The Covid-19 pandemic has raised a world-wide health emergency. The pandemic affected and continues to affect not only everyone’s day-to-day activities but also different sectors of economy, including commercial real estate market. Join us for this 5-part blog series as real estate experts from Finland, Italy, France, Cyprus and the United States tackle the subject of “Navigating Real Estate in a Post-Covid Market”.
In Part 3, Managing Partner of Aliant U.S., Jacob Stein discusses how Covid-19 has had a significant impact on all sectors of the US real estate market, from shifting consumer demand, to moratoriums on evictions, and a different approach to drafting commercial leases.
The U.S. real estate market has been on a tear over the past several years and Covid has not been able to stop it.
The growth has been fueled by quickly rising prices of single family and multi-family residential properties, as well as industrial properties. Commercial properties – office space – have been in a holding pattern. Surprisingly there has not been a decline in prices, but landlords do have to accommodate changing tenant needs. There has been a downward trend in the retail space, with no end in sight.
As of today, almost every single U.S. state has an eviction moratorium in place that prohibits landlords from evicting residential tenants. The extent of the moratorium differs from state to state. Some states extend the moratorium to commercial tenants, some prohibit the publication of the notice of eviction, some prohibit the filing of court actions, and some have suspended hearings.
Other relief is available to residential tenants in the form of mortgage forbearance (limited to 1–4-unit residential properties), and limited relief is available to residential landlords from local governments to supplement unpaid rent.
Lawyers have been busy restructuring and picking apart commercial lease agreements and negotiating new terms for their clients, including partial or full rent abatement, rent deferral, and early termination. These are typically three-party transactions as lender approval is often required.
As eviction moratoriums start to expire, we expect to see a significant rise in bankruptcy filings by tenants. Rent is rarely forgiven by landlords (as they have their own obligations to satisfy) and it is either abated or deferred. In either case tenants will have to resume rent payments or even make catch up payments, and many who have so far been floated by the government, will not have the means to do so. For tenants who have a viable business, and they want to remain at their existing location, bankruptcy may not be a viable option. In bankruptcy, tenants who want to assume the lease must catch up on outstanding obligations and provide financial assurance of future performance.
On the planning side, there has been a shift in what is important in negotiating a lease, with more emphasis on lease termination rights and force majeure clauses. Tenants are pushing for stronger early termination rights and demanding the right to terminate leases if their inability to use the space continues for more than a certain number of months. Some landlords also want the ability to terminate early and bring in a stronger performing tenant. This is particularly true where landlords receive a percentage of the tenant’s revenue.
Covid continues to be somewhat of a wild card in the real estate market, but two years in there is a lot more certainty as to the direction of the market and the legal rights of the various participants.
For more information onreal estate law in U.S. contact Jacob Stein at jstein@aliantlaw.com
Or watch watch the full webinar Navigating Real Estate in a Post-Covid Market: 5 Countries Perspectives here.
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