By Andrew McIntyre

Law360 (April 29, 2020, 1:57 PM EDT ) In this edition of Coronavirus Q&A, one of Blank Rome LLP's real estate leaders chatted with Law360 about how landlords and tenants are handling rent discussions, the way force majeure may play out and how the COVID-19 pandemic compares to the Great Recession.

Pelayo Coll, a Philadelphia-based partner and co-chair of Blank Rome's real estate practice group, shared his thoughts as part of a series of interviews Law360 is conducting with lawyers on the ways in which the pandemic has impacted businesses and created a new set of legal challenges and considerations.

Coll works on purchase, sale, financing and joint venture deals for properties nationwide that span various asset classes and is also vice chair of the board of directors of economic development nonprofit Asociación Puertorriqueños en Marcha Inc.

This interview has been edited for length and clarity.

How would you describe the way your work has changed over the last couple of months?

Obviously, the working-from-home aspect brings its own challenges. We're a transactional practice, and while transactions are still going on, just logistically and administratively everything's more difficult with everybody in a remote location. Our workflow and workload have also obviously been impacted by COVID-19 in that we're not seeing the volume of transactions, the startings, that we would typically see.

Credit markets are frozen and/or are uncertain. We have all kinds of practical stumbling blocks to getting things like due diligence done. You can't go and walk into units at a multifamily property. Some tenants aren't allowing people into their space. The practical things that drive a transaction on the ground are all very difficult with stay-at-home orders. What we're doing is trying to help our clients think of creative and new and different ways to get around these stumbling blocks.

What are some creative ways that you're seeing landlords and tenants address the question of how tenants are going to be able to pay rent?

A lot of that is going to depend on what your loan documents say. Many of our clients, particularly retail, obviously, and office have been approached by their tenants — we're advising tenants as well as landlords —asking for rent deferral: deferral of all or some rent during stay-at-homes times, depending on whether they are essential or nonessential businesses. The first thing that we tell our landlord clients at the very least is check your loan documents to make sure that you're not entering into amendments or other arrangements with the tenant that are prohibited by your loan documents or require lender consent. We're advising clients to also make sure that they're not doing things that would create nonrecourse carveout implication, by either unwittingly entering into what would be considered an unpermitted transfer or, in some cases, admitting to the inability to pay by, in a simple email, letting the lender know, "Hey, these tenants aren't paying, so I won't be able to make my mortgage payment this month."

Assuming that those things can be navigated through, we're seeing a whole host of different ways that a lot of landlords are deferring rent for some period of time and adding it to the back end or extending the term. And some of them are receiving the payment over some other period of time. For three months of rent, you might take some increment over the following six months. It's all over the map. It all depends on the landlord's tolerance and the landlord's ability to do a transaction with a tenant and the terms of their loan documents.

What are you seeing on the lender side? Are you seeing conversations between lenders and owners over debt service payments?

We have seen it. And it all depends on what type of loan and what type of lender you're dealing with. We have found that banks and life insurance companies and relationship or balance sheet-style lenders have been much more approachable, and some of them have initiated conversations with the borrowers with, in essence, stock programs that they're offering. "We'll defer three months of escrow payments," or, "We'll go to three months of interest only." A lot of lenders actually initiate that conversation.

Fannie [Mae] and Freddie [Mac] and their servicers have their own programs for forbearance, which included 90 days of forbearance provided that the landlord/borrower agreed not to pursue remedies against the tenant for penalties or late fees. Some of that got undercut by the CARES Act, which some landlords didn't realize. And the CMBS [commercial mortgage-backed securities] world has been a little bit more of a mystery. I know that some CMBS servicers and special servicers have started discussions with folks. I've seen a number of prenegotiations floating around and I've seen some discussions. Some special servicers also have programs already in place telling borrowers that they can forgo deposits into escrow reserves, other than insurance and taxes. Some of them have started negotiation or discussions of forbearing some portion of the principal payments and some other things, but those have been much more slow in developing. In some cases, just winding your way to the special servicer has been difficult.

What's your sense of the credit market right now?

My sense of the credit market is that it's very sluggish, if not just about completely shut down. We are seeing — I'll call them relationship lenders or balance-sheet lenders such as some banks and some insurance companies — still making loans. The big discussion across the board with some lenders that are still open, like Fannie and Freddie, is debt service reserves, which at least in the Fannie and Freddie world had not really been a big discussion point before. But new provisions have come out dealing with debt service reserves and debt service coverage ratios to address COVID-19-related payment delays and deferrals.

CMBS origination, we are not seeing much of any. It's been tough sledding on that front. We have seen, again, banks and life insurance companies are still completing transactions, but in some cases there's been some discussion on basic terms.

Are there parallels between what you've seen over the last two months and what you saw in 2008 and 2009?

I think there are some parallels, but it's interesting because this was not an economic collapse. The fundamentals of the market and the fundamentals of the economy were not in question before the pandemic set in. The pandemic has caused portions of the economy to now have fundamental problems. We'll see how hospitality, entertainment and retail rebound from this. But this isn't the result of bad fundamentals or unbridled enthusiasm or poor underwriting, securitization.

As a real estate lawyer, you're dealing with one of two things. You're dealing with transactions, whether you're buying, leasing or financing. And you're dealing with the flip side of that, whether it's workouts, litigation or bankruptcy and transactional aspects that lead into all of that. And while we're dealing with workouts, they're different styles of workouts. This is really people kicking the can down the road for what everybody believes will be a better time. From a transactional side, you're working on accommodating deals that you still think may happen.

At the beginning of the pandemic there were a lot of extensions of due diligence periods, and in some situations, in retail transactions in particular, you did have transactions fall apart. I mean, it's difficult to price a shopping center when you don't know how long it's going to be empty for, and you don't know whether tenants are going to come back or they're going to end up in bankruptcy.

From the work perspective, it is different in that there's a view that for at least most of what we're doing, whether it's industrial, office or multifamily, these deals are going to happen at some point, or they're going to come back, and if a client pulls a property off the market, it's a temporary stumble and hopefully will come back. And in some circumstances we're writing provisions where sellers are escrowing six months worth of rent roll so that their buyer can draw on that. So we're in essence subsidizing six months worth of rent roll in a quasi-master-lease scenario. Or we are writing due diligence to include extensions related to stay-at-home orders.

There's still hope that these transactions are all going to happen, whereas in the downturn, it was more of, "Uh-oh, we're going straight to significant workouts," and things really sort of ground to a halt.

You mentioned hospitality earlier, and I want to ask you about force majeure. What's your view on how force majeure is going to play out in the coming months as some of these disputes go to litigation?

As I look at force majeure clauses in contracts, obviously well-written force majeure clauses from a landlord's side would usually not excuse the payment of money and would make clear that payments of money, as in rents, would be an independent obligation of the tenant. But then you've got force majeure clauses obviously applicable in construction contracts and a number of other things. I think that it's really going to be fact-intensive from a court standpoint.

I can't tell you that there's a cure-all. I know that in some states like New York it's going to be a lot more difficult for someone to get sympathy in a force majeure clause. And then you've also got all of the other attendant equitable defenses, such as impossibility of performance and frustration of purpose. It's going to be interesting to see how courts do it.

--Editing by Jill Coffey and Kelly Duncan.

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

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