Advice to Companies Engaging in Restructuring Documents With Lenders and Landlords

We are currently at the beginning of an economic downturn being driven by a worldwide, viral pandemic that has resulted in an abrupt and massive disruption of normal business. The impact has just started to take hold but is expected to be severe and extended. Borrowers and tenants across a broad spectrum of industries are turning to lenders and landlords for relief, particularly in the retail and service sectors where mandated government shutdowns have made it impossible to maintain a revenue stream necessary to service current obligations.

The unique nature of the underlying cause of the disruption in business activity and its very real impact on revenue and collateral values has created an environment that requires businesses and their lenders and landlords to work together to resolve a collective problem. The alternative for failing to do so will in many cases result in business failure, an inability to realize on expected values associated with the exercise of remedies upon a default and attendant decreases in debt recoveries and rental income streams.

Today, perhaps more than at any other time, the stage has been set for companies to engage in meaningful and realistic restructuring discussions with their lenders and landlords. We are seeing borrowers and tenants request relief from payment obligations using several different strategies, including lease amendments, real estate purchase agreement modifications and loan modifications aimed at addressing current issues. The first step is to fully understand the terms of the existing lease or loan documentation, including the definition of force majeure and its implication in rent and loan payment obligations. The relief requested and conditions to the relief have been varied but have generally followed certain parameters:

1. Request for forgiveness of rent/mortgage payments:
   1. Some landlords and lenders appear to be allowing forgiveness/deferment for April payments. Decisions on May payments may be deferred until later in the month when a clearer picture of when the current shut down will end may form.
      
      
   2. Some landlords and lenders are already including all or a portion of the May payment in the forgiveness/deferment.
      
      
   3. 100% forgiveness without any way to recoup the lost payment(s) later is rare, and often unlikely, in most cases – forgiveness is really deferment:
      
      
      1. The landlord or lender will extend the term to add the payment forgiveness to the back of the lease or loan term (this is a very common way to recoup up front free rent in a lease – for example, 3 months free rent but term is 63 months as opposed to 60 months); or
         
         
      2. Amortize the deferred payment over the remainder of the term, increasing base amount due commencing on June 1 (or the first day of the month following removal of the restrictions), for the balance of the current term.
         
         
2. Some tenants and borrowers, fearful that they cannot recover from the governmental mandated closure, want to terminate the lease or loan agreement without any further obligation. It is rare that a landlord or lender would grant an absolute termination right. The Landlord may have a mortgage loan on its fee interest. The lender will most likely have a provision in its loan agreement prohibiting the landlord from terminating a lease without the lender’s consent, where the existing lease does not now give the tenant this termination right. It is inescapable, however, that the issues brought about by current conditions jeopardize the viability of many businesses and necessitate a workout that takes into account current and anticipated circumstances.
   
   
3. In some instances, the existing lease may grant the landlord a purchase right of the tenant’s interest, or the tenant a right to acquire the landlord’s interest. These are rare and may or may not be useful in the negotiations.
   
   
4. In nearly every instance, the amendment/agreement imposes an obligation on the tenant to apply for applicable governmental grants and loans being offered to get funds to pay the deferred payment as quickly as possible. However, the affiliate rules under the new legislation do not currently make that possible in every case.
   
   

The terms that may apply in each instance are very fact specific and the strategy for proposing and negotiating the terms should be carefully crafted before the landlord or lender is approached. Ballard Spahr LLP’s Real Estate, Banking and Finance and Restructuring lawyers are experienced in restructuring transactions and crafting these strategies as well as drafting lease and loan document amendments, including modifying the definition of force majeure to expand it to clearly cover the existing shelter in place restrictions affecting the tenant’s or borrower’s business and are available to assist you.

If you have questions regarding your documents and contracts, please let us know.

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.