Real Estate Industry Alerts Tracker - May 29, 2020 Issue

Mayor de Blasio Signs New NYC Law Limiting the Enforcement of Certain Personal Lease Guaranties

As an update to our previous issue, on May 26, 2020, Mayor Bill de Blasio signed into law the New York City Council’s Bill Int. No. 1932-A. The new law is codified as Section 22-1005 of the New York City Administrative Code. It prohibits the enforcement of any provision in a commercial lease or other rental agreement” that makes any individual who is not the tenant liable for payment of rent, utility expenses, taxes owed, or fees and charges related to routine building maintenance upon the occurrence of a default, if certain conditions are met. As we previously reported, while the new law’s intent is to prohibit the enforcement of personal guaranties against individual guarantors, the law as written fails to account for the fact that fequently lease guaranties are provided for in a standalone agreement (a separate guaranty document) between the lessor and the guarantor, and not in the lease itself. It remains to be seen whether courts will interpret this language so broadly so as to include lease guaranties as rental agreements.” Commentators have also pointed out several other issues with the law being vague and overly broad. There will also likely be constitutional challenges to the law given many view it as violating the Contracts clause, which bars a state from enacting a law that impairs the obligation of private contracts.

Additional information may be found here.

New York Landlords File Lawsuit in Federal Court Against Governor Cuomo’s Order Restricting Evictions

In our May 15th issue we reported that tenant advocates are actually against New York Governor Andrew Cuomo’s May 7 order providing for a 60-day extension of the statewide commercial and residential eviction moratorium through August 20, 2020.  They argue that the new order fails to provide the blanket protections of the existing order because the ban on evictions under the new order only applies to tenants who are eligible for unemployment or otherwise facing financial hardship due to the COVID-19 pandemic.” As expected, landlords are also against the Governor’s May 7 order.  On Thursday a group of New York landlords filed suit in federal court against the order arguing that the Governor’s new ban on evictions violates their due process rights and constitutionally protected right against takings.” The plaintiffs claim the order has given carte blanche to tenants to withhold rent without immediate repercussion”. The plaintiffs’ claims are based on alleged violations of the due process clause of the 14th Amendment and the contracts clause in Article 1 of the U.S. Constitution.

Additional information may be found here.

Landlord Group Files Lawsuit Against Local Ordinance Providing for a Moratorium on Rent Increases and Evictions

The Union City Housing Initiative (“UCHI”), a group of Union City, New Jersey property owners, has filed a lawsuit seeking to overturn the City’s local ordinances that prohibit rent increases and evictions of both residential and commercial tenants that cannot afford to pay rent during the COVID-19 state of emergency. On March 19, 2020, New Jersey Governor Phil Murphy signed an executive order providing for a statewide ban on all residential evictions and foreclosures for a period of two months following the end of his state of emergency declaration. UCHI claims that the City ordinance is redundant and far exceeds the Governor’s executive order by extending protection to commercial tenants. The plaintiffs also claim that the City’s moratorium on rent increases is unnecessary given tenants in rent-controlled buildings are already protected against unreasonable rent increases. UCHI’s attorney has stated that Union City’s ordinances are an excessive use of police power and that landlord/tenant rights are exclusively governed by the state. He said both the rent freeze and eviction freeze ordinances are arbitrary, capricious, and unreasonable and violate the constitutional right of equal protection of laws, impairing the right of contract and constituting an unconstitutional taking without just compensation.” The Hudson County Superior Court has denied UCHI’s request for an injunction to place the ordinances on hold until trial. UCHI’s counsel is scheduled to be back in court on June 23, 2020.

Additional information may be found here.

Proposed California Bill Would Allow Bars, Cafes, and Restaurants to Renegotiate or Terminate Leases

Last week, the California Senate Judiciary Committee advanced Senate Bill 939, which will now be heard in the California Senate Appropriations Committee in June. The proposed bill would allow small businesses, such as cafes, restaurants, and bars, to renegotiate their leases if they lost more than 40 percent of their revenue due to emergency government restrictions, and if they will be required to operate with stricter capacity limits due to continued social distancing mandates. If the landlord and tenant do not reach an agreement on the renegotiated lease within 30 days after the landlord receives a negotiation notice, then, under the proposed Bill, the tenant would be free to terminate its lease without liability for future rent, fees, or costs that otherwise would have been due under the lease. The renegotiation provision will not apply to publicly owned companies or their businesses. It would be in effect until the end of 2021, or two months after the state of emergency ends, whichever is later.

One of the Bill’s sponsors notes that while they are sensitive to the needs of property owners in terms of their loan obligations, practically speaking, landlords will not be able to collect the pre-COVID-19 rents from restaurants, bars, and cafes. In their view, the choice is not between full rent and reduced rent, instead, it is between reduced rent and no rent. The Bill, in their view, is not designed to have leases terminated, rather to give landlords and tenants space and incentives to renegotiate their leases to allow these small businesses to survive.

Landlords, however, are vehemently opposed to the proposed legislation and have mobilized in opposition, claiming that the proposed Bill is overly broad, overreaching, and unconstitutional. Landlords are concerned that tenants that may have otherwise been able to survive the closure orders, now have the opportunity to take advantage of the proposed new Bill by renegotiating leases on their terms or getting out of their leases without penalty. Landlords and landlord attorneys are concerned about landlords’ ability to meet their loan obligations and maintain their properties. They also note that renter relief proposals are more reasonable than Senate Bill 939, which would effectively re-write commercial leases for all but publicly traded companies and shift the negotiating balance entirely in the tenant’s favor.

Additional information may be found here and here.

ARRC’s Recommended Best Practices for LIBOR Transition

Unless extended, the London Interbank Offering Rate (“LIBOR”) will no longer be used as a benchmark rate after December 31, 2021.  With this deadline on the horizon, the Alternative Reference Rates Committee (“ARRC”) published its recommended best practices in order to guide market participants through the transition away from the benchmark LIBOR rate to its recommended alternative rate, the Secured Overnight Financing Rate (“SOFR”). The recommended best practices provide date-based steps that should be taken for securitizations, business loans, floating rate notes, consumer loans, and derivatives in order to successfully transition away from LIBOR to SOFR. Although the LIBOR transition is not COVID-19-related, ARRC’s guidance is particularly helpful given the current market volatility and provides milestones that ARRC believes will help minimize market disruption in the transition from LIBOR to SOFR.

ARRC’s best practices recommendations may be found here.

Heard Around the Industry

Sale/Leaseback Transactions on the Rise as Property Owners Seek Liquidity: In response to the impact of COVID-19 on the economy, businesses seeking to strengthen their capital reserves for immediate needs and other activities that are core to their businesses have turned to sale/leaseback” transactions. By using this transactional structure, companies get the benefit of a cash infusion from the sale. At the same time, by leasing back the property from the purchaser under a triple net” operating lease, they are able to retain possession of their facilities and not be concerned about moving into, and building out, a new facility.

Companies Looking to Office Space in the Suburbs: Real estate brokers and landlords have seen a surge in interest in office space outside of New York City from media and technology companies, law firms, and financial firms. The COVID-19 pandemic has raised questions about the safety of crowded building lobbies and elevators, as well as concerns about employees needing to use mass transit in order to commute into Manhattan. Manhattan-based financial firms are looking at suburban office space for two or three year leases. Companies are also re-evaluating how much office space they actually need, and how many of their employees can work from home permanently.

Commercial Rent Payments in New York City Have Plummet Amid Pandemic: As a result of the lockdown ordered in response to the COVID-19 pandemic, commercial tenants are falling behind in rent at unprecedented rates. While residential rent collections have also declined, the erosion of commercial rents has severely impacted landlords, particularly smaller landlords who rely on ground floor commercial rents as the largest source of their monthly income. The Community Housing Improvement Program (CHIP), which represents approximately 4,000 landlords of rent-stabilized apartment buildings, noted that among its members who also have commercial tenants, two-thirds of those commercial tenants did not pay rent in April and May, contrasted with 25% of residential tenants that did not pay rent in May and 20% of residential tenants that did not pay rent in April. The group’s members, collectively, own more than 100,000 rental units in New York City.

One of New York City’s largest commercial landlords reported that nearly all its retail clients with the exception of grocery stores and other essential businesses have sought financial relief. At the beginning of April and May, about 80% of that landlord’s retail tenants did not pay rent, although the landlord managed to collect 53% of its retail rent for April by the end of April. For its office tenants, only about 60% of tenants were able to pay rent at the beginning of April and May, but 90% of April office rent were collected by the end of April.  Another commercial landlord noted that more than a quarter of its office tenants and more than 50% of its retail tenants did not pay April rent.

Additional information may be found here.

Commercial Property Prices Growing, but Sales Plummeting: Store closures and social distancing mandates have caused a 71% drop in real estate transactions year-over-year in April. Most of the transactions that closed in April were negotiated before the pandemic spread nationally, and purchasers closed deals to avoid losing their deposits. Deals that were not as far along fell through because of social distancing requirements, travel restrictions, and closures of non-essential businesses made it difficult to complete due diligence. However, the effects of social distancing and closures have not affected pricing yet because owners have not been forced to sell.

Additional information may be found here.

Retail Construction Drops; Construction Delays Expected as a Result of COVID-19: In a recent report, an analyst at Moody’s Analytics Real Estate Information Services reviewed figures from the Great Recession of 2008 in an attempt to forecast short-term construction in three major construction sectors. According to her analysis, during the 2008 recession, apartment and retail projects saw delays of six months or more, while office construction saw delays of three to four months. Based on that experience, the analyst believes that a prolonged construction delay will also occur as a result of the pandemic. The report showed that retail construction in the first quarter of 2020 was down 70% from the fourth quarter of 2019, a two-decade low, with just 400,000 square feet completed in 80 metro areas. Based on construction completion numbers for over 80 metro areas in 30 states that had shelter-in-place orders or bans on non-essential construction, construction figures for office space for the first quarter of 2020 were down almost 85% from the last quarter of 2019, while apartment construction completions were down 82% from the same time period.

Housing Advocates Seek Rent Cancellation During Pandemic: Housing Justice for All, a housing advocate group, is pushing for the New York State legislature to suspend landlords’ ability to collect rent for the duration of the pandemic. Even though Governor Cuomo issued a 90-day moratorium on evictions in March, the housing group is concerned that millions of New Yorkers are unable to pay rent during the crisis, with the full impact landing squarely on low and middle income tenants. The group also suggests that the state could alleviate the pressure on tenants by freezing all rents for two years and by enacting legislation barring landlords from warehousing vacant apartments.