Commercial Real Estate in the Age of Coronavirus

By David J. Petersen

The coronavirus (COVID-19) pandemic has brought a whirlwind of changes to how business is done in Oregon and across the country, and commercial real estate is no different. Enough time has passed, however, that a pattern of prominent issues has begun to emerge.

Take Care of Employees

Every employer’s immediate priority should be to minimize the risk to its employees. This is no different for real estate businesses. Policies and protocols should be adopted or reexamined for both remote work and workplace safety and hygiene. You can find several employment-related updates from our Labor and Employment group here.

Allow More Time for Transactions

Many things that could be done quickly in normal times are taking longer due to the practical hurdles created by stay-at-home orders and social distancing. Agreements should build in extra time for things like environmental studies, surveys, property inspection reports and lender review. This is particularly true for transactions that require notarized documents, since it has become more difficult and risky for signers and notaries to meet face-to-face. Twenty-seven states have enacted permanent or emergency rules allowing for remote online notarization, but Oregon is not yet one of them. Getting documents recorded also takes longer, with in-person trips to the recorder’s office either non-existent or extremely limited. Escrow companies are adapting to the new environment with resources like electronic recording and mobile escrow and notary services, but more time will be needed to make these services more streamlined and readily available.

Mind the Gap

While most county recorder offices continue to accept electronic recording, there are some exceptions. If a recording delay or office closure results in a gap in time between funding a transaction and recording, lenders and buyers should request title insurance coverage during the gap. Commercial title insurers are developing procedures to handle an increase in gap coverage requests, such as giving local managers the authority to issue coverage rather than having to refer the matter to a regional underwriter for approval. Typically, gap coverage will require an indemnity of the title insurer from the seller.

Keep Lease Communications Flowing, but Confidential

So far, commercial landlords and tenants seem to have recognized their co-dependence and are for the most part working together to find economic accommodations that work for both parties. A relatively new condition appearing in some lease accommodation agreements is to require the tenant to apply for an SBA loan under the CARES Act as a condition of rent relief.

This spirit of cooperation should extend to keeping each other up-to-date with information that may endanger public health, such as confirmed infections in employees or building users. But do not disclose unnecessary information and be sure to respect the privacy rights of individuals involved. As each tenant’s situation is different, landlords should also consider requiring tenants to keep economic concessions confidential, subject to carve-outs for tenant’s agents who need to know, or as required by law.

Don’t Assume the Pandemic Is a Force Majeure

Leases and contracts of every sort commonly contain a force majeure clause excusing delays in performance for various reasons beyond the control of the parties. A pandemic might be a force majeure or it might not. Similarly, the pandemic itself might not meet the definition, but a consequence of the pandemic (like a government shelter-in-place order or a shortage of materials) might. Also, some force majeure clauses limit the types of performance that can be delayed – for example, many leases with force majeure clauses do not allow force majeure to justify a delay in paying the rent. Each agreement is different and the specific language should be reviewed closely in each case before concluding that the force majeure clause can (or cannot) be relied upon.

Construction Delays May Increase

Some jurisdictions, like Washington State and the San Francisco Bay Area have restricted non-essential construction. Exceptions vary – for example, Washington allows government construction to continue, and the Bay Area exempts infrastructure and health care. Oregon has not done so yet, so most projects in the state continue. However, the number of workplace complaints has dramatically increased, as has absenteeism. For example, in the first three weeks of March, Oregon OSHA received 67 virus-related workplace complaints about construction sites. Many general contractors have sent preliminary notices to owners explaining that labor or materials shortages have not yet occurred, but may in the near future, which could result in construction delays. Whether these delays are justified or excusable may turn on the force majeure language in the construction contract, as discussed above.

Hurdles to Legal Enforcement

Many states, including Oregon have enacted moratoria on residential evictions for non-payment of rent during the crisis. Increasingly, jurisdictions are trying to extend these protections to some commercial tenants, such as Oregon and San Francisco. Moratoria are popping up to protect residential mortgagors as well. The federal Department of Housing and Urban Development has issued a 60-day moratorium on foreclosure of FHA-insured single-family loans. The limitations are not only legal — practical limitations like courtroom occupancy restrictions also abound. Developments in this area are quickly changing and should be monitored closely.

We anticipate that some or all of the foregoing issues will likely arise for our commercial real estate clients during this pandemic. But please note that every situation is different, and often outcomes turn on issue-specific language in agreements and other legal documents, so please contact one of our attorneys to discuss your issues in greater detail. Also, every day brings new developments, and the real estate community adapts in response. Accordingly, our advice to clients continues to evolve, and we recommend that you check our website and our Ear to the Ground blog regularly for updates.

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