The COVID-19 pandemic has ushered in a series of broad regulatory initiatives in both the private and public real estate sectors. Here’s a quick look at some of the latest developments.
Recording Office Operational Status
The COVID-19 pandemic has resulted in widespread closures of recording offices. The American Land Title Association (ALTA) has been consistently monitoring the operational status of all recording jurisdictions and posting the real-time data on its website that includes:
- Recording Office Current Operational Status: Specifies whether the given location is open, closed, or conducting limited operations
- Reopening Date: Specifies if given location has announced when operations will restart
- Search Status: Specifies what search services are available, to include online and walk-in appointments
- Title Plant Data: Specifies whether this data is currently available
- Status of Recordings: Specifies the availability of eRecordings, walk-ins, drop-offs and mail
- Jurisdiction-Specific Plan: Outlines given jurisdiction’s staffing and reopening protocols
Understanding Business Interruption Insurance Coverage
Business interruption insurance is usually integrated into property insurance policies and is intended to provide coverage for direct physical losses or property damages stemming from natural disasters such as earthquakes, floods, etc. This category of insurance, however, may not cover losses associated with global pandemics like the recent coronavirus outbreak.
Accordingly, corporate entities should conduct a thorough review of their insurance policies, as certain business interruption plans offer coverage extensions for instances of infectious diseases that do not result in the type of direct physical damage that is required for the majority of insurance plans. In some cases, business interruption insurance policies that cover these type of events may be limited to the time window following the government’s official declaration of the epidemic, and any claimed losses would have to be directly linked with the pandemic and not attributable to alternate, unrelated causes for reduced business operations.
Force Majeure Provisions Invoked Nationwide
A number of major retail corporations have notified their respective landlords that they are planning to invoke the force majeure lease clauses to temporarily shutter all locations due to the government recommendations and required closures issued as a result of the nationwide spread of COVID-19. Because rental agreements can vary greatly, the issue as to if the concept of force majeure is a viable option for tenants must be determined on a case-by-case basis.
The most commonly incorporated force majeure clauses cite “acts of God” and “government actions” as conditions under which the provision may be invoked. The usual construal of an “act of God” is a disaster resulting from nature—such as a tsunami, earthquake or hurricane. If the given agreement offers detailed examples of what qualifies as an act of God in relation to the invocation of the force majeure provision and said examples do not cite interruptions stemming from infectious diseases, there may be some question as to whether the clause can be implemented. Conversely, broadly worded clauses that use generic terms and lack specified events are easier for tenants to invoke. While the COVID-19 epidemic is technically not a “government action”, tenants may argue that the resultant government-mandated closures would qualify as such.
Loan Default & Recourse Liability Focal Points
Those who have a mortgage should closely look over their paperwork before amending an existing list or waiving any of its clauses. The anticipated increase of tenant inquiries to their landlords regarding rent deferral and forgiveness options may invoke previously existing lender consent requirements contained within the original mortgage loan contract.
Usually, borrowers are required to get a lender’s permission to renew, amend, or modify certain types of leases in addition to any waivers related to the mortgage that would curtail the lease term or alter the rental fees. Not obtaining this prior consent can lead to a default that may be challenging to correct once an amendment or waiver has been consented to.
An unauthorized lease change or waiver can also set off certain recourse carve out clauses that may, in some agreements, qualify as an impermissible transfer, typically leading to full recourse liability for a borrower and guarantor. Additionally, a majority of loan agreements allow for full recourse to borrowers and guarantors if a borrower concedes via written statement, or during a legal proceeding, that they are insolvent or are unable to meet their debt payments on time.
Borrower Protection Measures
For federal related mortgage loans, which are typically consumer loans secured by the principal residence of the borrower, there are numerous restrictions in place which may prohibit or prevent foreclosure.
The Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), in addition to multiple state jurisdictions, are offering a range of borrower protections in response to the COVID-19 epidemic. Typically, these initiatives mandate that lenders delay foreclosures and evictions and reporting delinquent payments to credit rating agencies, and eliminate or offer forbearance for certain charges on mortgage loan fees for a specified time period. Here’s a quick overview of these initiatives:
Freddie Mac & Fannie Mae
Offering up to 12 months of mortgage forbearance; waiving penalties and delinquency charges; pausing all foreclosure sales and evictions until May 17, 2020; halting reporting of delinquencies to credit agencies; and providing options for loan modifications.
New York
Per Executive Order No. 202.9, the New York State Department of Financial Services (“DFS”) has legal authorization to extend emergency regulations to safeguard borrowers within the jurisdiction that are experiencing financial difficulties related to COVID-19, including but not limited to: mortgage forbearance; halting delinquent reporting to credit bureaus; and postponing foreclosures and waving late fees for up to 90 days. Lenders who violate the order will be found to have violated Section 39 of the New York Banking Law and punished accordingly.
California
The state legislature has negotiated an agreement with several financial lenders to provide the following relief initiatives: 90-day forbearance of mortgage payments affected by COVID-19; pause of late payment reporting to credit rating entities; 60-day halt on foreclosures and evictions; and 90-day waiver on refund late charges.
Understanding the CARES Act
President Trump recently signed off on the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which provides nearly $2 trillion dollars of stimulus funding intended to offer financial assistance to individuals, jurisdictions and entities that have been negatively affected by the coronavirus pandemic. Below are a few of the main provisions of the relief package:
- $1,200 one-time checks for individual tax filers; $2,400 for joint filers, plus $500 per dependent depending on income bracket.
- Approximately $250 billion on unemployment initiatives
- $500 billion in corporate, city, and state economic distress relief
- $349 billion in small business funds in the form of forgivable loans
- $150 billion in direct support to state and municipal governmental agencies
- $221 billion in additional business tax breaks
- $117 in healthcare facilities and veterans care programs
