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MAYDAY MAYDAY- Contractual Issues Amidst a Pandemic

Benjamin Sens from BOSS Construction Group interviews Scott Marcus from Becker & Poliakoff Law Firm about Contractual Issues amidst a pandemic. Here are are the talking points:

Purchase and Sale Contracts:

  • Contractual obligations speaking to tenant thresholds (rent roll at time of contract vs. rent roll at closing)
  • How those issues are worked through

Landlord Tenant

  • It’s not always the “big bad landlord” they have obligations to lenders too
  • Landlord tenant discussions – how to work through disconnects

Sponsored by Reliable Lien Search Inc. and NAHREP Fort Lauderdale.

Transcript

Benjamin Sens
Hi everyone, this is Ben from boss construction your South Florida permanent code compliance specialist. I have a really special guest for all of our viewers here. We have Scott Marcus, a Becker, shareholder, a real estate attorney over 25 years. Hi, Scott. How you doing?

Scott Marcus
Hey, Ben. Good. I’m doing well. Thanks. Good to be here.

Benjamin Sens
I know we’re, I know we’re live right now. But I just want to wait a couple minutes. I want to tell our I just want to outline for for our attendees both live on on Facebook and zoom and we’re going to have an educational video on this for the boards as well, mayday, mayday, contractual issues and missed a pandemic. We talked about a lot of business disruption right now. And that’s kind of an and and you represent property owners buyers and sellers on all asset levels, residential and commercial And we come into this a lot of times and developing solutions for changes in income or changes in terms and contracts.

Scott Marcus
Yep. Yep, absolutely. And that’s what you know. So we’re going to speak about that today. What what this pandemic represents really is a situation where in a commercial real estate transaction, it’s, it’s pretty much that the the asset that the purchaser is buying is comprised of the leases in in most of your commercial transactions. So given the current environment, leases are changing, therefore the asset changes so we’ve got issues on the land or 10 o’clock we’ve got issues on the purchase and sales front, we’re going to discuss a little bit about how how that plays, play. this plays out.

Benjamin Sens
Perfect, and we have all we have most of our attendees live now. So it is 11 o’clock, and we’re very excited to start and begin, again for all of you, who are just joining. Thank you, Louis Suarez are not at Fort Lauderdale, Chapter president who’s here. Welcome, everyone. I have Scott Marcus, shareholder, backer. And he is amazing. And we’ve worked for many years. First of all, Scott has 25 years of experience, which is amazing. And we’ve worked for many years when I entered the real estate community, representing property owners and sellers. I come to Scott with solutions. I come to Scott with questions. We are here to try and make the deal happen and and get the deal done. Right, Scott?

Scott Marcus
Absolutely. And I have to compliment you. There’s been a number of times where we’ve had to bring you in on permitting or code violations that that we find as we lead up towards a purchase, and you and your team have been just just instrumental One thing to work with Yeah,

Benjamin Sens
thank thank you so much. Got it and and what’s what’s very interesting, some things that get found in between going under contract inspection period after inspection period. Once we have the lien search, how resolution is supposed to be conducted, but today we’re going to talk about what happens when business gets disrupted, and a pandemic arises and rent roll changes on an asset.

Scott Marcus
Sure. So so just to set the stage for the viewers. In the commercial property arena. We’ve got properties, raw land, multi family retail, industrial office, in in all of those categories with the exception of raw land, they’re tenant driven, because we’ve got an office building full of tenants and industrial warehouses. That’s, that’s, that’s full of tenants, retail same thing. So that is to say that these transactions and commercial are comprised of and they’re valued based on the tenant revenue. So as, as you can imagine, if you are entering into the purchase contract, and a pandemic, such as the one we’re in hits, then the asset is likely or could change and therefore, what you were initially contracting for is is different than what then currently is. So it’s an interesting it’s very interesting times and calls for a lot of calls for some new negotiations and calls for some creativity.

Benjamin Sens
And you have a lot of experience creating those negotiations and solutions, especially in commercial real estate.

Scott Marcus
Sure, absolutely. Yeah, I, one of my main areas of practices is the commercial real estate. And it’s, you know, commercial real estate. Unlike residential, residential, we have a form contract we use, I sit on the committee that drafts that far bar contract as well. In commercial, I could receive a contract from a buying side, and it’s it’s a Word document, it’s complete, it could be completely different than the last contract that I have seen. But for the most part, the general terms are going to be similar. And there’s, you know, a number of I mean, we can we can also offer a contracts course for, for the viewers, but, you know, the the general terms are are going to be consistent amongst contracts is just how those, how those terms are addressed in the contract that differ.

Benjamin Sens
How far how far back do you think that with with the pandemic and the COVID-19 and the changes have income on these properties under contract, when when do you foresee problems starting to occur? Do you see that his problems now? Like, what should what should a seller do when they have their property listed right now and they’re going through some things with the tenants?

Scott Marcus
Well, you know, to, to answer that question just let’s back up a bit. Okay. So, so we’ll let’s talk about how a property a commercial property is valued. Okay, commercial property is valued by what’s called a capitalization rate or cap rate. And that’s a formula it’s typically net operating income over divided by current market value, and you come up with a percentage. So when, in a, let’s say, a shopping center, with 25 tenants with a certain cap rate, a buyer is Looking to that property before they even before they even go under contract, they’re looking to that property for a certain rate of return. And in a in a pandemic such as this, once they’re under contract, and depending what stage of the contract they’re in, is it pre due diligence is that after will will depend on what they need to do but, but, you know, since the revenues are driven, since the assets value is driven by the tenant revenues, a lot can change as to the value of that asset, and then the buyers motivation can then change. So really, we need to it to answer your question depends a lot on where the buyer is in the contract process. However, we could talk about some things that each contract should or could have that could help out either party and and allow that Allow the deck to get restocked when something like this comes along.

Benjamin Sens
And, and as far as you had mentioned, you had mentioned that the sellers ability to modify lease terms without buyer approval. I wanted to touch on that with the audience, because that’s a very important part.

Scott Marcus
Yeah, so one of one of the, one of the sticking points that that comes up when you’re negotiating a commercial contract is the seller wants the freedom to do what the seller needs to do with their tenants before the buyer purchase the purchases the property. a buyer On the flip side, the buyer does not want the seller creating new deals or new obligations for that buyer after a certain amount of time. So typically, what the parties will do is prior to due diligence period expiring which is you know, either it’s called the due diligence period, investigation period inspection period. That’s the that’s typically the go hard date prior to that time a, a seller would have the right to enter into new leases some, some real estate contracts would would mandate that the seller run the lease by the buyer and have you know, the buyers, the buyers approval is required, although the buyers approval in some cases should not be unreasonably withheld. But after that due diligence period expires, the modification or new leases that that’s typically a stopping point because that means that the buyer is committed and as such, they’re they’ve gone hard on the property. So, so this it’s really it is although it is the seller’s property and title, the buyer is committed to that property and therefore the buyer would want to say so in any modifications to that lease,

Benjamin Sens
and a lot of these principles apply to with multifamily apartment buildings, anything where you’re renting out a property, whether it’s residential, commercial industrial space, correct.

Scott Marcus
Hundred percent 100%, the whole the whole commercial arena that that is 10 and driven, all of these concepts are going to apply. And, you know, I look at it like this, it’s your as a, as a purchaser of a commercial property, you’re contracting for something, and let’s call it an apple. And a pandemic comes along, which, you know, nobody could have anticipated something like we’re facing now, coming along, but actually, Bill Gates did anticipate it, and he actually said it in several interviews. But, you know, for When, when, when something like we’re facing now comes along, that Apple changes, and maybe it’s now in orange or banana. And that’s just a simple way of saying that. What you’re what you’re originally were buying is no Longer what you’ve got. And that might not mean that the deal is bad. That That just means that it that it opens, it’s changed and it opens up the floor for potential renegotiation or discussion. And that is driven by what the contract says. So,

Benjamin Sens
so and again, most people were in front, you know, they were scared that, that the deal might be dead, since so many things have changed, but you’ve had constant success in bringing sellers and buyers together.

Scott Marcus
Absolutely. Well, I wouldn’t say constant success. I mean, this environment, this environment is is unique. So I think a lot of a lot of transactions where buyers have the right to terminate a contract completely. They might just be too nervous to pull the trigger and go forward with that asset and that might not happen. have anything to do with the asset, but it might have, it might have more to do with their their current asset portfolio, their own financial situation, the market losses that they’ve taken. So, you know, those factors factor into buyers decisions on whether or not they’re going to go forward with an acquisition. And depending on where in the transaction, the buyer is, whether it’s pre inspection period, deadline or post will depend on what the buyer uses for that leverage and put putting a deal back together. Once something like a pandemic has has occurred, you know, the people it it’s it becomes a business decision. If if an asset has been thoroughly vetted, pre COVID And now, we’re now COVID strikes we’re we’re in a situation where the numbers are Changing, the parties are going to the buyer is going to request request new information from the seller as to how the tenants have been affected, whether or not there’s been any lease deferrals, any read deferrals. And any changes to lease terms, any defaults. So that is going to drive the buyers decision as to whether or not they’re going to purchase the asset. And if they do, maybe, maybe they do, but under different terms, maybe the price is now different, correct time. So, you know, and that’s, that’s just all business type negotiations. The legal part comes in is, what do I as a buyer hang my hat on, in order to open up the floor for these negotiations. And there there are a number of different clauses in your typical commercial contract. You’ve got your representations and warranties from a seller saying that the rent roll will be relatively better Same at the time of closing as it is at the time you enter into the contract. Some some contracts will say the opposite they will say that the the seller gives no no assurance as to the as to the rent roll or the viability of the tenants. So it’s more of a buyer beware type of setting. You’ll also have the tenant estoppel provisions and estoppel is just a fancy word for a letter from the tenant which indicates that the the lease is current, that there are no defaults, what the tenant is paying, what security deposit is up and whether or not there’s any obligations on either party’s part the seller or they the landlord which has which which is still do so. You know, they

Benjamin Sens
often are and again, with with everything has a number in negotiating and valuating these assets, how, how often should a tenant landlord estoppel be conducted? And how many times have you seen that done if a property was under contract in February and now we’re in

Scott Marcus
May? Sure. So, a sample in the landlord tenant arena are are very important. They’re, they’re typically a contractual requirement and all the contracts that that I’ve handled. What will differ is the number of tenant estoppel, as the landlord is required to get if, if, let’s say you have a shopping center with 40 tenants, the landlord might not be able to get 40 estoppel letters for for the buyer. So what the landlord can do is the landlord can certify the information in the estoppel letter that would come from the tenant Now, in most, in most landlord tenant leases, the tenant is obligated to provide an estoppel letter. So, if a tenant is contractually obligated to provide it, in most cases the tenant will but there are times where maybe the tenants frustrated with the landlord and you a landlord won’t be able to procure the estoppel from the tenant. The closer the the estoppel. The estoppel letters typically go out towards the tail end of a transaction, because if it transactions 60 days before closing, you don’t want dated information. You don’t want information that 60 days ago, you want current information as of the current month. So you’ll learn a lot about the asset some somewhat later in the the progression of the of the transaction and sometimes you learn things that you wish you knew in the beginning, sometimes we get, you know, I always, I always like provisions where I can get a stoffels early on and then have them updated later. But that puts a big burden on a landlord and it’s on their tenants. People don’t want to bother their tenants. Yeah, they don’t want to, they don’t want to pester their tenants with here’s a, you know, here’s another thing you have to sign but I just signed this, you know, three weeks ago, I know but we’re in a new month now. So there’s a little bit of a push and pull contractually as to as to when those are executed, whether they can be renewed on or updated. You know what the party’s obligations are? And

Benjamin Sens
I like what you mentioned about these real scenarios with negotiations between the buyers and the seller. We’ve we’ve we actually spoke about this I mean, tenants with new build outs, they’ve had issues getting CEOs, or local business tax receipts, which the lease says they have to have. So are landlords able to affect the tenants ability to operate? Or is it really in control of the municipality on what they do?

Scott Marcus
Well, the, your question boils down to. So whether or not what you’re requiring from the tenant, let’s say it’s a CEO to operate, your tenant shouldn’t be operating without their their license, their proper licensure to do so. And if they are, they’d not they’d be in violation of municipal code. And in most cases, depending on who drafted the lease or how it’s drafted, they’d be in violation of Elise as well. So, just to answer your question in a vacuum, I would say that in most cases, landlord can ensure that a tenant is operating in a manner that is that is appropriate for the municipality. And, yeah, that’s that’s going to be, you know, standard that, you know, in most in most of your leases that the tenant is not in violation of any municipal ordinance and that they have all of the required licenses in order to operate the business that they’re operating.

Benjamin Sens
And, okay, so let’s dive into the really, really crazy part and Mr. pandemic, what should landlords and tenants do? Meaning So, for example, a commercial Shopping Center, the tenant might say, I want to operate under a different business or I can’t pay my rent or what do i do and missed a government shutdown? Things like that.

Scott Marcus
I was. I was reading you know, so the I think the first the first thing we we need to understand and taking a step back is, you know, we talk in terms of tenants being affected by a pandemic. And because tenants are perceived as the little guy and for the most part they are. But it is important to remember that the landlord has obligations as well. Landlords got a mortgage typically to pay they’ve got investors or various shareholders to answer to, they’ve got maintenance obligations, and if the rent is not coming in those obligations, or the landlord’s ability to meet those obligations then might fall short. So I was reading an article by Barry wolf who is one of the landlord tenant gurus in our in our industry in South Florida. And it was a great little piece because he indicated that you know, this is, this is a very good time for a landlord to possibly renegotiate some lease terms. So if a tenant comes to a landlord and says, I need some, I need to defer my rent. I’m not going to be able to make Mae’s rent June’s rent. The landlord can say, Okay, here’s what we’re going to do, we’re going to take the rent that you would have paid for May and June, we’re going to extend the lease term. Maybe instead of those two months, we’ll extend your turn another year. And maybe the landlord would use that opportunity to, to say that they wish they had done certain things at the outset of the lease, now is a good time for them to contract for them. Maybe they want to convert the lease from a double net lease to a triple net lease. Maybe they they want to Make make some other obligation play some other obligation on the tenant that wasn’t already on on the tenant. Maybe they want to require financials of the guarantors updated financials, maybe they want to tie the request to a request for financial information on the business, which maybe they didn’t have a right to do in the preliminary lease. So, you know, these are it, it just anytime one

Benjamin Sens
party so so so basically, like your, like landlord is gonna say, Okay, I’m gonna be flexible, but I want to verify some information.

Scott Marcus
I want to be flexible, I want to verify some information. And then I possibly want to change some terms favorable to myself as a landlord, as I give you tenant terms which are favorable to you. So it’s a trade is a trade and I thought that was a very interesting piece that Barry wrote. It was, it was kind of a nice spin on it. Things that you know, don’t look at this time as, as a complete negative. If a tenant approaches a landlord and asks for something, it’s an opportunity for both sides to, to huddle up again, and, and retrain the deal. Not fully, but at least some of the terms.

Benjamin Sens
Ask for a show basically asked for something, get something cause and effect everything, everything kind of affects and and what do you recommend as far as and we had discussed that landlords and tenants For example, we don’t want any of the behavior to affect renegotiations or terms. So what do you what do you recommend whether it’s on you know, we all pay rent or mortgage? We all shop at the shopping centers. How do you recommend the tenant to be conversing with the with with the landlord Or communicating or things to share not to share?

Scott Marcus
Well, you know, it’s interesting and, and it depends a lot on who your landlord is and how they interact in their, in their business relationship with you. It could be that you’re dealing with a property manager, or it could be you’re dealing directly with a landlord. It could be that the landlord has always been very amenable and open to discussion and open to hearing, you know, issues or confronting and problem solving with the tenant. But for the most part, what what I have seen for the last several months, is tenants approaching landlords, indicating that we’re in them where not only is are we in the midst of a pandemic, but the pandemic has caused a government shutdown and in a lot of your leases, and not to belabor what we’ve talked about before, and people People might have heard this a number of times. But in in a standard force majeure clause, which is something outside of the party’s control has caused an event and therefore my failure to do something, pay rent or perform under my lease and any type of any other obligation is stayed until that force majeure is lifted. So, if the force majeure clause is drafted appropriately to include government shutdowns or government regulations, then the tenant does have a very good opportunity to go to, to approach the landlord and and say, listen, we need to let’s let’s just have a candid discussion. I will tell you this then, it is so much easier to work with your existing tenant than it is to go dark and How to deal with an eviction go dark on the space, find new tenants. So that’s

Benjamin Sens
a lot of expense.

Scott Marcus
It’s a huge expense. And, and to, to work with an existing tenant, so long as you’re not dealing with an extreme case of somebody that never had the ability to pay, and was always a problem to begin with. And now he’s just using a pandemic such as this as an excuse not, you know, to, to rightfully maybe do what they weren’t doing before. But I think I think it’s, it’s a it’s a time where there’s open discussion, it’ll depend on the parties, it’ll depend on how the parties Converse. And, and I think, you know, honesty is leveling with seminar and saying, Listen, I have no ability to have customers in my store. We’re doing takeout but we have to do it one at a time. And it’s it’s hampered my business by 68%. So, you know, all I’m asking for is and then x But, and if and if a landlord is, is not going to be willing to have those discussions with the tenant, it, you know, then you have to turn to an attorney and possibly dive into the lease, see what the obligations of the landlord are. But for the most part, I have not been receiving the calls as an attorney of my landlord is is being uncooperative. I need you to get involved on the legal side. This is more i i’ve been more of an advisor of here’s what you should do. And it’s more just human to human contact and business discussion. And for the most part, the landlords landlords understand and they’re agreeable to change and and and so that’s Yeah, that’s what we’re that’s what we’re seeing more so now.

Benjamin Sens
And you know, tenants have said for example, we have a client in like a class a healthcare office building in there like We started to open up but you know, the side doors are open in the building. There’s not the security guard that should be there again. But we also like you said, we need to, we need to be mindful that we shouldn’t use those excuses. His how not to or how to interact with our landlords?

Scott Marcus
Yeah, I think I think honesty is is appropriate Look, there’s there’s always going to be those that aren’t, are doing just as well, despite a downturn as they were doing originally, and they look to take advantage of a situation. I don’t see that I haven’t seen it for the questions that I’ve you know, for the several dozens of landlord tenants called I’ve received, it’s been more so how, what’s the best way for me to handle this and I will tell you to the one that I haven’t. It’s been less of me telling them well your lease says this. So therefore, I can write a letter to your landlord, you know, legal letter saying, you know, please be advised and starting starting off negotiations that way. It’s more of pick up a phone, contact your landlord have a have a, just a human discussion as to how, how the pandemic is affecting you. When you think that you’re, you’re going to be able to get back on track and, and then yeah,

Benjamin Sens
so basic landlord

Scott Marcus
might ask for something too.

Benjamin Sens
So basically no hard lines, and just keep the door open.

Scott Marcus
keep the door open. Sure.

Benjamin Sens
And and that’s, that’s really great advice for our viewers, and I’m really glad everyone who came today and who share and Scott from Becker, amazing shareholder, amazing real estate attorney. Again, we’ve got the chance to work together on real estate transactions, both commercial and residential, we’ve got the chance to educate agents and property owners throughout South Florida. And thank you so much for being here today, Scott, very, very welcome. And and I would be remiss if I didn’t thank you for hosting and also just singing your praises, because I’ve encountered certain sticky situations where I’ve called you in and you will go down to the municipality, you will talk to the people that you need to talk to, you will undo a situation that was done, and you’re just a pleasure to work with, or I love the partnership. Thank you so much. We’re simply like you’re saying, you know, everything’s in negotiation, everything is evaluation. Why don’t we get to the closing table if the city of Miami is closed? And, and again, most of the municipalities are open, but you know, why don’t we give a credit to the buyer? Why don’t we evaluate the situation? Why don’t we get to the closing table, so Most often, sometimes the resolution is conversation and valuation, like we discussed here. And Scott, how can our viewers reach you because your law firm offers so many so much perspective and your experience? How can they reach you if they have a question of how of something has changed in a property that they’re purchasing or a real estate agent has a question about something that they represented in a listing or things like that.

Scott Marcus
So our law firm is is now under the flag of the Becker firm. It still is Becker Poliakoff in, in its corporate records, but if you google you know, Becker, Attorney Scott Marcus, you’ll, you’ll get me. Very cool. Find me on the website, email me, but we do have such a vast array of practice groups. That’s what makes our Law Firm, very nimble, admit something like this because commercial, real estate might be down, litigation might be rising. We represent homeowners associations, they’ve got questions in something, you know, such as the environment that we’re living in now. So Becker is really very diverse in the, in the interests that they can assist clients with. And that’s one that’s really one of the reasons that I’m very proud to be a part of that firm. And also the people the people are just as I’ve been with the firm for 16 years, there are partners that have been over 30 so I mean, it’s just a it’s just a great environment to to practice it

Benjamin Sens
but but but again, you have to be able to especially during these times, to shift gears and serve your clients in many capacities and whatever they need. Hundred percent

Scott Marcus
Yep, yeah to be nimble.

Benjamin Sens
All right. They Thank you so much Scott Marcus from Becker, shareholder. This is Ben from bas construction your South Florida permanent code compliance specialist. Thank you so much to reliable lien search and na rep Fort Lauderdale, and of course, Becker for presenting this interview today. Thank you so much guys. Be safe and have a great day.

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