Landmine borrowers and lenders should avoid when negotiating reductions and deferrals
By Thomas Furst, Partner, Adam Leitman Bailey PC
In the midst of the current deep economic distress, there are, and always will be, countless communications between tenants and landlords asking for forbearance from paying rent.
This will undoubtedly trigger demands from homeowners to their lenders, asking for forbearance from mortgage payments. The following discusses some of the relevant considerations, as well as existing moratoria, as they apply to residential and commercial loans. The discussion ends with a brief overview of the Federal Paycheck Protection Program, which offers forgivable loans that can be used to pay mortgage interest, among other things.
Admit Inability To Pay Debt – Business Loans: While it is likely that most lenders will act reasonably and not take unfair advantage of the current situation, it makes sense for homeowners to exercise caution in their communications with lenders. In this regard, we note that many non-recourse exclusions in loan documents provide, on an exceptional basis, for a borrower’s admission of inability to pay his debts.
Although the courts have held that such an admission, in order to trigger a non-recourse exclusion, must be very explicit and direct to the lender (excluding, for example, an admission of financial distress in a government statement) , it would be prudent to prepare the communication to the lender as provisionally as possible. For example, a homeowner should avoid telling a lender that their tenants won’t pay rent and that would make it impossible to pay the mortgage. [thus, perhaps, admitting insolvency]. Instead, a real estate owner should tell their lender something like the following:
Our tenants are asking for a forbearance from rent and we would like to consider granting such a forbearance under the current conditions, but we would need to know your [the lender’s] position with respect to our mortgage payments in the event that such forbearance is granted.
Lease Amendments and Commercial LendersLikewise, when Tenants request a lease modification, even when a property owner will remain fully solvent following such a Lease modification, it is important to note that non-recourse exclusions could be lost, or that the Limited guarantees could become full guarantees in some cases if real estate owners make significant changes to a lease without the prior consent of the lender. While the above probably does not apply to terminating a lease without consequence in the ordinary course of business, a real estate owner should consult their lender, in writing, before making any major lease grants or changing any. important leases.
Basics to cover in a practice discussion with a lender: There are a number of items that should be clarified, preferably in writing, in any discussion with the lender
- Property taxes: If property taxes are frozen as part of the monthly mortgage payment, there should be a discussion of how property taxes will be paid in the event that payment of these is due during the forbearance period. . One option is to pay, even during the forbearance period, the portion of the mortgage payment that represents property tax escrow, assuming the lender accepts this arrangement.
- Compensation for missed interest payments: The borrower should specify whether the missed interest payments will be due at the end of the forbearance period or within a specific time period thereafter.
- Catch-up of Missed Principal Payments: The borrower must determine whether the principal portion of the missed mortgage payments will be due at the end of the mortgage term and whether the mortgage term will be extended accordingly. If the term is extended, it is worth inquiring about how the performance maintenance schedules / prepayment penalties are affected by the extension of the term of the mortgage.
- Late fees and legal fees: will these fees be waived?
- Credit bureaus reports: will there be negative reports?
- Guarantees: will the guarantors receive the same tolerance as the borrower?
New York foreclosure moratorium, residential and commercial mortgages: There is a 90-day moratorium on foreclosures in New York State, and this applies to both residential and commercial mortgages. The moratorium begins around March 20, 2020.
Moratorium on certain remedies for mortgage execution – residential mortgages: On March 24, 2020, the NYS Department of Financial Services (DFS) issued an emergency rule requiring New York State regulated financial institutions to grant residential mortgage forbearance on property in New York for a period of time. 90 days to anyone residing in New York. York demonstrating financial hardship due to the COVID-19 pandemic, subject to the safety and soundness requirements of regulated institutions. Forbearance includes, but is not limited to, the following:
- Waiver of mortgage payments due to financial hardship
- Grace period for loan modification
- No late fees or online payment fees
- No negative reports to the credit bureaus.
New York Gov. Andrew Cuomo has clarified that the above will not exempt residents from mortgage payments, but will expect lenders to adjust the mortgage to include those back-end payments. Additionally, once the 90 day period is over, NYS will “re-assess as the situation evolves whether or not it needs to be extended.”
Federal Paycheque Protection Program Loans: This new federal program provides financial assistance through 100% federally guaranteed loans to employers who maintain their payroll during this emergency.
Eligible entities must have been in operation on February 15, 2020 and include small businesses and 501 (c) (3) non-profit organizations, persons who operate a sole proprietorship or as an independent contractor, and self-employed persons. eligible, as well as certain businesses that do not employ more than 500 employees per physical location.
Permitted uses of the loan include paying interest (but not principal) on a mortgage bond, lease bonds, and utilities. The request for forgiveness of the loan is made through the lender concerned.
Conclusion: A very large number of property owners are in serious financial difficulty due to the inability of tenants to meet all or part of their financial obligations. Therefore, it is more important than ever for these landlords to carefully craft their approach with tenants, lenders and government entities in a way that will allow them to survive this unprecedented crisis and emerge from each other. side in as strong a position as possible.
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