We are all faced with the unique challenge of financial uncertainty, due to the economic impact of Covid-19. While our leases, expenses, and contract obligations remain fixed, our ability to work, the ability of our customers or clients to pay, and future economic prospects are all beyond our control. There are solutions, but they require us to be proactive. The objective of this Memorandum is to help you deal with the certainty of contracts in uncertain times.
Leases. If you are a tenant, and believe that you will have difficulty meeting your lease obligations, the first thing to do is to let your landlord know. There are solutions. The most common option is a lease modification which will adjust your rent, to a workable rate for a fixed period of time, followed by a return to the original rental rate (or the original rate with some “catch up” additional rent after a fixed period of time). The second option would be a lease modification which would allow for free rent for a fixed period of time (such as 3 months), with the three months being added on to the current lease term. Finally, some landlords may be willing to enter into a forbearance agreement, which would forgive rent for a fixed period of time. Just walking away from a lease is rarely a good solution. It creates credit issues, jeopardizes your ability to get a lease in the future and may create personal liability for you, depending on the terms of your lease.
If you are a landlord, moving quickly to default and terminate a lease may not be in your best interest, unless you have a tenant ready to lease the same space. The loss of a current tenant or defaulting a tenant diminishes your ability to refinance the property, may have a negative impact on your current financing, and is a sure way to cut off all rental income attributable to the space. Often, the same strategy which applies to tenants will also benefit landlords. Entering into a short-term lease rate modification, a lease modification which provides for short period of free rent with a tack-on period to the end of the lease, or a free rent forbearance agreement may be the best options. It avoids the all or nothing approach. Additionally, courts in Georgia are currently limited to essential functions under the Supreme Court of Georgia’s Judicial Emergency Order until May 13, 2020, and this order may be extended further. As a result, many judicial remedies, including dispossessory proceedings, are likely unavailable to landlords.
Loans. If you or your business have outstanding loans, and believe that you will have difficulty meeting your loan obligations, the first thing to do is to carefully review your loan agreements to confirm your rights and obligations. Applicable notice requirements or an event of default may have been triggered as a result of business and financial interruptions related to Covid-19 (many agreements include a material adverse changes in the borrower’s business or financial condition as an event of default). If you have any questions about your loan agreements, or how best to proceed, please give us call. Lenders on a secured loan, such as a mortgage or equipment financing, will typically not move quickly to refinance or substantially modify the secured loans. Instead, lenders will more likely consider a forbearance agreement which either reduces or excuses payments for a period of time or which will tack-on additional payments at the end of the loan term. Understand that if a forbearance agreement is entered into, the lender will generally require the payment of additional fees and expenses.
Force Majeure. Force Majeure is a contract clause regarding an extraordinary occurrence beyond control, which prevents one or both parties to a contract from fulfilling their obligations. Depending on the language of the Force Majeure clause, the contract may become void or voidable. Typical occurrences which appear in Force Majeure contract provisions include terrorist activity; weather events; civil disobedience; natural disasters, and acts of God. Whether Covid-19 is a Force Majeure depends on the language of each separate contract having a Force Majeure clause. Reviewing your contracts for such a provision and determining the impact of such a provision, would be a best practice.
Other Contracts. Other contracts will typically follow the format detailed for leases and loans. However, each contract will be subject to its own terms and conditions and may have specific provisions or requirements related to forbearance, modification, defaults, notices and other terms which directly control the parties’ obligations and rights.
Business Interruption Insurance. If you have a business, professional practice or are in independent contractor, you may have business interruption insurance. If so, you should carefully review your policy and determine if you are entitled to compensation under your specific policy. Typically, business interruption insurance only pays if there is direct physical damage to a business which proximately causes the business interruption. This would include fire, flood, equipment failure, structure failure or similar effect. If you determine that, under your specific policy, you are entitled to a recovery, you should carefully document the facts and contact your insurance agent/broker and the insurance company at the earliest possible date.
We understand that contract review and interpretation can be a complex and daunting problem. However, unless you fully understand your rights and obligations under the contracts which control your personal and business finances and assets, you stand the risk of incurring a liability or missing an opportunity, neither of which any of us can afford in the post Covid-19 economy.
If you have questions or if we can assist you in any way in these matters, please do not hesitate to contact us directly.