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COVID19 Legal Update 04-20-20

Section 1031 Like-Kind Exchange Disaster Extensions and COVID 19:
 

Last week, the IRS issued Notice 2020-23, extending a variety of deadlines, specifically including 1031 deadlines. Although the Notice is confusing, because it is not written like the typical disaster relief notices, this Notice extends any 45-day or 180-day deadline that occurs between April 1 and July 14, to July 15, 2020.

Here are two examples to illustrate the current extension.

  • Example 1: Exchange began April 1, 2020. 45th day is May 16, which would be extended to July 15, 2020. Taxpayer must still close on replacement property by Sept 28, which is the 180th day; because Sept 28 is after the last day of the disaster period (July 15).
     

  • Example 2: Exchange began Dec 31, 2019, 45th day is Feb 14, 2020. ID period is not extended because it is before April 1. The 180th day is June 28, which would be extended to July 15, 2020.

 

The CARES Act: Forbearance of Multifamily Owners with Federally Backed Mortgage Loans:

On March 27, 2020, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  Section 4023 of the CARES Act contains several provisions that assist borrowers of federally backed multifamily mortgage loans due to the COVID-19 outbreak.  Multifamily borrowers with a federally backed multifamily mortgage loan experiencing financial hardship due, directly or indirectly, to the COVID-19 emergency may request forbearance.  The loan must have been current on its payments as of February 1, 2020. The request for relief must be submitted to the borrower’s servicer and such request may be verbal or written.  Upon receipt of oral or written request, the servicer shall: (i) provide forbearance for up to 30 days; and (ii) extend forbearance for up to 2 additional 30-day periods, upon the request of the borrower, provided that such request is made during the covered period (the “covered period” begins upon enactment (March 27, 2020) and ends on December 31, 2020 or, if sooner, the termination date of the COVID-19 national emergency as declared by the President); and

 

The CARES Act: Temporary Moratorium on Eviction Filings:

The CARES Act contains several provisions that prevent the eviction of residential tenants of certain buildings secured by Federally backed mortgage loans under several federal programs for a 120-day period.  The key provisions include the following:

  • The CARES Act provides that for a 120-day period beginning on March 27, 2020 (the “Moratorium Period”), the landlord of a “covered dwelling” cannot (A) make, or cause to be made, any filing to initiate a legal action to recover possession of the covered dwelling from the tenant for nonpayment of rent; and (B) impose any fees, penalties or other charges on a tenant for late payment of rent.
     

  • The CARES Act further provides that during the Moratorium Period the landlord of a covered dwelling cannot: (A) require a tenant to vacate a dwelling unit located in the applicable property before the date that is 30 days after the date the tenant is provided a notice to vacate; and (B) may not issue a notice to vacate until after the expiration of the Moratorium Period.

 

Key Terms:
 

  • The CARES Act defines “covered property” to include, among other thigs, any property that has a Federally backed mortgage loan or a Federally backed multifamily mortgage loan, such as Fannie Mae, Freddie Mac or HUD.
     

  • The CARES Act defines “dwelling” by reference to Section 802 and 803(b) of the Fair Housing Act as apartment buildings (generally meaning buildings of more than four units), nursing homes, group homes, seasonal facilities, residential facilities, mobile homes, trailer parks, condominiums and certain single family homes.
     

  • The CARES Act defines “covered period” as the period commencing on March 27, 2020 and ending on the first to occur of (A) the termination date of the national emergency concerning the coronavirus disease outbreak declared by the President on March 13, 2020 and (B) December 31, 2020.
     

For more detailed information on both Forbearance of Residential Mortgage Loan Payments for Multifamily Properties with Federally Backed Loans and Temporary Moratorium on Eviction Filings, please reference CARES Act sections 4023 and 4024 or contact your loan servicer.

 

The Cares Act: Effect on Commercial Leases:
 

The Temporary Eviction Moratorium only impacts eviction filings for certain residential tenants and does not address eviction filings for commercial tenants.  Prior to the pandemic, the retail industry was already facing challenging times. Store closures reached record levels in 2019 primarily driven by “big name” store closures. A large factor contributing to the existing difficulties facing the retail industry is the rise of e-commerce, which is predicted to continue and accelerate as nonessential stores are forced to temporarily close. The existing challenges facing the retail industry will clearly be exacerbated by the outbreak of COVID-19.

With retail bankruptcies expected to continue to rise, parties in the retail space, especially landlords and vendors, need to closely monitor their counterparties to best position themselves in the event of a bankruptcy. Section 365 of the Bankruptcy Code provides debtors with the ability to assume or reject executory contracts and unexpired leases and lease rejection damages are capped, but there are some specific protections built in for landlords of commercial real estate.  If one of your tenants should file, or if you even suspect that a tenant will file, bankruptcy, then you should immediately contact bankruptcy counsel as assessing your position in advance puts you in the best position for making quick, informed decisions when faced with these situations.

 

The Cares Act: Paycheck Protection Loans:
 

If you are not familiar with the Paycheck Protection Loan program, please call your banker to discuss. These are U.S. Small Business Administration (SBA) insured loans that are intended to incentivize small businesses (less than 500 employees) to continue to maintain their payroll and pay their rent, utilities and mortgages.  In a nutshell, a small business can borrow approximately two and one half times their average 2019 monthly payroll.  The loan bears interest at 1%, has no payments for 6 months, and is then repaid over 18 months.  Amounts spent on payroll, rent, utilities and mortgage payments over the 8 weeks after receiving the loan (with no more than 25% for non-payroll items) may be forgiven without tax consequences.  For this purpose, an employee’s compensation over $100,000 per year is not taken into account, and there are reductions in the amount subject to forgiveness based upon reductions in employee head count or reductions in pay.  You must apply through a bank, and at the moment most banks are limiting this to existing commercial customers. 

 

 

Loan Covenants affected by COVID-19:
 

Many retail businesses and office buildings closed or operating at a reduced capacity for an unknown period of time, either voluntarily or due to a government mandate, and multifamily tenants have lost their jobs and are able to pay their rent (and landlords possibly restricted from evicting and replacing tenants). As a result, rental streams are likely headed downward for some unknown period, creating a real possibility of trouble ahead for the owners of commercial properties and the lenders that hold mortgage loans encumbering such properties. These borrowers and lenders will want to examine their loan documents to identify the problems that could arise and begin to devise and discuss solutions.

 

The first place that lenders and borrowers should look when examining a loan in the face of COVID-19 is any financial tests used in the loan documents, such as debt yields, loan to value ratios (or “LTV”), debt service coverage ratios (or “DSCR”), net worth and/or liquidity requirements.  If a borrower, a property or a guarantor no longer satisfies a financial test, the lender’s rights with respect to such failure will be set forth in the loan documents and those provisions should also be reviewed.  Some of the rights that can be triggered by such failures include, (i) declaring a default, (ii) springing a cash management structure into place (ii) replacing the  property manager, (iv) requiring a replacement guarantor, or (v0 appointing a receiver.

 

Loan documents may contain so-called Material Adverse Change (MAC) clauses which permit the lender to call a default (or pursue a payment guaranty) if there is a material adverse change in the operations or financial condition of the borrower, the ability of the borrower/guarantor to pay its debts, or the value, use or operation of the property.   

 

Loan documents may also require that the borrower notify the lender if it becomes aware of certain matters, such as the presence of COVID-19 at the property.  Even maintenance covenants may take on a new light in the age of COVID-19. Borrowers and lenders should consider the standard.  Lastly, certain property types (in particular, retail) may have ongoing covenants to remain open during certain hours that will need to be considered in connection with voluntary or involuntary temporary closures caused by the COVID-19 countermeasures.

 

Force Majeure Clauses During the Pandemic:

 

In this period of considerable market volatility, stay at home orders, restaurant and entertainment closures, and the like, force majeure provisions in various agreements are coming under considerable scrutiny by parties to deals, and potentially the courts. In certain circumstances, a force majeure clause might allow the purchaser to walk away from a transaction between signing and closing depending on the circumstances and the specific language used.  It’s highly likely that purchasers will consider invoking these clauses looking for a way out of a deal they can no longer close or that they feel no longer justifies the purchase price, or in an attempt to renegotiate a signed deal.
 

There is no single “standard” force majeure clause, so each contract, lease and loan document will need to be reviewed.  Having a force majeure clause that specifically references epidemics or pandemics will be the most helpful to a party wanting to obtain relief from a contractual obligation as a result of the coronavirus pandemic. However, few contracts outside of the healthcare industry typically have such specific references.  Many such clauses include “Acts of God,” which would seem to describe a global pandemic, but this varies from jurisdiction to jurisdiction.  In Texas, this is limited to matters solely caused by forces of nature. Also, there is an issue as to whether the cause is the pandemic or one or more orders of the local, state or federal government. Similarly, there is an issue as to whether performance was made impossible, impractical or illegal.

 

Recording Jurisdictions-Operating Status:
 

While there are only 2 Recording Jurisdictions that are actually closed in Texas as of this moment, many have modified hours of operations. For a complete list of Texas recording office operating status, please click on this link which links to the ALTA website:  https://www.alta.org/business-tools/county-status.cfm?state=TX.