After the initial article on An Idea to Avoid Financial Destruction, there have been a number of companies and state governments who have either unilaterally decided to stop paying rent or instituted a “moratorium” on enforcement actions like eviction for 90 days.
Unfortunately, without a valid mutual agreement between a lender and borrower or a Landlord and Tenant, these actions only forestall what could be a series of protracted and expensive legal fights. We still believe that the best overall outcome is for the parties to agree to an equitable series of terms.
Here are a few considerations that might be part of a 3 month agreement that could apply to both loans and leases.
- Base Rent or Mortgage principal and interest payments are suspended for 3 months (subject to adjustment based on circumstances).
- There would be no accrual of interest or penalties for these periods of non-payment.
- The non-payment during the agreed period would not constitute an event of default. Getting this agreement is critical, in that those companies that unilaterally declare they are not paying rent, they could be in technical default and subject to all of the Landlord remedies (e.g. acceleration of rent, ejectment). In some states like PA, leases include a Confession of Judgement so security deposits or guarantees can be claimed. Some releases we have read, the Lenders and Landlords would still reserve their rights to demand repayment at a certain point. Negotiating whether or not an extension of the mortgage or lease to spread recovery will be very important.
- Here are a few additional thoughts that could also be included:
a. Lease or mortgage term could be extended by the number of months of relief. This allows for some form of recapture of the missed payments. The negotiation will need to include whether the extension is in lieu of repayment.
b. If possible Tenant or Borrower would continue to pay operating expenses. In the case of utilities or property taxes, local entities may have their own pause programs.
c. All critical dates of the lease or mortgage are extended by the number of months of pause. This could include expiration dates, option notice dates (renewal, purchase, termination).
A few important considerations will be whether these are commercial agreements or residential. For businesses, another factor will be whether the location is closed or open but operating at less capacity (and therefore revenue).
The key takeaway from this is wherever possible, document the understanding to avoid unintended consequences when the dust clears Unfortunately, this will also require a lot of direct contact and will also require a willingness on the part of the Lenders and Landlords to cooperate.