Cox Castle helps landlords weather short-term pain and prepare for longterm business prospects

LOS ANGELES -- While many cities and counties throughout the state have drafted eviction moratoriums for commercial tenants amid the pandemic, landlords aren't getting the same break on their mortgages.

Instead, their attorneys are urging them to reach out to their lenders directly while encouraging them to be careful about what they say, according to Caroline Dreyfus of Cox, Castle & Nicholson LLP, who represents commercial landlords on financing matters.

"If you come right out and tell your lender, 'I'm not paying you; I can't make this payment' that makes your loan in default," she said.

Instead, there's specific language she's advising her clients to proceed with.

"What you say is, 'In light of COVID 19, we are seeing a decrease in rent,' and then you start the discussions," Dreyfus explained.

As for why local governments are refraining from drafting default provisions for landlords, it's because most lenders are federally regulated, Dreyfus explained.

"They also have their own regulatory bodies and different rules, and I think that's more of a national scope than a county, city or state," she said.

Properties owned by her landlord-clients range from shopping centers to retail and restaurant space as well as office use.

Cox Castle has prepared letters tailored for each landlord when issuing a request to a lender for deferring payments, Dreyfus said. Some landlords also intend to apply for small business loans laid out in the CARES act, the stimulus package signed by President Donald Trump in late March, Dreyfus noted. But doing so requires approval from a lender as many of her landlord-clients have provisions in their loan agreements prohibiting them from incurring other debt, Dreyfus noted.

"So they need to go to their lender if they want to get these SBA loans," she said.

As the coronavirus pandemic has progressed, Dreyfus, who also represents some lenders, said her workload has gradually shifted to handling mortgage repayment matters. She noted lenders started receiving notices of force majeure delays for construction loans and requests to modify payment obligations in the past week.

"Upon receipt of the letters from the borrowers, the lenders sent out pre-negotiation letters so that the parties can speak freely without the risk of something being raised in litigation if things go south," Dreyfus explained. "And then the lenders and borrowers start discussions as to what can be done in terms of a loan modification or a forbearance if COVID 19 already caused a default."

Given that March rent was already paid, responses from lenders are still unfolding, and it's a bit too early to tell how they will proceed with landlords, Dreyfus said.

"It's hard to say what each one will do because right now they've received the request and are analyzing internally what they can and cannot do," she said. "But it's not a shock to any lender in this country that these requests are coming in because obviously it's across the board. Everyone's been affected by them."

Corin Korenaga

Fellow Cox, Castle & Nicholson LLP attorney Corin Korenaga said his workload has transformed entirely from signing new tenants and leases and expansions to working with hundreds of clients and their tenants on hammering out rent deferral deals.

"I just did an agreement yesterday that said a landlord agrees to defer a payment of rent for April, May and June of this year, and then the tenant agrees to start repaying those amounts starting in January 2021," Korenaga said.

He said most counties and cities drafted ordinances permitting commercial tenants to request payment deferrals if employees have become infected with the coronavirus or if the outbreak and the forced closures have dried up their income and ability to pay.

In such cases, it's the tenant who reaches out first to the landlord via letter.

"What we advise our clients to do is when you get a request like that is to send a response that basically says, 'We sympathize with what's gong on,'" Korenaga said. "'We'd like to work with you.'"

In their reply, landlords request information and supporting documentation that shows how a tenant's business operations and finances are being negatively impacted. Even with all the municipal orders prohibiting evictions, Korenaga said he's seen zero examples of his clients wanting to evict because of the effects of the pandemic.

"It's very unlikely there's going to be a long line of tenants waiting to take their place," he said. "What they have is an occupant that is hurting and may have the prospect of paying rent later. So it's really in the landlord's interest to work with these tenants."

For now, Korenaga said if he was forced to predict, he believes there may be an uptick in evictions once the pandemic is over, but not a flood. The calculus behind his forecast could change, however, in coming weeks, he stressed.

"Again, it really depends how long the emergency lasts, how landlords and tenants weather the short-term pain, tenant's longterm business prospects, the business relationships between the landlord and tenant, and availability of replacement tenants," Korenaga said. "I'm guessing in many cases of businesses that are unable to rebound that landlord and tenant will work out a termination agreement without landlord having to evict."