with their tenants. Since no one knows when and for how long the moratoria may be extended, innovative solutions for landlords and tenants are in order such as:

  • Reduce rent or defer rent to be paid over time during the remaining term of the lease;
  • Disburse any prepaid rents (for example, last month’s rent) and security deposits to satisfy the outstanding and future rents;
  • If the property is financed, landlords should request a loan modification from the lender to defer principal payments for a specific period or increase the principal amortization term, both of which will result in a reduced monthly mortgage payment; or
  • If the lease is guaranteed, landlords should demand rent payment from any additional obligors under the lease.

Best course of action – Commercial Tenancies

Although commercial landlords have the option of enforcing their leases due to the lack of moratoria, working things out with the tenants may still be the best alternative.

As with residential tenancies, offer the tenants abatement, forgiveness and reduction. Try to keep the tenant in the properties. Commercial landlords should take the following into account:

  • Assuming that the landlord can obtain legal possession of the premises, will there be replacement tenants? This evaluation is fact driven and location specific, but the landlord should know the type of industries that would be most attracted to the property and how much they may be affected (both short and long term) by the COVID-19 Pandemic.
  • Keep in mind the effect on other tenants of a rapidly emptying shopping center or office building. Obviously, the departure of anchor tenants has a huge impact on the culture of the property, its visual desirability and viable market rent. Moreover, the departure of non-anchor tenants may have a profound economic effect on other tenants due to customer and business type synergy as well as cross-marketing agreements.
  • Landlords can administratively appeal their real estate tax assessment based on the actual reduction in the value of the real estate caused by reduced rents, increased vacancy rate, etc.
  • Commercial leases are regularly provided to entities which have few assets other than the cash flow from the business operation. This makes the credit based portion of tenant approval highly important. Often the guarantees of the principals, affiliates or parent companies of the tenant are required to fill that gap. Demand for rent payment should be promptly made to each guarantor who may have motivation to pay to avoid eviction and suit for damages against the tenant and guarantors.
  • A business interruption insurance claim may be made by the tenant to its insurer notwithstanding that most policies require physical damage to support the claim and may exclude viral outbreaks.
  • The lease may contain “co-tenancy” provisions which permit a tenant to terminate its lease unilaterally if a certain percentage of the tenant spaces in a shopping center become vacant or if the anchor tenant closes its business.
  • The lease may contain a provision permitting the tenant to “go dark” so long as the rent is paid when due. If this cost saving option is exercised by the tenant, the visual element of the premises’ viability will be impaired so landlords should consider concessions to keep the lights on at the premises.
  • Most commercial leases contain a force majeure clause which should be carefully reviewed by counsel for application to COVID-19 related effects on landlord and tenant performance obligations. Be aware that most force majeure clauses do not excuse the tenant from their financial obligations of paying rent, maintaining insurance, etc. or permit either party to be excused from payment and performance based on economic conditions.

Commercial leases have unique lender issues which are triggered upon tenants failing to perform under their leases, closing business operation or vacating the property such as:

  • If the landlord faces an upcoming mortgage loan maturity or other need to refinance, vacant units will reduce the appraised value of the property resulting in potential failure of the landlord’s real estate collateral to support the necessary loan amount.
  • Commercial mortgages generally contain covenants which prohibit the landlord/borrower from materially modifying any lease without the written consent of the lender.
  • Commercial loan agreements customarily contain a “debt service coverage ratio” covenant which requires the income generated from the property be greater (for example 1.2:1.0) than the debt service to the lender – with the effect that any abatement, deferral or reduction in rents can place the landlord/borrower in default under this covenant.

This check-list of actions to consider is not comprehensive. It is intensely fact driven by the type of property, target tenants, and, as is always the case in real estate: location, location, location.

We are available to discuss and assist you with these issues.



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