Cancelled Contract: Managing Contract Disputes Amid the Outbreak

Anthony Geraci:

So wonderful. So if you are in the right place, you should be here for a canceled contracts and basically managing contract disputes amid the outbreak. My name's Anthony Geraci and I'm the managing shareholder and CEO of Geraci LLP. Some of you may or may not know me but more want to introduce Darlene Hernandez, she's one of our senior litigation attorneys and Darlene, I'm going to hand it over to you to introduce yourself.

Darlene Hernandez:

Thank you Anthony. I appreciate the introduction and welcome everyone to the webinar on canceled contracts. Just wanted to give you a brief background. I am new to the firm and I am so happy to join Geraci. And just to give you a summary of my litigation background I came from a law firm that specialized in default servicing litigation with consumer loans and for the last 10 years worked in that space and before that the previous 10 years I worked in San Diego at a law firm practicing general business litigation.

Anthony Geraci:

Wonderful, and I can definitely vouch Darlene welcome to the team and excited to have you and I don't know if I'm excited or not, but definitely give everybody some background about why this webinar and probably needs no introduction itself but,

Covid and Coronavirus has given us quite a few different challenges and I'm sure everybody here is feeling that in different ways. But one of the segments if you will of the challenge of this virus is well what happens in different contracts with something like the pandemic, which is coronavirus and I'm sure I do not tell anybody on this call the different things that are going on, but just a quick synopsis, I won't waste anybody's time. You have government shutting things down here in California, which is where we're located. Governor has stay-at-home orders and our governor is not alone. I think as it stands, even though states are reopening at one time I think 42 states had different lockdown orders of various severities in place and that of course created its own challenges. And of course not just the economic climate but also in the business climate, what business is going to be done and what happens when what you contracted for wasn't really what you were expecting.

And that's really going to be the heart of the agenda of this call. So first we're going to talk about what's the current business dispute climate and I can tell you we're getting several calls on this, what are the common claims that are going to be made of the contracts with the core focus of two different elements that we're getting a lot of questions on which is real estate purchase and sales contract disputes. And we're going to cover the full gamut, if you will, of residential all the way to commercial and different types of contracts as well as common mortgage lender disputes as well. As I said, if you have any questions at the time, there's a q and a box just if you're coming on late to the call there's a q and a box that feel free to put in any thoughts, questions, comments, concerns, and we'll get to them either during the webinar or during our q and a section which will be afterward, but we'll try to weave them in if you have any questions whatsoever.

Wonderful. So kind of what we're talking about, we are really discussing almost daily different variations of what's going on in the business climate. I can tell you I've had quite a few different phone calls regarding various purchase deals. One has been residential properties all the way up to various apartment buildings and different commercial aspects of clients that they were looking to purchase on the buyer side and then also on the seller side we've had quite a few contracts and buyers trying to get out. So we know a lot of our clients are both sellers and buyers. So this might be the time where we try to put a bounced webinar but also give you guys some different viewpoints as well as different arguments you're going to see on either the buyer or seller side of these various contracts. And my guess is if you're here, you're either hurt about it or you are in the situation right now and I hope we can give you a lot of different guidance that I can. Darlene do you have anything further to add on that particular point?

Darlene Hernandez:

Yes. Just to give you some examples of some typical disputes that have come up from clients in the past few weeks. Some involve disputes regarding fundings on loans and whether or not the lender especially since the advent of the covid and lockdowns whether the lender can pull their funds on, for example, an existing escrow if they believe they will be suffering some severe financial loss because of what's happening in the market, can they do that? So that's one example. Other examples would be one client had a commercial lease agreement and the tenant, a longtime tenant is late on payments and isn't responding to inquiries about status of their lease payments. So there's a number of contracts out there and various concerns that clients have especially where maybe a breach has not occurred yet but they're worried that it will occur and then what should they do about it? And we'll talk a little bit about that later on in the webinar.

Anthony Geraci:

Wonderful, looking forward to that. If you want to hit the next slide for me and we're going to really get in the heart of the matter and I think over the, gosh, I'm trying to think probably the last 12 years I've really been speaking about various lending topics and real estate topics. This is going to be the first time I've ever talked about force majeure and impossibility and give you guys a little bit of background on this. I think we've always included these type of clauses, but outside of little things like, and I'm trying to see, I'm struggling to give thoughts of the last 10 years. I can tell you I have never before really given serious consideration to force majeure clauses outside of making sure and having a good idea to have them in contracts but never really thought about them past that. And as you can imagine, the current economic climate and business climate has really forced us to get up to speed very quickly on the current law and then trying to expand the current law into what you will, the health and pandemic aspects of both government action as well as what ramifications are there.

And so really wanted to get to the heart of these three different topics which is going to be force majeure, impossibility, and good faith. And while you may have heard about these topics, I don't know passing definitely this is going to be the webinar we really dig into them and again something we've had to get up to speed very, very quickly on and Darlene feel free. Perfect. So again, what we're seeing right now is if in any you can definitely see that these addendums weren't even contemplated before coronavirus, but what we're seeing right now, especially with the California real estate purchase contracts and various multi-family contracts that what what's called the coronavirus or Covid addendum and really it's trying to do a lot of different things within it. We'll dig deeper in a second, but you can generally speak, they're either trying to extend time, modify terms, or otherwise have different concessions within the contract itself. And Darlene, I don't know if you add anything further on that one.

Darlene Hernandez:

Oh, nothing further.

Anthony Geraci:

Perfect. So let's talk about force majeure because before today I can tell you most of these type of contracts really are an act of God and we talk about war and strike and hurricanes, but really I'd have to rewind the clock almost to Hurricane Katrina for those of you that remember it for the last time I've really thought about and argued force majeure clauses and for those not familiar with it, the hurricane Katrina was the hurricane that hit Louisiana and really devastated the local and I would even say regional community as a spawn, different tornadoes and stuff like that and really active God has really been linked to weather. There's tons of case all about hurricanes and different disruption there but I can make, I can't even think of the last time a pandemic entered this but I can't think of the last time such a government response to a pandemic has really forced us to think about is coronavirus and in the government actions and act of God.

And so that that's really going to be part of the heart of what we're talking about. Important to know is not all contracts have a forced clause kind giving a snapshot into what we're going to talk about. Also most real estate purchase contracts, funny enough they have time is of the essence clauses, which is pretty typical. People want to close as quickly as possible. What's missing as a forced clause usually I have not seen any, at least in the California ones for sure and a few other states that they just don't have a force clause. This was never really contemplated and I can tell you California forums have been in existence over 20 years. The other part is there's really no consistent definition of what is required or what force majeure is and you're going to have various different state laws trying to interpret this and also I guess if you will, different requirements.

So California for instance to the heart of the matter, especially when we talk about economics, California doesn't really recognize if you will, economic damages as force majeure if you will. New York really wants to look to see if you have a force majeure clause, they want details as far as if it's detailed in there, they're going to limit you to those details within the force majeure clause, Texas is a little bit in between California and New York and really Florida is probably one of the strictest states is if it's not listed there, they're not going to enforce it. How about you Darlene? What are your thoughts on force majeure clauses and some of the things you've seen out there?

Darlene Hernandez:

What's interesting I I've heard the term price majeure and that's where there is a disruption that impacts the profitability of a contract and in that case it may not be sufficient for a force majeure claim unless there's an express contractual provision for that situation. So for example the economic downturn caused by covid and the general adverse business conditions could be argued as sufficient to support a force defense if someone were trying to cancel their contract. But I agree with you it's going to be very fact specific if a party is going to use a force majeure argument to try to get out of a contract.

Anthony Geraci:

Absolutely. And some of the things we're not touching on that you guys may have looked at when you're thinking about this topic is there are a couple of few comment elements, but I don't know whether, especially in the context of what we're discussing, which is coronavirus, what really makes a lot of sense to spend a lot of time on it. So I'll give you some of the elements that we did not spend any time on because unless you guys tell me otherwise, there's really no way you could have predicted this. But some of the typical elements is that you could not have reasonably foreseen that whatever the force contemplated in this case course coronavirus was not reasonably foreseen. I think we can check that box pretty quickly. It's also has to be completely beyond the party's control, the enforcing party's control or the party trying to get out of the contract.

Again, I can't see anything regarding anybody being able to control the virus and if you can, hopefully you can get that to the governments to take care of that. Really the key part is assuming those two facts and a lot of the time we've been spending on does it render the performance of the contract impossible or impractical and that's kind of really the analysis we're focused on here. What type of contracts do you have? As Darlene said, very fact intensive and so a couple scenarios that I can give you off the top of my head. Again, these did not have force clauses but I know something off the top of your fingertips and thoughts would be entering into a real estate contract and what does that entail? Let's assume it had a force clause. Would you be able to enact a force clause and get out of the contract?

For instance, we're going to discuss other elements in particular with real estate contracts but want to focus on this and let's just assume you had one. Well again, going back to Texas for instance, or excuse me Florida, if it was not specifically listed and you had other lists, they would say, well you can't use force majeure in California. Again, you have the economic test. So it's very much factual intention but also you're almost becoming a pioneer because you have these different arguments but it's really no one has really considered this and I could say probably the last pandemic if you want to cause really damage was the Spanish flu in 1918. So there's not a lot of case law out there to give guidance to judges either. So you're really be pioneering on these type of arguments within the court system.

So let's say you don't have a force your clause. I think the next one really this is more of a common law remedy, so you won't necessarily have this in the contract itself. So one of the remedies you could have would be impossibility, the contract itself, can it be performed due to forces outside of the control of the parties? Well do we have that? Absolutely. And then also what about the shutdowns within your state? Does this make the contract impossible for you to continue? And there's different segments of that. As I said, I think I see this play out probably easier in the commercial context than maybe even the residential context in this case. And so imagine that you had a commercial building that you're purchasing and the tenant is looking to get out of the lease. Well what is the value of that property right now and in the future?

Extremely uncertain, but is it impossible? And that's really going to be that the heart of what the court has to decide, as I said in California, maybe a little bit more difficult to get that's just an economic damage necessarily. But in states like in New York, especially with New York City under lockdown, almost like the Bay Area if you will from California, does this render the contract impossible that that's for the court really they're going to have to decide. My guess would be I'd err on the side that likely the court may find at least the contracting purchasing the building. Impossible. Gar, what are your thoughts on that?

Darlene Hernandez:

The, there's so many reasons now than ever before to raise possibility as a defense. Like you said lockdowns preventing businesses from operating and also the reduction in the workforce and being able to operate their businesses to the level where they can perform their contracts. Let's say you are a construction company and because of covid and lockdowns your employees are unable to assemble, let's say if they are tasked to repair or construct a roof if they can't get together because of the lockdown, how are they able to perform under their contracts? So there's just a lot of practical implications where impossible impossibility is a great defense. I think that other factors that the court would look at besides something being impossible to perform is whether there was actual prevention or hindrance and I think it'll turn on those terms with the court. Another very factual analysis by the court on whether or not parties can raise impossibility as a defense.

Anthony Geraci:

Absolutely. So the other part is also good faith and I want to spend some time on this because this is probably the afterthought. Most people don't even talk about good faith and here we are talking about it, what does that really mean? And what that means is we have the sentence here, all agreements require the parties act honestly fairly and in good faith to one another. I'm going to liken this to I think what you guys have already seen out there regarding the payroll protection plan loan or the P ppp if you will. Sorry, think we slides here. No worries. And what does that really mean? So let's talk about, I want to give you guys a scenario. Let's say that you commercial building and that you actually had plan on same theory that we had before. Tenant wants to get out of the lease.

Now let's just say that there was plenty of evidence out there, you didn't really care about the tenant. Your whole goal was to occupy the building yourself and let's just say it was your own business. You owner occupy this particular building and while other businesses are suffering, I think there's also other businesses that are doing very, very well and your businesses happens to be one of the ones that are doing very well. Are you going to be able to get out of that contract? And the answer by the way is no. Maybe you had other reasons, maybe you just don't like the building anymore after you sign that. But if there's plenty of evidence that shows that you're really not acting in good faith, you really have no reason other than, gosh, this seems like a great time to get out of this contract. Look what happened coronavirus.

Well there may be sympathies your way and of course the default answer's going to be, wow, I completely understand this is a problem. If there's plenty of evidence that shows your business is fine, you plan on occupying the building anyway, you're not going to be able to exercise either force majeure or impossibility. There's a legal term that comes to these are equitable defenses and what it comes down to is are you coming with queen hands? Good faith and fair dealing is very much equitable in that if you're not acting a good faith, not only is it going to be a problem in exercising these, that in itself can be a breach of contract as well going out. If you had anything to add on that.

Darlene Hernandez:

Oh nothing

Anthony Geraci:

Wonderful you let's advance this one. So there's also, and it's not just California, all states have various different codifications of this basic rule I would say that you see in contract, which is our ours is unfair competition and it's business professions. Code 17 200 basically comes down to if you have any business practice that's unfair, deceptive, untrue or misleading and kind of delves into what that scenario that I give you is really your whole idea is, well let me see if I can use this as a negotiating tactic that they're going to have to be able to find any other building. I agree to pay a million dollars for this building, I bet if I push some screws into them I can get this cheaper for some hundred thousand or so then that's going to be a nice negotiating tactic for me. They may have a ca case against you for unfair or fraudulent business practices or as I said, back to the good faith and fair dealing. What are your thoughts Darlene?

Darlene Hernandez:

That's absolutely right because if you're going to go to the court for relief on a cancellation of contract, whether you are the party wanting to cancel the contract or you're preventing cancellation cancellation of the contract, you need to demonstrate to the court that you've dealt with each other fairly and reasonably, especially in light of the fact that the decision that's going to be made concerning the application of these principles is going to be made by a judge and you would want the judge to know that every effort was made to accommodate and to communicate. I think those are the two main points that we would like to drive home during this crisis is that the parties should try to work together and then if for any reason one party decides to not cooperate or it's basically they come to an impasse as far as a compromise at least you can demonstrate to a judge that you've tried. So that's very important to keep in mind going forward with seeking equitable relief. You want to be fair to begin with.

Anthony Geraci:

Absolutely. So probably to the heart of everybody's questions and we're going to really spend some time with in real estate purchase agreements. I'm going to start off with there are several different forms that various states and realtors use for California. It's a California Association of Realtors forms also for apartment buildings. There's other far like apartment owners association has various different, if you will form contracts. You're going to find a lot of these very much form based if you will. So we're going to talk so much something about the car form but also if you're getting into bigger deals that you could very well have custom contracts drafted by law firms. So that that's going to be the question and I really want to emphasize when we're talking about contracts in general this really becomes what is in your contract. We're trying to cover the whole gamut of different contracts.

So we're going to talk about things that have various commonalities as I said, like the car forms or apartment association forms, what type of clauses do they have, but really I hope no one takes this as this is exactly what your contract has. Please read it. If you have any questions on it, please consult with an attorney. But we're going to talk about some, if you will, boilerplate contract forms that we've seen a lot of and the car forms in particular. So on this side we're going to talk about the buyer side analysis if you will. The car forms are definitely buyer friendly with some liquidated damages provisions which we're getting going to get into.

The difference though in either buyer or seller side is there's no force majeure clause. In fact, especially with the car forms, they were coming out with an addendum post coronavirus to have this signed right after this. But I could tell you a lot of the questions I had to answer this form was not signed. In fact, there were a couple couple of cases that the seller wanted the buyer to sign yes, sign this coronavirus or vice versa depending on what's going on. The buyer, hey, I want to use this as an addendum seller. And the seller's like well I don't want to sign something gives you additional rights so I refuse to sign it. So first thing to cover is are you required to sign such an addendum after you have a signed contract? The answer is no. You don't really have to have any addendum.

If you have a valid signed contract there may be some ideas for both cases in which to sign it. Maybe you are uncertain whether this is the time to sell. Maybe a coronavirus has changed your situation on both buyer and seller side. Generally speaking though, the coronavirus addendum is really buyer friendly as we talked about. So if you're a seller and you're really looking to sell obviously don't sign the form and really take a look at everything else that you've got in there. There's still of course, like we talked about, buyers could have the impossibility defense or what have you. We're going to find in most states they're looking for impossibility very much sparingly at least that's been historical. Does coronavirus change judges' outlooks? I mean that's really the question to be determined and Darlene has stated it is really going to be very factually intensive so be prepared to have a lot of evidence that says this really is impossible for you to execute based on what your business objectives were in entering the contract and of course what your purpose is during and then maybe an exit various scenarios could include you're looking to flip the property.

Well if you were flipping the property, you had a contract lined up and were ready to sign and then all of a sudden this person can't execute the contract they were able to get out of it. That can very much be an impossibility defense for you. There are some leverage points though so it does require a notice perform in the car form. So basically after the contingency has lapsed, you can demand the notice to perform and the borrower, me, the buyer has couple of days by default or whatever days you put in the form to perform and if they don't then you can go straight to cancellation of the contract as well as requiring getting the liquidated damages. We're going to talk about that next so I'll save that for them. The downside is if you do want performance on this, it really requires mediation. So if you want to necessarily get either damages or maybe you really want the property specific performance you're going to have to go through mediation. And so with attorney's fees there could be a chance of losing both a deposit in the attorney's fees. Darlene, any thoughts on this particular slide?

Darlene Hernandez:

Yes, I can give you an example of the attorney's fees provisions and the possible loss of your deposit and fees. I have a case that's in probate court and there was a court approved sale and our client was the buyer and had according to the court's order posted a sizable deposit because it was an as is all cash sale. And so this was before covid. So now after covid things are a little tight and our buyer may or may not be able to fully perform and go through with this sale. So what happens? Well the court because the court ordered an escrow opened for the earnest deposit as well as attorney's fees because there were attorneys involved in the transaction. All of that is still an escrow and it won't be released unless by court order. So there there's is certainly risk but it would be good for all the parties to try to negotiate that portion of their agreement if they can earlier rather than later.

Anthony Geraci:

Yeah, that's a great point that we didn't even touch on. But yeah, there's money in escrow and I I've seen a scenario actually a couple of times where literally you're on the eve of closing, all money is in and then no one closes or in this case, well really I see this is impossible for me to do anything with. I want my money back. What happens then? And as Darlene said, really no escrow's, definitely not going to, oh here's your money. Just feel free to figure it out amongst yourselves. What escrow will do is either the buyer and seller agree on something or if it's significant enough and if the parties are aggressive enough, what escrow's going to do is what what's called inter pleater action. They're just going to deposit the money with the court, sue both of you and just say, we have no dog in this fight.

Here's the money that we have in escrow ports. You figure it out and so you could really be tied up for a couple years. While that gets sorted out, I think we're going to move to the seller side. Now let's talk about the seller side. So if you will, the flip side of the equation really on the seller side you you're have one goal either getting the purchase done or retaining the maximum amount of the buyers deposit what's not mentioned here and maybe remedy that you may be thinking about as well. The buyer has specific performance abilities as in they can make you specifically perform and sell them. The property itself the seller does not have that luxury. They don't have any specific performance to actually perform on the contract itself because really what's the seller's in interest, the seller's interest here is to sell it for money.

So no court is going to give specific performance to a seller. They will of course discuss damages. So what is the maximum amount? I would say this is not really limited to car forms, although of course that's what we've got here. Most forms are going to have some sort of liquidated damages. So what liquidated damages are on a basic level is what we don't know how much we're going to be damaged by not being able to sell this property. So we're going to some amount and that's going to be our damages that we'll settle for in advance. So basically within the car form and a lot of other forms, it is usually linked to some deposit amount by the buyer and I've seen typical amounts, 3% I've seen more depending on the custom transactions. But I would say generally 3% is required by most sellers For the buyer deposit, I've seen it of course as well as 1%.

So that that's going to be something we can discuss not at the heart of this webinar, but just something for you to look at is whatever that amount is deposited is really that amount of liquidated damages you're looking at to be made whole for a breach of contract. So what's the maximum amount of liquidated damages? It depends. The car form itself has generally 3% capped as well. And in residential likely 3% is going to make a lot of sense. Could you get a hundred percent of the contract amount is liquidated damages? Probably not. And really the heart of that matter is, well what are you really damaged? The real estate is never worth nothing. So it's worth something. And what is really your damaged amount typically? I would say pre coronavirus 3% was definitely enough to compensate people during this time. However, what are the likely challenges of selling a piece of real estate right now? We'll get into of course lending itself, but of course let's talk about the buyer. If there's a loan or loan contingency they need, are you going to be able to get a loan if they're going to pay in cash? The dangers of course is well we changed our mind as in, hey look, coronavirus made us change our mind. So you may want to start requiring more if you're a seller on these real estate purchase agreements and your liquidated damages. Assuming it's not just residential Darlene

Darlene Hernandez:

Just a thought if the seller and the buyer if they understand the challenges with going through with the contract what if both the seller and the buyer agree to an extension of time to perform under the contract? Let's say the buyer is facing some delays with obtaining financing or maybe they tap into a fund where they held funds in the stock market and because of covid the value went down so they have to find other resources. Is that something that the parties could negotiate in order for the seller to sell the property?

Anthony Geraci:

Yeah, that makes perfect sense. And really the thought process comes down to what is going to make you whole and unfortunately how can anyone predict what's going to make you whole depending on what we see in the next six or 12 months. I think if we had to give you kind of rule of thumb, you may want to require more than a 3% deposit and really truly consider those loan contingencies in con and at least the car forms. But I know they're popular in different contracts, some sort of loan contingency. You may not even want a contract unless they can really prove beyond a doubt they not only qualify but the bank is not only willing to but able to fund those loans. So just some thoughts there.

Let's transition a little bit to what are the lender related litigation claims. And so we're going to focus on the lender borrow relationship here and just rewind the clock if you will give you a historical perspective perspective of what we've seen especially in the private lending space. The private lending space from if you will, 2009 to I would say six months ago, salt really influx of I'll call Wall Street capital or definitely secondary markets in general that really had the ability to flow capital into this space. They were changing yield at the time and really private lending space offered very attractive yields And we saw this steady supply of this up until six months ago and I think you're, you're going to see that really in one of today. So six months ago what would've been 7% and maybe one point has really come back to what I call the 2010 rates which is 10 or 12% and three points.

And the reason for that in my opinion is really what was a good amount of capital has now become an undersupply capital as secondary market is really in a wait and see pattern waiting to see what happens and how coronavirus impacts not only the value of real estate but also the value of loans. But now is going to look and has six or 12 months to see maybe there's a wait hour in the meantime. Now there's under supply capital, a lot of private investors and lenders are really coming into this and seeing their yields increased. But what about loans that have already been originated? So my guess is you're seeing huge amounts of payment deferrals and if you haven't I can't believe by the time we're doing this webinar, haven't already really touching base with some of your borrowers, finding out where they're at because either you haven't seen or you're about to see payment deferrals.

And I see that in the sense of borrowers themselves had, and of course the stimulus, the $1,200 that came into it that may or may not be impactful. Again, when we talk about this, we're covering the wide gamut of if you will, owner occupied borrower loans all the way up to sophisticated commercial loans with bigger deals and apartment buildings and what have you. So I'm trying to generalize a conversation that should be uniquely tailored probably to each different scenario. But taking the borrower, if you would, don't my borrower, that stimulus probably didn't go very far. If it did, maybe they made their April payment with it is going to be really the deciding factor. Are they going to make the may payment? And hopefully you guys have a good indicator of that switching it. A very similar analysis comes down to even the commercial tenant.

If you had commercial buildings or you're renting to restaurants, I may not tell you where they're at right now. A lot of them have switched to takeout and stuff like that. But at least some of the reports I've read is they're really seeing revenues decline. 80 to 90%. Does that give them enough to pay you at the end of the day? So the next question I'm sure you're going to ask is, well why do I care? I'm going to start foreclosures. That may or may not be an option right now if rewinding to how we started the entire dialogue, 42 states had stayed at home orders and within that, especially on the eastern states that have judicial foreclosure only they, they've been stopped from filing a lot of judicial foreclosures. I'm talking generally there may be different states that are still allowing it, but at least the states I've looked up, especially even in California, which is a trustee state judicial foreclosures have been stopped within the court system. Also, let's just assume you can complete a non-judicial foreclosure in the Western states. A lot of states have also stopped the judicial process of eviction. And does that mean just tenants as far as people living in houses or commercial? And that that's really state by state question that I don't have an answer to off the top of my head. For every state in California, all evictions have been stated at this point. So I'm guessing they'll probably open up commercial evictions soon, but that's what we've seen out there. Darlene, any thoughts on that?

Darlene Hernandez:

Yes the evictions are going to be on hold a and that's indefinite. And as far as proceeding with non-judicial foreclosures there is pitting legislation with the state of California on whether there'll be further delays in proceeding with recording notices for foreclosure. So that's still to come and I believe NEMA and Melissa had covered that in their webinar last week.

Anthony Geraci:

So I hope that that's a good history if you will. So let's dig into this a little bit deeper. So let's just say you do get a request for pivot deferrals. Our advice, of course respond in writing. You don't want them to say, well they told me this was going to be some sort of modification. Probably may not tell you guys, but definitely if you are responding to these requests, respond in writing and consider them. And I also encourage you to consider your alternatives at this point. What have you got to lose? I think you guys know me pretty well, you're on this webinar. I'm very much a relationship person as much as I can be because I think relationships are golden. And hopefully you can use this opportunity to build and deepen the relationships with your tenants whoever they may be. Whether we're talking about owner occupied tenant or the commercial tenant with rents encouraging you to take the longer view of this too shall pass.

At the same time, of course getting some thought to can this business survive coronavirus? And I think that's what a lot of these people are looking into. Next one really, especially in construction loans. So give you guys some background for those who may not do construction loans is these are usually funded in multiple steps. So what'll happen is you get a bar, a loan, let's call it for a million dollars. I have to use examples cause it's easier that way. And the purchase price is 600,000 and there's going to be 400,000 worth of improvements for the purpose of our discussion. Not sure it matters necessarily. Well now that we've done through partially the construction loans, well what happens now the lenders are going to say, eh, we're not going to fund anymore because things have changed. And again, this isn't going to be very general discussion.

Let's talk about that in particular. Cause I know we have an answer a question as well. And the question is a lot of lenders are effectively reneging on existing construction loans as they don't have the funds to cover ongoing draw requests. So I know a lot of these lenders are going to say, oh, impossibility force that's going to be difficult to prove in this context because remember the whole part reason of making loans, unless there's a specific clause in the contract that says otherwise, there's going to be some liability in not funding these construction loans. And I can tell you actually we can tie this all the way back if you will, to 2006. This is exactly what happened in 2006, 2008, we had a number of construction lenders, both banks and private lenders not funding construction deals. Slightly different. I would say this time we're getting a lot of rehab loans versus pure construction.

But 2006 to 2008 really came down to construction lot and there were a lot of lenders out there that said, Hey, I'm not funding anything. Real estate's going down. Most of those cases actually came down on the result of the borrower and that they had an obligation to fund the loans. So there's definitely some liability I would say, on behalf of the lender if they're choosing not to fund these construction loans. And I want to make sure I emphasize the theory behind that. When you make a loan to a borrower, it's not so much you're making a loan because of the value of the property. Yes, of course that's part of your underwriting standards. And us as private lenders of course look at the value of the property as a big reason to lend. But traditionally what you're making a loan to is not necessarily the property itself. You're making a loan to the borrower who's supposed to be credit worthy or not credit worthy as you have determined. And the property itself is security for the loan. And we saw that play out in might be 2006, 2008, very similar analysis and really coming down to if you don't fund for the borrower, you you've have significant liability. Kelly, do you have any thoughts on that?

Darlene Hernandez:

No thoughts on that but I do have an example of a question that came up last week regarding a construction loan. The lender had reserve for construction and for the most part the loan was being performed but because of the apprehension that the lender was having about future performance and future payment the lender wanted to know is there any way that we can recover our losses from that reserve? Can we touch it? And it depends on the contract. And so in this particular case, there was a provision to recover loss from the loan through the reserve. Not every contract has that provision, but that's something that came up that I thought was interesting as far as what remedies do the lenders have when they see a potential loss.

Anthony Geraci:

Yeah, absolutely. Yeah, it comes down to guys loans themselves or course are financial obligations, but their contracts at the end of the day. And so it really depends on the various,

Sorry, I didn't realize I was muted there, so I was just kept on talking. But yeah, a hundred percent Darlene I completely agree with that. The question comes down to what's really in your loan documents. I know we're talking about financial instruments, but really what they are at the end of the day are contracts. What assigned and what's within your contract is going to be the analysis here. And unfortunately, or maybe fortunately just like me, just the real estate contracts, it's going to be a case by case basis and a lot of that will turn on in the contract itself. One of our final points is going to be expect a ramp up on bankruptcy filings. This is definitely going to happen. I mean you're really seeing in this play out in the retail sector right now. I don't know if you guys were our conference, it's probably been three years ago now.

We had a futurist that basically said big box, big box retail is going to be in danger. And it was this type of scenario that I'm sure he did not forecast necessarily like all of us. But really this type of scenario is where big box retail really shows its fragility. And so Neva Marcus, if you guys saw this morning declared bankruptcy J Cruz declared bankruptcy and I'm guessing they're just the beginning, not necessarily as a result of coronavirus, but kind of coronavirus was the straw that broke the camels back in that scenario. And we're going to see a lot more of these come up time and time again. And that's just that particular scenario. Again, going back to the restaurant example, are these restaurants really going to be able to survive? And I think that's going to be the toughest question to answer in the next three months or six months.

As these states are contemplating loosening restrictions, you're seeing that they're still going to have restrictions on the number of GA gatherings. So I've heard a couple states say restaurants will be halved, 50% of people will be able to go into the restaurant and eat there. So this may be a great time to have a conversation with your tenant borrower. What is their plans to pivot? Because if they're going going to have 50% capacity, what was a great space with the mood lighting and what was a great get together place now becomes, hey, you're not going to be able to have that many people there at all. So what are you going to do to ramp up and take advantage of other avenues? But with that said, I think we're just seeing the beginning of numerous bankruptcies that's going to take place very shortly unfortunately.

So we touched on this a little bit, but let's really discuss in general, besides of course, basic loan documents, there's generally an inter creditor or subordination agreements. Again, take a look at these if you have them. Make sure you comply with notice and cure periods as applicable. You'll see a lot of these and if you will, different document segments where you really have to have a 30 day notice. So again, please read your loan documents our own documents, got rid of that years ago, just a result. But if you have, I would say the traditional Fannie May loan documents that definitely they have notice and cure periods within them under participation agreement look into lender rights and who has the rights? Is it the lead lender, participating lender? Generally speaking, the lead lenders, the person who put together the participation, so they're going to have more rights to exercise or not exercise that particular avenue.

Junior lien holders, they're going to start making claims as well especially if you guys in your senior position start foreclosing. Do they have standing? Can they actually sue you take California because this is top of mind right now. They could sue you I suppose, but they have actually have a requirement to cure your loan in order to have any rights underneath it, unless of course there's something invalid with your loan itself or they must provide, provide notice of the junior holders in most states, California being wanted them that you're foreclosing on the property. Any thoughts on that?

Darlene Hernandez:

With respect to the junior lien holders I'm seeing an uptick in mechanics, lanes claims and litigation foreclosure and mechanics lanes. And it's interesting how despite covid they still feel that because there may be delays in foreclosure proceedings on some of our client's properties that they would still be able to recover and perfect their lean. So that's one of the trends that I'm seeing.

Anthony Geraci:

Absolutely, absolutely. You want to move up? Yeah, we go. So kind of summarize unfortunately, I think you guys know I'm pretty much a bottom line person. I try to tell you everything I can. This is such a bigger discussion that it really comes down to your agreements. All of them are contracts, whether it's a loan or purchase agreement, these are going to be different agreements and it really depends on what you have in those agreements. Anticipate breach right now. I can tell you, I'm not sure there's many segments. I know it's a theoretical and actually I know a few businesses that are growing during this time, especially in the health related areas. But a lot of businesses are not either not growing break even, which would be helpful. Maybe they're declining slightly or in the case of restaurants or others affected directly by this order, greatly affected by the current way of the land right now anticipate that especially in the restaurant industry, anticipate a breach apartment.

Buildings anticipate a breach. These people have been told, Hey, you won't be evicted don't worry about it. Don't pay your rent. As shocking as I'm sure it comes to me and all of you. That's the government's response. And yet at the same time, the question I've had on the tip of my tongue is great. Who's paying the mortgage for the apartment? Building owners? Of course that we've been silent on that one. Just telling other people, oh, don't worry about it, you just don't have to pay for your rent. So anticipate breach, not because the owners want to, but maybe they've been living off that property and are unable to pay the mortgage itself. Offense is really our best advice for you. Like I said before, I, I'm very much in the relationship business. I think all of us are get to know your borrowers or buyer in this case and really find out because these are so fact intensive, you're going to want to know everything that's going on on their side of the equation.

And we have a question actually here about a buyer who waived their due diligence period. And they're basically on Eva close, it sounds like they need to extend the escrow for 30 days and the seller agreed to it. And now of course there's this major issue about coronavirus. So the question comes down to that's such a fact intensive, but also what? Take a look at your contract itself what really occurred there. And I would almost liken that to an earlier comment of is it really about coronavirus or are they just using today's news to take advantage of the situation look into their business dealings. And again, at least in California, economic damage alone is not going to get a sympathetic judge. There has to be a little bit more there. And especially if they're waving D due diligences and stuff like that. Sounds like you'd have a strong argument accordingly.

But yeah, definitely offense in this case, knowing more of what's going on in the borrower or buyer's mind is going to help you either decide to enforce this agreement to accept liquidated damages or different aspects of that. And just know your options before you act really comes down to take a look at your contract. I know I beat that with a divorce at this point, but these are so factually intensive that that's really what it's going to come down to. Know you. If you have any questions on it, please talk with an attorney to get advice on it, but what's in your contract And also knowing the motivations as well as where are your borrowers at. It's going to help you make the most informed decision. Darlene, any thoughts on that one?

Darlene Hernandez:

Absolutely Anthony, I agree with you. It's good to know what options that are available to you. Communicate with your buyer or your borrower find out if there can be any accommodations and then if the parties don't agree at least understand what the terms of your contract say as far as any defenses such as force majeure or impossibility, if those can be raised. And if the parties are unable to agree, there's other options available. There's mediation and there's also arbitration. And so those are two available remedies that the parties can participate in short of having to litigate. And if you have any questions about litigating in terms of enforcing any agreements you can reach me or Anthony after the webinar and we could discuss your particular case further.

Anthony Geraci:

Wonderful. We've got some questions already, Darlene. So I've got one I think I'm going to toss to you here. And the question is, in a construction loan agreement, can you include a force clause that favors wonder only i e an veno like coronavirus excuses, lenders performance of funding construction advance, or does a force clause have to be mutual to be enforceable?

Darlene Hernandez:

Anything is negotiable. So if you introduce that into your contract and the other party agrees to it or has it reviewed by another attorney there's nothing wrong with that.

Anthony Geraci:

Awesome. And then oh, I answered this one I think already was the good faith deposit and seller paid an extension fee and now they're trying to use coronavirus on that one. I dunno if you had additional thoughts on that particular scenario, Darlene, please feel free to jump in.

Darlene Hernandez:

Can you repeat that one more time, Anthony?

Anthony Geraci:

Oh sure. And I'll give you the whole scenario here. Buyer waived their due deal of this period, thus contractually releasing buyer's $500,000, good faith deposit and agreed to pay seller a hundred thousand dollars extension fee to extend the close of escrow for 30 days. Coronavirus or covid 19 suddenly becomes a major issue, which causes buyers' lender and some the buyer's investors to withdraw from the deal based on the scenario. A seller entitled to keep the buyer's $500,000 good faith deposit and a hundred thousand extension fee is damages for buyer not purchasing seller's property and agreed upon price and date slash time.

Darlene Hernandez:

I would have to see the agreement itself and see what the language provides for. In general the earnest money deposit would be forfeited but we would have to take a look at the actual language of the contract.

Anthony Geraci:

No, absolutely, and I completely agree with you. Unfortunately, I guess that reinforces the fact that this really is based on your contracts themselves. So yeah, take a look at them obviously if you need any thoughts or help, please get with us, get with an attorney, you trust anybody who can help you through this time. And I think probably the biggest thing that maybe you may not be doing is really get to know the posing side, the buyer or borrower in this case that's going to give you the most information to make the best decision you can.

Wonderful. If you want to move us to the next slide. Okay. So without any further questions, that's kind of going to be it for our webinar. I want to tell you about some of the other things that we're going to be doing on Thursday, May 14th. Kevin Kim and his team are going to talk about qualified opportunity zones new regulations and extensions on Monday May 5th. Let's try that again. May 18th. We have one origination fraud 101, obstacles and remedies for litigation or bankruptcy. And Darlene, I think you're on that one as well, correct? Yes. And Marisol Nagata. Oh, wonderful. Yeah, our bankruptcy person. And then on May 25th we're going to talk about commercial real estate and covid 19 impacts and predictions for the commercial real estate market. Well, appreciate everybody being on this call and webinar. If you have any questions whatsoever, please reach out to us, reach out to your attorneys, reach out to somebody. Stay safe during this time and hope everything is going well, otherwise for you and we're here for you any way we can. Take care.