Negotiation and forbearance – The coronavirus/COVID-19 pandemic presents challenges and opportunities to the real estate, business, and finance markets.
Warning for sensitive readers: This piece is highly metaphor-laden. Please take all suitable self-protective measures.
The apocryphal tales have begun. Due to temporary or permanent unemployment resulting from the Coronavirus/COVID-19 pandemic, residential and commercial tenants have begun to miss (or at least delay) rent payments. 1 As a consequence of those rent payment lapses, commercial real property owners are at risk of missing mortgage payments. Likewise for homeowners who may similarly miss mortgage payments. And also businesses throughout the supply chain with non-real estate loan payments which are at jeopardy as a consequence of operational slowdowns or shutdowns.
To use a double metaphor, the dominoes which can fall from the opening of this systemic Pandora’s Box of payment defaults could be: (1) increased evictions and foreclosures 2; (2) decreased property tax, insurance, and owner association collections; (3) deferred maintenance; (4) decreased, delayed, or missed dividend payments or other distributions to owners or business equity; (5) substantial amounts of collateral in all categories for creditors to maintain and dispose due to foreclosures; (6) claims against credit insurance, investment account margin calls, business entity capital calls, and other financial ‘parachutes’ (number three) and risk mitigation mechanisms; and (7) foreclosure collections lawsuits, tax deeds, bankruptcies, assignments for the benefit of creditors, and deeds in lieu of foreclosure.
But this apocalyptic recession (or even possible depression) scenario is not necessary. With great challenges come opportunities. This is that time – to use a fourth metaphor – to move ahead of the curve.
Now, before the other shoe drops (fifth metaphor), tenants, borrowers, business owners, and all others similarly situated with an eye to the bottom line (number six) should: (1) find and review their leases, mortgages, loan agreements, security agreements/financing statements, personal guaranties, investment contracts, and other agreements and instruments with financial implications; (2) evaluate their responsibilities and rights; (3) determine their cushions (seven) of available cash and other cash-equivalents (such as stocks and bonds) to weather the storm (eight); and (4) begin planning to attend to their short- and long-term payment abilities. Oh…and (5) open a realistic conversation with their creditors or lenders. (Understandably they may want to conduct those dialogues with their lawyers and accountants in-tow [number nine], due to the implications which could result from an effective admission of a predicted inability to pay on a timely or complete basis.
Mirror the paragraph above for landlords, lenders, investors, credit insurers, and their parallel creditor market players (number 10) on the other side of the table (11).
This is the time when debtors and creditors must work assiduously and collaboratively towards fashioning creative and good faith measures to protect their own, and the other side’s, respective economic interests. Debtors do not want to lose their assets or diminish their financial status, particularly if their payment deficiencies are not actually due to self-inflicted wounds (number 12) such as the current pandemic. Creditors do not want to lower their payment streams (at least in unpredictable manners), marshal unwanted collateral which then has to be managed, or mar their own investor relationships. The end-product of these sorts of workout negotiations are forbearance agreements, in which the parties will alter the terms of their existing arrangements, debtors will make payments and engage in other activities pursuant to the new agreements, and creditors will refrain from taking steps to protect their collection interests (such as by standing down [13] from commencing new or pursuing existing lawsuits).
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Here, then, are some common-sense topics which can be incorporated into forbearance agreements:
- Decreasing currently owed principal, interest, and other payments due, typically by adding those amounts to replacement principal amounts
- Extending payment due dates
- Extending maturity dates
- Increasing principal to meet the debtor’s predicted ongoing operational needs
- Adjusting interest rates, either fixed or a market adjustable basis
- Requiring additional collateral
- Requiring additional guarantors
- Requiring additional or different insurance
- Requiring specific ongoing maintenance
- Requiring enhanced reporting
- And other debtor covenants as far as the eye can see (number 14)
So certainly, while “ these are the times that try men’s souls” 3 (not a metaphor, but an on-point and pithy quote, so this writer claims number 15), they do not necessarily have to end in devastating financial outcomes. Through rational negotiations (mediated by neutral third-parties, if needed) resulting in forbearance agreements, the parties can weather the storm (16 – actually number eight again) until times and conditions return to ‘normal’. (This writer has prepared forbearance agreements. They are, indeed, possible and used in the real world.)
The take-away: Consider forbearance agreements early, while the parties still have time and the means to engage in calm negotiations.
For information about Bogin, Munns & Munns’ own response to Coronavirus readiness.
1 This writer heard as such this past week during a conversation with a commercial property owner.
2 These particular risks have been mitigated, in part and at least temporarily. See, for example, the federal government’s initial response to the matter at https://www.consumerfinance.gov/about-us/blog/guide-coronavirus-mortgage-relief-options/ and Florida’s Governor’s statewide initial response at https://www.flgov.com/wp-content/uploads/orders/2020/EO_20-94.pdf. It should be expected those responses will evolve.
3 Thomas Paine, of course. https://www.ushistory.org/paine/crisis/c-01.htm.
For other Coronavirus/COVID-19 articles in this series see: https://www.boginmunns.com/a-brief-note-for-floridas-individuals-families-and-businesses-about-extensions/, https://www.boginmunns.com/coronavirus-state-and-federal-resources-to-florida-laid-off-and-furloughed-workers/, https://www.boginmunns.com/another-important-coronavirus-covid-19-pandemic-resource-the-paycheck-protection-program/, https://www.boginmunns.com/the-coronavirus_pandemic-resources-for-floridas-businesses-families-and-individuals/, https://www.boginmunns.com/life-in-the-times-of-the-coronavirus-week-2/, https://www.boginmunns.com/life-in-times-of-coronavirus/.
– For more information, call Philip N. Kabler of the Gainesville, FL office of Bogin, Munns & Munns at 352.332.7688, where he practices in the areas of business, banking, real estate, and equine law. He has taught business and real estate law courses at the University of Florida Warrington College of Business Administration and Levin College of Law and is the President-Elect of the Eighth Judicial Circuit Bar Association.
NOTICE: The article above is not intended to serve as legal advice, and you should not rely on it as such. It is offered only as general information. You should consult with a duly licensed attorney regarding your Florida legal matter, as every situation is unique. Please know that merely reading this article, subscribing to this blog, or otherwise contacting Bogin, Munns & Munns does not establish an attorney-client relationship with our firm. Should you seek legal representation from Bogin, Munns & Munns, any such representation must first be agreed to by the firm and confirmed in a written agreement.
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