Dear Clients,
We are all experiencing an unprecedented moment in modern times which remains uncertain and changing every day. We would like the community and our clients to understand that Rosenberg & Estis, P.C. is – as always – available to guide our clients through this difficult time.
We represent a number of major Developers with projects underway, as well as many Borrowers and Lenders in construction and permanent loan situations. We have received an increasing number of inquiries from our clients with respect to these matters and want to outline for you a few areas of the greatest concern.
Construction Loans
As between Borrower, Guarantors and Lender, what constitutes “Force Majeure”, “Excusable Delay” or “Unavoidable Delay”? Delays in construction completion (affecting interim dates as well as final dates) would likely be the most common force majeure consequence and force majeure events could be numerous depending upon the clause in question – governmental mandate slowing or shutting down construction, unavailability of materials, staffing issues, etc. While there are common concepts among all loan documents, each set of documentation is unique, has been separately negotiated and needs to be evaluated independently. Should you desire, we are available and prepared to review and evaluate these provisions for our Borrower and Lender clients. NOTE: Similar provisions may be contained in ground leases, development agreements and like documentation.
Mini-Perm and Permanent Loans
No matter what the asset class, property cash flow and collections are likely to be seriously affected during this crisis. In such an environment, the ability of a Borrower to meet its on-going obligations may be challenging and the ability of the parties to resort to a judicial resolution of disputes is – at the moment at least – seriously compromised or perhaps even impossible. In addition to the difficulty of making debt service payments, other areas potentially affected by reduced collections include the Borrower’s ability to comply with DSCR tests; in many loans, failure of a DSCR test can trigger a lock box requirement. In addition, Borrowers need to be concerned about triggering a default interest accrual which can be devastating to their equity in the property. Accordingly, Borrowers would be well served to discuss with us questions such as “How do I approach my lender?” and “What should I be asking my Lender?” On the flip side, Lenders areas of concern are “How can we mitigate our risks?” and “How do we as Lender respond to a Borrower’s request for relief of debt service, maturity extension?” Lenders will likely want to be proactive and require Borrowers to “come clean” with all relevant property related information before agreeing to any relief; in this context, full disclosure and a demonstration from a Borrower that they are honest and doing all that can be done goes a long way as Lenders would rather solve problems not created by Borrower mismanagement or bad acts. In addition, in times such as these, lenders need to be sensitive to actions or statements which may give rise to claims of “lender liability.” We have years of experience and perspective representing both Borrowers and Lenders from previous events and look forward to guiding you through these issues.
Workouts/Bankruptcy
On the borrower side, where defaults exist critical analysis and timely action needs to be taken to avoid catastrophic loss. Whether a project is behind schedule or over budget, due to Coronavirus induced delays, capital market fostered challenges, or technical defaults, you must act quickly or your rights may be permanently impaired. A successful restructuring requires sound analysis and planning from a skilled and experienced team. The game is won before the team take the field. And a successful restructuring occurs before the first proposal is put on the table. With Rosenberg & Estis, we help you develop, plan and present that proposal and implement a successful restructuring. From a lender’s perspective, bankruptcy and litigation can be costly. An out of court restructuring can often be your best alternative. At times, a negotiated settlement isn’t possible, and the situation may require litigating in state, federal or bankruptcy court. And, at times the case will shift from one court to another. Only experience in these situations allows you to understand the dynamic of these situations. With a multi-disciplinary team of litigators, real estate, restructuring and bankruptcy professionals that have been involved with some of the largest restructurings in the United States, Rosenberg & Estis is uniquely positioned to advise you through these situations. Other firms can try, but our multi-disciplinary approach and experience provide you with options that other firms simply cannot provide.
Construction Contracts
Every construction job has any number of construction contracts with contractors, sub, suppliers, etc. While each is different and negotiated, there are common themes that have potential application in this crisis, and we are available to speak with you – whether developer or contractor – about your specific situation. WE HIGHLY RECOMMEND THAT IN ANY CONTRACTS CURRENTLY UNDER NEGOTIATION AND UNTIL THE CORONAVIRUS ABATES, YOU CAREFULLY CONSIDER THE IMPACTS OF THE CORONAVIRUS. Common themes include:
· Typical construction contract delay and force majeure provisions:
· AIA type forms provide for time extensions (and perhaps compensation) for delays that were not reasonably foreseeable at the time of contracting, that are beyond the contractor’s control, and cannot be mitigated by a reasonable work around plan.
· AGC/Consensus Doc and DBIA forms specifically provide for time extensions (and maybe compensation) for “epidemics.”
· In all cases, the contractor must:
· provide timely written notice (defined by the contract);
· document the specific impacts by days/types of delay and costs; and
· mitigate the delays and impacts as is reasonably possible.
· Even when not using a standard AIA, DBIA, AGC/Consensus Doc, or other industry form, the “custom” terms tend to be very similar to the forms, which have been plagiarized for several decades.
· Typical construction contract suspension and termination clauses (all of which typically require written notice, and sometimes a time to cure):
· Owners frequently have the right to suspend work for any reason, but this requires providing a time extension and frequently extra compensation;
· Same with termination provisions – these frequently allow the Owner to terminate for convenience, but also requires providing compensation for the costs of termination and typically lost profit.
· Contractors sometimes have the right to suspend work for extraordinary circumstances (usually nonpayment, but can be others), and may or may not have the ability to seek a time extension and additional compensation.
NOTE: When not specifically covered by a construction contract, it is possible that common law remedies may apply for extreme circumstances that were beyond the contemplation of the parties. In addition, it is possible that state or federal statutes may provide relief. Each of these considerations would need to be carefully researched and considered on a case-by-case basis.
Insurance Issues
There are potentially a number of insurance related issues to be considered and addressed (and policy language, including exclusions/exceptions need to be carefully read) , including:
· Builder’s Risk or Property Insurance typically provide coverage for business interruptions under certain circumstances, but may be of limited use in this case because typically, must incur “direct physical loss” – such as making the property uninhabitable or not fit for use/construction activity. This may not be the case and./or may be hard to document if there is no corona virus infection at the property.
· May be coverage for actions of civil authorities – such as a quarantine or travel restrictions
· Need to provide timely notice and keep track of actual damages:
· CGL polices should provide coverage for claims by third parties for property damage or personal injury caused to them.
· D&O coverage may come into play if the company leadership is accused of not making timely and appropriate decisions relating to the virus.
· Worker’s Compensation insurance likely will not apply to cover “ordinary diseases of life,” which likely will include the corona virus. However, if a worker is infected while on the job, Worker’s Compensation should apply.
NOTE: In this environment, employers and project/property owners should have policies in place protecting the health and safety of its workers and employees; some guidance can be found here:
· https://www.cdc.gov/coronavirus/2019-ncov/community/guidance-business-response.html
· https://www.osha.gov/Publications/OSHA3990.pdf
We are continuing to monitor this ever-changing and dynamic situation.
Please reach out to the undersigned as we are available to discuss any questions or concerns our clients have.
Sincerely,
Gary M. Rosenberg, Richard L. Sussman, Michael E. Lefkowitz, Eric S. Orenstein and Michael Castellon