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Does COVID-19 Impact Your Contracts? Perhaps Its Time To Review Your Agreements
April 2, 2020
Jennings, Strouss & Salmon, P.L.C. - Real Estate Blog
It has been said that nobody really looks at the language of a contract until there is a problem. Now there could be a problem.
Shopping center owners and their restaurant tenants are now studying the language of the leases. Sellers and buyers of commercial property that are in escrow are now paying attention to the language in the estoppel certificates. Many prudent business tenants purchased business interruption insurance. Now the question is whether the insurance policy covers business interruption because of a global pandemic. Even hard money lenders, bridge loan lenders, small custom home builders, and property flippers who had a terrific symbiotic business relationship during the past several years are looking at the language of the documents they signed.
There is no “one-size fits all.” Every commercial lease is slightly different from other commercial leases. Estoppel certificates were mostly boilerplate but now tenants are adding language to the estoppel certificates before signing. What happens if a house flipper is delayed in reselling a home because of the market interruptions and is nearing the maturity date of the note secured by the deed of trust? Will the flipper lose the newly created equity?
The good news is that there is a spirit of cooperation between many landlords and tenants and lenders and borrowers. If there are loan extensions or rent deferments to be made, it is very important that the deferments, extensions or abatements be set forth in writing and drafted based upon the language of the lease, note and deed of trust, or sale contracts. Landlords must be careful to not run afoul of covenants in their mortgages when entering into rent abatement or deferment agreements with their tenants. Landlords must also be sure to comply with the requirements of applicable Federal and Arizona law governing their activities, including the recently-imposed prohibition on eviction of residential tenants during the Covid-19 crisis. Hard money lenders must be careful to not waive their rights under the note and deed of trust when extending the maturity date of a promissory note. The borrower may be interested in making some pay down of principal as part of the loan extension agreement. Custom builders and their lenders may want to include subcontractors and materialmen in the loan extension agreements in order to avoid the recording of mechanic’s liens.
It is refreshing to see the high degree of cooperation between the groups that are often adversarial. It is important to have the rent deferments, abatements, loan extensions, and other cooperative agreements professionally prepared. Hopefully, the parties will never have to read it again and this pandemic will be in the rearview mirror.
For more information on this or other real estate matters, please contact Mr. Brnilovich or another member of our Real Estate practice group.
ABOUT THE AUTHOR
David Brnilovich | Read Bio