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Law360 (May 27, 2020, 5:24 PM EDT )
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| Katherine Amador |
Commercial real estate owners felt the effects of the pandemic in the months of March and April. Many landlords struggled to collect rent, and tenants, whether justified in their reasoning or not, refused to pay it.
Landlords are already reporting that collecting rent in May will be no easier, and many are reporting it is even harder. Thankfully, during this difficult period, many lenders listened to the Federal Deposit Insurance Corp.'s recommendations and accommodated borrowers with short, multimonth payment deferrals.
Although that short grace period took the immediate pressure off of borrowers, the looming long-term questions remain unanswered for now: When will the coronavirus droplets settle? How will this pandemic change the commercial real estate industry?
As retailers and restaurants dissolve and organizations come to learn that the majority of their workforce can effectively work remotely, the question of what the commercial real estate landscape will look like when this pandemic is over remains unanswered and maybe unanswerable. What is certain, however, is that whether commercial real estate investors are ready or not, any grace periods extended by their lenders will end well before the fallout of this pandemic will, and the bank will come knocking.
Before the bank finds you, borrowers should take the following strategic steps now.
1. Seek legal representation and address your business model. Assuming the economy does not improve in the next 12 to 18 months, what is your business plan? If you were one of the lucky ones who received a three-month reprieve, can you survive the next year? Do you need to — and can you — pivot?
2. If you have a sustainable business plan to carry you through the next 12 to 18 months and simply need more time, reach out to your lender before the end of the deferral period and ask for an extension or any accommodation, such as a loan modification, that would best serve your business projections. Contact legal counsel for assistance in the review of prenegotiation letters, loan modification agreements or forbearance agreements, as these may include language that could potentially cause a detrimental impact to your defense, such as the admission of a default or waiver of defenses.
3. Have a clear understanding as to what collateral was provided to the lender when the loan was obtained (i.e., a mortgage, stock pledge or personal guaranty). Know what remedies are available to the lender pursuant to your loan documents and understand what steps the lender needs to take to enforce their remedies.
4. Understand the foreclosure process, including the timing of the process, potential costs involved in foreclosure defense, and consequences to named parties that may be involved, including your tenants.
The modus operandi for many borrowers during foreclosure proceedings is to delay, delay, delay. In Florida, many lenders, especially those who learned the hard way from their foreclosure experience during the 2007 recession, utilize Florida Statute 702.10 to thwart a borrower's attempts to slow down the speed of litigation.
Also known as the "expedited foreclosure statute," the statute allows a lender who has filed a complaint for foreclosure to request an order to show cause for entry of a final judgment, subject to the lender filing a verified complaint and otherwise complying with the requirements of the statute. For a borrower, this means that they may be facing a judge and explaining why a final judgment of foreclosure should not be entered as early as 20 days after the service of the order to show cause.
A borrower can avoid the entry of a final judgment of foreclosure if the borrower files defenses by a motion or files a verified answer. This time pressure on a borrower can be troublesome as a borrower will find it harder to delay the process when required by a court order to appear in front of a judge. But wait — there's more. Florida Statute 702.10 has a second advantageous feature that lender's love, specifically Section (2)(d) of the statute.
Under this section, even if the borrower avoids the entry of a foreclosure judgment by filing a verified answer, if the court finds that the lender is likely to succeed in the foreclosure action, a lender can request the entry of an order requiring the borrower to make payments on the loan as provided for in the loan documents prior to the acceleration of the payments. If a borrower fails to pay the monthly loan amounts, the statute provides that a lender would be entitled to possession of the premises, unless at the hearing on the order to show cause, the court finds good cause to order some other method of enforcement of its order.
In other words, a borrower can be required to "pay to play." A game of hide-and-seek in a foreclosure action wherein a lender seeks the relief of Florida Statute 702.10 can cause a very fast and serious turn of events for borrowers as it eliminates many typical hiding spots commonly used by borrowers and often results in a "game over" outcome much sooner than expected.
5. Become familiar with alternatives you can propose to lenders, such as a deed in lieu of foreclosure. Depending on the status of title and the presence of any potential liens that would need to be otherwise extinguished in a foreclosure action, lenders may elect to accept a deed in lieu of foreclosure.
A borrower may be able to negotiate advantageous terms in exchange for not dragging a lender through the cost and time of a lengthy foreclosure action by agreeing to execute a deed in favor of the lender, in exchange for a benefit, such as the release of guarantors or the forgiveness of debt. Borrowers should discuss any deed in lieu offers with their accountants as a deed in lieu is generally treated as a sale of the property, and there may be tax consequences attributable to the cancellation of debt in certain circumstances.
6. Finally, consider whether and when to use a Chapter 11 bankruptcy. Like a timeout in a game of hide-and-seek, a bankruptcy can provide a pause to a lender's relentless pursuit of its collateral.
The Bankruptcy Code's automatic stay provisions can act to stop lender litigation, while providing a platform to manage other creditor claims, liens and leases. A filing may create a needed opportunity for a borrower to negotiate time for a refinancing or for an orderly sales process that may save equity in the property. While lenders have many tools in their arsenals to protect their rights in a bankruptcy, borrowers also have this as an option.
Conclusion
To end on an optimistic note, there are some positive factors to this economic crisis that were missing from the 2007 recession. For example, when the economy came to a shrieking halt, the Federal Reserve responded quickly with relief (to some) through several stimulus programs and loan options. Also, lenders are more disciplined in their lending practices and tactics today than they were in 2007, and it is doubtful that we will experience anything similar to the complete debacle of the mortgage lending industry that we experienced in 2007 (and hopefully never will again).
Although there is no doubt that the coronavirus has caused significant financial damage and trauma, the reopening of the economy is expected to bring relief to those people who can get back to work and to businesses that are waiting to reopen. Seasoned investors who were affected by the downturn in the market during the 2007 recession still carry the same philosophy today as they did over a decade ago, and that is "hold on as long as you can" — and as you would if playing the classic game of hide-and-seek — try to get to home base before the bank catches you.
Katherine Amador is a partner at Berger Singerman LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the organization, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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