Real Estate Industry Alerts Tracker - May 15, 2020 Issue
New York City Bill; Lease Guaranties
This week, the New York City Council enacted Int. No. 1932-A, which is awaiting the Mayor’s signature. Section 22-1005 of the bill provides that any provision in any commercial lease or other rental agreement that provides for a non-entity guarantor to be liable for the payment of rent or additional rent upon the occurrence of an event of default is not enforceable against such individual guarantor(s) if the tenant: (1)(a) was required to cease serving food or beverages on premises or to cease operations under the Executive Order 202.3 issued by Governor Cuomo on March 16, 2020, (b) the tenant was a non-essential retail establishment that was subject to in-person limitations under Executive Order 202.6 issued by Governor Cuomo on March 18, 2020, or (c) the tenant was required to close to members of the public under Executive Order 202.7 issued by Governor Cuomo on March 19, 2020, and (2) the default or event causing the guarantor to be liable occurred between March 7, 2020, and September 30, 2020. It is not clear from the bill itself whether it would apply only to guaranties that are baked directly into the lease as the language of the bill suggests, or also to guaranties that are standalone documents separate from, but referenced in, the lease. From a practical standpoint, it should not make a difference as to whether the guaranty is incorporated directly into the lease or is part of a separate standalone guaranty document since the intent of the interim bill is to protect the individual guarantor’s assets. Separately, given the bill limits the protections to individual guarantors, small family holdings companies (which are sometimes the guarantor under “good guy” guaranties) will likely not be protected under this legislation.Additional Relief for Delinquent Fannie and Freddie Borrowers
Both Fannie Mae and Freddie Mac have announced a COVID-19 payment deferral program at the direction of the Federal Housing Finance Agency (FHFA). Beginning July 1, 2020, servicers of Fannie and Freddie-backed mortgage loans may offer a payment deferral to borrowers who have become delinquent as a result of a COVID-19-related hardship. Under the programs, mortgages will be returned to a current status after up to 12 months of missed payments. The amount of a borrower’s delinquency is moved into a non-interest bearing balance that will be due and payable upon the earlier to occur of the maturity of the loan or earlier payoff. The remaining terms of the mortgage continue unchanged. The FHFA, which oversees government sponsored entities (GSEs), also recently announced that the Fannie and Freddie moratoriums on evictions and foreclosures have been extended and will now last until at least June 30, 2020. The moratorium under each GSE’s current program was set to expire on Sunday, May 17, 2020.Additional details and eligibility requirements on the Fannie Mae payment deferral program may be found here and specifics concerning the Freddie Mac program here.
Additional information on Fannie Mae and Freddie Mac’s eviction and foreclosure moratorium extension may be found here.
New Jersey Re-Opens Non-essential Businesses and Restarts Non-essential Construction
New Jersey Governor Phil Murphy signed an executive order allowing non-essential retail businesses to re-open for curbside pickup only and for non-essential construction to resume effective 6 a.m. on Monday, May 18, 2020. Drive-in and drive-through services will also be allowed to resume with social distancing guidelines in place.Additional information may be found here.
Pennsylvania Senate Introduces Bill Related to Business Interruption Insurance
Since the outbreak of the COVID-19 pandemic, many policy holders seeking coverage for “business interruption” have had their claims rejected, either because the policy contained a “virus exclusion” or because the loss was not a “direct physical damage or loss” to property. Pennsylvania recently introduced bipartisan Senate Bill No. 1127 (the “Bill”), that interprets the phrase “direct physical damage” to include the presence of COVID-19. Under the Bill, as proposed, if a person who tested positive for COVID-19 has been present in, or if the presence of COVID-19 has otherwise been detected in, a building, an office, a retail space, a structure, a plant, a commercial establishment, or other area of business activity, that area of business activity is deemed to have experienced property damage. The Bill also classifies the Governor’s executive order closing all non-essential businesses as an order of civil authority under a first party insurance policy and deems such closures to be the direct result of physical damage at or in the vicinity of those businesses.A copy of the Pennsylvania Senate Bill No. 1127 may be found here.
Federal Government Official Predicts New Real Estate Projects in D.C. Area
In a webinar last week, Dan Mathews, the General Services Administration Public Buildings Service Commissioner said he expects that the pandemic will result in the federal government requiring additional space, which will likely lead to new real estate projects. He noted that, in addition to public health agencies expanding to combat the pandemic, he expects additional projects to stimulate the economy.Additional information may be found here.
Commercial Evictions
Many states have enacted and then extended orders related to residential and/or commercial eviction proceedings. In states where the filing of commercial evictions has not been specifically barred, hearings have been postponed, or court facilities have been closed, effectively delaying eviction actions even without an eviction moratorium.New York: Governor Cuomo extended an order suspending enforcement of evictions of residential and commercial tenants until after August 20, 2020. New filings of commercial eviction proceedings are currently prohibited under the March 22 order by the Chief Administrative Judge of the New York State Courts, which prohibits the filing of any matter of a type not included on the “essential” matters list that is an exhibit to the order – commercial evictions are not listed as an essential matter.
Connecticut: Connecticut has issued a stay on the execution of evictions until June 2, 2020. Additionally, there is a moratorium on commencing residential eviction proceedings until July 1, 2020. Although there is no such bar on commencing commercial eviction proceedings, Connecticut courthouses that are still open during the pandemic are only addressing “Priority 1” business functions, which do not include eviction proceedings. Furthermore, eviction proceedings are also currently not included in the “non-Priority 1” matters that are being heard and adjudicated remotely.
New Jersey: New Jersey has placed commercial lease evictions on hold until after May 31, 2020. There are no restrictions against commercial landlords commencing an eviction action against a commercial tenant, but matters will not be addressed before May 31, 2020.
New York Residential Rent Freeze For Regulated Tenants
Last week, the Rent Guidelines Board, with a 5-4 vote, cast a preliminary vote approving a rent freeze amid the pandemic. It also took another preliminary vote to increase rent by one percent for renters with two-year leases, with the increase to be effective in the second year of the lease. That increase would apply to tenants that enter into leases after September 30, 2020. The Rent Guidelines Board also rejected tenant advocates’ request for a rent reduction, and rejected landlord requests for a 2% increase on one-year leases, and a 4.75% and 5.5% increase on two-year leases.Additional information may be found here.
Heard Around the Industry
“Shutdown” Provisions in New Leases and Pandemic Insurance: As a result of the pandemic, many developers and landlords believe new leases will include “shutdown” language to deal with government mandated closures of businesses. Such provisions would provide for rent reductions of 50% for the first x number days of a government shutdown, with a mutual right for landlord or tenant to terminate the lease if the government shutdown extends beyond that period. Some tenants are seeking the rent reduction option for the first 90 days of a government shutdown with a termination option after 90 days, while others are seeking the reduction for the first 12 months of a shutdown, with a termination option thereafter. Several landlords are responding stating they wouldn’t agree to such termination options unless tenants carry pandemic insurance.Tenant Advocates Argue Against the Extension of the Eviction Moratorium in New York: In a strange twist, tenant advocates are arguing against New York Governor Andrew Cuomo’s recent 60-day extension of the statewide commercial and residential eviction moratorium through August 20, 2020. The existing moratorium provides blanket protections for both commercial and residential tenants through June 18, 2020, without exception. However, the new executive order limits those protections to tenants that are unable to pay rent but the tenant must be eligible for unemployment or “otherwise facing financial hardship due to the COVID-19 pandemic.” Critics of the extension note that the recent executive order extending the moratorium is silent on what constitutes a “financial hardship” and it shifts the burden onto tenants to show they qualify for the protections. Furthermore, those same critics believe that tenants who earn their living off the books, or are undocumented immigrants may not qualify for the eviction moratorium protections afforded under the extended program, where they would have qualified under the initial moratorium.