By Andrew McIntyre

Law360 (June 26, 2020, 12:29 PM EDT ) In this edition of Coronavirus Q&A, one of Fox Rothschild LLP's real estate leaders discussed new ways force majeure clauses are being written and the ways leases and loan documents are being amended amid the pandemic.

Robert Gundlach Jr., co-chair of the real estate department and zoning and land-use practice at Fox Rothschild, assists owners, builders and developers on purchase and sale, entitlement and financing for properties in Philadelphia and in the Pennsylvania and New Jersey suburbs of the city.

He shared his views as part of a series of interviews Law360 is doing with lawyers to discuss ways the COVID-19 pandemic has impacted business and brought about a host of new legal questions and considerations.

This interview has been edited for length and clarity.

What sorts of questions are you getting from clients as we move to potentially reopening businesses in certain parts of the country?

Well, the focus of my work is all real estate. I do both transactional work and zoning and land-use work. So I will tell you as far as the transactional work goes, we hear the word amendment quite often. And so we're doing a lot of work involving amendments to all types of agreements. Those are amendments to leases, amendments to loan documents, amendments to agreements of sale and amendments to contracts in general. We have seen a substantial number of lenders amending loan documents to give their landlords and property owners forbearance for three to four months due to the fact that their tenants are not paying rent. And likewise, we have seen a substantial amount of lease amendment work whereby landlords are giving tenants either rent abatements or rent deferrals. And lastly, to a lesser extent, amendments to agreements of sale, where proposed buyers are asking for additional time to satisfy their contingency under those documents. So, I'll just wrap up by saying, to answer your question, as far as transacational work, many clients are asking: What's the market? What are other people getting? What are other people giving? What's a fair position to take with respect to these proposed amendments?

So when you think about amendments now in 2020, compare that to '08, '09 and '10. What are the similarities and what are the differences regarding issues with amendments this time around?

I think landlords are much more empathetic to the tenants and are working with them more. Similar to lenders working with their borrowers. You barely even have to ask lenders these days, and they're immediately offering this relief. Similarly, landlords for the most part are giving tenants the relief. There isn't the disdain and fight over that or the jockeying that we saw 10 years ago during the financial crisis. People are looking at this much more equitably than they did in the past.

So on the zoning and land-use side, are the major obstacles simply getting entitlements through government bodies right now? Is that the big challenge on the zoning side?

On the zoning and land-use side, I would say that it's primarily timing, that the process with the closure of many of these municipalities has slowed the process, but hasn't stopped it. On the one hand, it's getting longer to get on agendas. But the reviews have actually been quicker. And I'll address particularly the suburbs, where most of the plan reviews are done by outside consultants. Private firms. Those individuals are working at home and they're looking for work. So I have seen record time in the way in which they are turning their reviews. So you might send in a full plan set that would take, in past times, a month to review and turn around, but it is now coming back in a week or two. The simpler, less complex applications for permits and approvals are still being processed as they did in the past. The more complex and controversial projects have basically slowed in terms of their public meeting participation.

Is part of this, on your side of coin, participating in planning meetings over Zoom now? Have you been doing that during the pandemic?

Yes. We've been doing Zoom meetings. Now the municipalities are opening up for public meetings and a combination of public, in-person participation and Zoom. I attended a meeting [recently] in the suburbs where they offered both options. I attended in person. I think I was only one of four people, so we had 20-foot social distancing. And there were more people on the Zoom box. The meetings take a little bit longer because logistically you have to go around to everybody on the Zoom box and give everybody a chance to connect and, you know, with these calls, as I'm sure you're experiencing personally, people don't always hit the mute button. And they're talking, and you have to remind them and there's back noise and you have to ask them to repeat things. So, it just does take longer. So for things that are very complex, we've been pushing those off for the last couple of months for the public meetings until we can get back into a room with everybody.

I'm sure you have your finger on the pulse both in Pennsylvania and New Jersey. Are there similarities or differences in the ways those states have approached the pandemic and how things are playing out now?

I would say the Pennsylvania and the New Jersey suburbs are very similar in terms of how they're reviewing and processing applications. In the suburbs it's done on a municipal level. And so there might be 40 or 50 municipalities in each county. And so you have to check in on the municipality as to how they're handling it. But generally they're all still in business, and processing applications in one form or another.

So what about the question of construction? What are you seeing in the Philly suburbs in terms of construction? Or New Jersey as well. Is it starting back up at this point?

Oh yes. It's going full speed ahead. In the Pennsylvania/New Jersey suburbs there was basically a few months where they could not move forward. The good news is that was during some of the winter months. So this is our season here up east. April through November is when you've got to get your work done and your blacktop down, because basically then you can't blacktop after a certain period. It's harder to move dirt. And so now it's the construction work, primarily what I'm talking about is the site work, that goes into a lot of these new developments. Particularly the residential housing developments in the suburbs. So I would say to you that site contractors are very busy now and we're seeing activity, which is a good thing for the economy.

I want to circle back to amendments again, because you talked quite a bit about that at the top of the call. What do you think is the next stage in the question of amendments? Where do you expect to the legal work to go, I don't know, over the next month, say?

Well, I think these amendments are a Band-Aid for certain real estate projects. And what I mean is lenders are giving the owners three months of forbearance, and landlords are giving, in general, tenants three months of rent relief. And everybody's getting through this time now. But when that relief period, whether it's three months, four months, some of them are as long as six months — I shouldn't just say three months; I should say three to six months — when that period burns off, the real question is, are the borrowers going to be able to start repaying their mortgage debt, and are tenants going to be able to continue to pay their full rents? And if they're not, then there's going to be ramifications in the marketplace, which may involve lenders moving forward to foreclose, or to accept deeds of lieu, or to restructure the loans with their borrowers. And same with landlords and tenants. That is, are landlords going to default and evict tenants, or are they going to work with them and restructure their leases, because they can't lose anymore tenants in their particular properties? That I see as more work that's forthcoming when these forbearance and deferral periods burn off.

And of course, maybe one of the first dates to watch is July 1, when the PPP loans expire. And that could impact disproportionately the multifamily sector, I suppose.

I think, yes, I agree. Multifamily. It's going to impact the retail sector. I think it's going to impact the hotel sector tremendously. Because hotel operators don't have the business now to carry their debt. They can't without the PPP money and without relief from their lenders. So the question is, when that relief period burns off, are they going to be able to generate sufficient revenue to pay their expenses and pay their mortgage? If they're not, there's going to have to be further relief granted in some form or another, or lenders are going to have to make difficult decisions and landlords are going to have to make difficult decisions.

Where do you see these disputes heading, either landlord-tenant disputes or owner-lender disputes? Will some of this go to litigation? Will these disputes get worked out prior to litigation? What's your thought on the litigation question?

Sure. Eventually, some of these disputes will go to litigation and there'll be some new law established concerning the subject of force majeure. But I think that most landlords, tenants, lenders are trying to work this out in a fair and equitable manner. But there will be parties that can't work it out, and they have to go to court. But eventually, borrowers have to pay lenders and tenants have to pay landlords. You might obtain certain force majeure relief through the courts, but a day of reckoning comes when monies either need to be repaid or monies need to start up being repaid, and courts can't force landlords to accept less rent. And they can't force lenders to waive debt service that's due under the loans. They may give them relief. Courts may give these parties relief as to when they have to pay or periods that they didn't pay, but ultimately you have to pay. This litigation might stall the inevitable, but eventually those parties are going to have to be able to start paying, and if they don't, they don't have the funds to start paying, some of that litigation will never see the courtroom because it will get resolved by itself before that date.

How do you think the pandemic has changed the way force majeure clauses are written now? I know it probably depends whether you're a landlord or tenant or lender. Do you have a sense of how force majeure clauses in general have changed, or will change?

Sure. How they're changing now is everybody's trying to negotiate their positions, but at the end of the day, I don't think it's going to change much. It all comes down to who's willing to take the risk. That is, everyone now wants to redraft the force majeure clauses to reference pandemics and government shutdown. Well, number one, is it going to include monetary payment, or is it simply covenant requirement? And there's a difference. Most landlords never ever agree that you can use force majeure to excuse payment obligation. And tenants now are trying to get that into the document. Similarly, borrowers are trying with lenders without a lot of success. But most lenders will give relief to covenant requirements, as will landlords to tenants. But unless tenants have significant leverage or borrowers have leverage, they're not going to get substantial changes. Now, you have a landlord who's got a half-vacant center and they're desperate for new tenants, then a tenant has much more leverage to negotiate that into a deal, and then the landlord's simply taking the risk, that there's not going to be another pandemic. So I think it goes to who's willing to take the risk and who has the leverage in the negotiations.

I was going to ask you about leverage, actually. Do you have a sense of which parties have the leverage going forward?

Yeah, well I would say to you it goes back to the fundamentals of real estate. That is, the best location in real estate, the most demand areas, where people want to be, where tenants want to lease and where consumers want to shop, that leverage goes to the landlord. Because if one tenant says they're leaving and they have two more willing to take their place, the landlord has all the leverage and they can say take it or leave it. If you're on the other end of the extreme where you have high vacancies and you have reduced consumer shopping and not a lot of people willing to lease space in there, tenants have all the leverage and the tenants can take risk on outlying locations and get better deals. And some of those deals will be force majeure provisions that are in their favor, and provisions that allow them to kick out of the lease and early terminate if sales don't come in at certain volumes. So I think it goes back to the fundamentals of real estate 101. Location, location, location. Where those best locations are will drive who has the upper hand in the negotiations.

--Editing by Rebecca Flanagan.

Check out Law360's previous installments of Coronavirus Q&A.

For a reprint of this article, please contact reprints@law360.com.