Speaker 1: This is Bloomberg Law with June Grasso from Bloomberg Radio.
Speaker 1: Major US retail and restaurant chains like Subway, the Cheesecake Factory,
Speaker 1: and Urban Outfitters are not quibbling about it. They will
Speaker 1: not be paying rent while their restaurants and stores are shuttered.
Speaker 1: The threat of a ripple effect across the real estate
Speaker 1: sector is looming, with the worst case scenario being banks
Speaker 1: calling in loans and repossessing assets. Joining me is Andrew Rossman,
Speaker 1: a partner a Quinn Emmanuel. How bad is the situation
Speaker 1: from what you're hearing from your clients. Well, for retail clients,
Speaker 1: it's pretty severe. They have no foot traffic obviously, their
Speaker 1: stores are shuttered, and they are looking to the question
Speaker 1: of whether they can get complete relief or some relief
Speaker 1: from their landlords or if necessary, from the government or
Speaker 1: other sources. Tell us what usually happens when a commercial
Speaker 1: tenant can't make the rent? What did the landlord and
Speaker 1: tenant usually do? Well. Leases are frequently written to be
Speaker 1: pretty protective of landlords, so the landlords have a variety
Speaker 1: of means to get the rent paid. Sometimes it can
Speaker 1: be drawing down on a letter of credit for example,
Speaker 1: and It can also include eviction of the tenant for
Speaker 1: failure to pay, and it can happen pretty quickly in
Speaker 1: the event of a non payment of rent. And here
Speaker 1: what we've got is a situation where the tenants may
Speaker 1: have some pretty unusual and potentially strong excuses under the
Speaker 1: law for paying or for forbearing. How often do landlords
Speaker 1: negotiate with tenants in commercial situations and commercial leases when
Speaker 1: tenants aren't able to pay the rent, Well, it depends
Speaker 1: on the size of the lease and the term. So
Speaker 1: what we've seen here recently is it was publicized so
Speaker 1: I could say it. Taubman has been telling all of
Speaker 1: its tenants that they expect them to pay because they're
Speaker 1: going to have to pay their lenders and pay utility
Speaker 1: bills and so forth, and hold them to it. In
Speaker 1: other circumstances where you've got a dominant tenant that makes
Speaker 1: a building otherwise not commercially viable and that tenant camp pay,
Speaker 1: than I would very much expect that the landlord would
Speaker 1: try to work with them. The circumstance here is unprecedented
Speaker 1: because it potentially impacts not every tenant, but of a
Speaker 1: vast majority of tenants. When you look up and down
Speaker 1: Fifth Avenue and Madison Avenue, and all the closed stores,
Speaker 1: all the vacant office buildings throughout the city. Its situation
Speaker 1: no one's ever seen before. Wendy's is deferring rent payments
Speaker 1: on properties least to franchises by half over three months.
Speaker 1: Can other businesses afford to take that kind of a hit?
Speaker 1: Is that a solution for some businesses but not others?
Speaker 1: It may have to be. I mean, people can only
Speaker 1: pay what they can pay, and the law can step in,
Speaker 1: and some circumstances legal doctrines, I should say and try
Speaker 1: to help folks out. So if your cash flow is interrupted,
Speaker 1: then it may be that doctrines like temporary and practicability
Speaker 1: make it impossible for you to continue to pay on
Speaker 1: down the stream. So if you're relying on a tenant
Speaker 1: paying you to pay your lender, for example, that may
Speaker 1: be a circumstance that excuses your payment or at least
Speaker 1: gives you some basis for a forbearance. What other legal
Speaker 1: concepts might come into play here? A variety of different
Speaker 1: legal concepts that apply to circumstances when a contract unexpectedly
Speaker 1: can't be performed or is extraordinarily difficult to perform. So
Speaker 1: impossibility is the extreme where you can't perform the contract
Speaker 1: at all. The example is where an opera house burns
Speaker 1: to the ground and the opera singer can't perform. Impracticability
Speaker 1: is short of that. It's one where in theory you
Speaker 1: could because you can always in theory pay money. It's
Speaker 1: not impossible, but you don't have the money to pay
Speaker 1: because the way that the contract is structured, it's coming
Speaker 1: from a particular source. Courts can be sympathetic to that,
Speaker 1: particularly if it's a temporary situation. The other one that
Speaker 1: comes into play here as a broad legal doctrine is
Speaker 1: called frustration of purpose, which is where you engage in
Speaker 1: a contract for a particular purpose so that everyone understands
Speaker 1: and you can no longer achieve that purpose. So the
Speaker 1: idea is, you know, you're renting Masison Square garden to
Speaker 1: put on a concert and can no longer occupy the
Speaker 1: garden because of government regulations. Well, the entire purpose of
Speaker 1: the contract can't be fulfilled. So those are the legal
Speaker 1: doctrines that can step in quite apart from particular clauses
Speaker 1: and leases. Is this a time when courts might be
Speaker 1: more sympathetic to tenants rather than landlords. It's a great question, June.
Speaker 1: The courts are very accustomed to seeing commercial lease disputes,
Speaker 1: and it's the landlords. They're typically repeat players, so they
Speaker 1: have their game well owns and and leases that are
Speaker 1: crafted to protect them. Here, I do think courts are
Speaker 1: going to be unusually sympathetic. The courts themselves are really
Speaker 1: under tremendous strains, So in New York, courts are closed
Speaker 1: for everything except what's deemed essential business, and they're handling
Speaker 1: cases on a remote basis. So I think you've got
Speaker 1: a circumstance where courts are going to be quite sympathetic
Speaker 1: to tenants, particularly if what the tenant is looking for
Speaker 1: some kind of temporary relief until the crisis abates, at
Speaker 1: least into some degree. Another question I have is if
Speaker 1: there are, you know, mass defaults on commercial leases, how
Speaker 1: much can the courts do during these times? Might overwhelm
Speaker 1: the courts at a time, and they're not really doing much.
Speaker 1: I think you're absolutely right. What you've got courts really
Speaker 1: with judges not showing up, with lawyers not appearing, they're
Speaker 1: doing what they can to try to handle essential disputes,
Speaker 1: and I think, um they will expect parties to be patient. Certainly,
Speaker 1: if what I read in the Wall Street Journal a
Speaker 1: couple of days ago is that half of small businesses
Speaker 1: in the US haven't paid their rent uh made their
Speaker 1: mortgage payments for April, I think that problem accelerates into May,
Speaker 1: because which you've got is people who are paying now
Speaker 1: to avoid what are sometimes pretty draconian penalties in their leases. Um.
Speaker 1: But they're just not going to be able to continue
Speaker 1: doing that, And the courts can't handle that kind of volume. Uh.
Speaker 1: And and there are going to in in uh, in
Speaker 1: New York, in California. Uh, they've both either authorized local
Speaker 1: governments to do it or or indicated that they're not
Speaker 1: going to proceed with commercial evictions in the short run. UM.
Speaker 1: Looking at that on like a three month basis, That
Speaker 1: may continue, And certainly you can't expect courts to handle
Speaker 1: thousands of cases on anything like an expedity basis. There's
Speaker 1: so many unknowns here. But even if landlords succeed in
Speaker 1: evicting someone, how do they get tenants in this environment?
Speaker 1: It's a great question. Uh. Look, that's that's a commercial question.
Speaker 1: They're going to have to be thinking about what do
Speaker 1: they replace it with um, you know, sort of at
Speaker 1: some point they may turn from being landlord's demanding rent
Speaker 1: to being partners trying to figure out the best way
Speaker 1: to restructure a difficult situation. And it's often better to
Speaker 1: get some rent then to get none. Governor Cuomo has
Speaker 1: said that tenants can't be evicted for the next few months.
Speaker 1: Does that apply at all to commercial tenants or is
Speaker 1: that just residential tenants? Now? Uh, my understanding is that uh,
Speaker 1: commercial tenant evictions have been paused. It doesn't mean that
Speaker 1: that they have gotten governmental real leaf in terms of
Speaker 1: um actually paying their rent um. But I think courts
Speaker 1: are minderstanding. Executive orders of courts are not going to
Speaker 1: be uh conducting commercial evictions over the next ninety days,
Speaker 1: and so those disputes will just continue to brew. Um
Speaker 1: So in some instances, because as I mentioned, their penalties
Speaker 1: and leases, tenants may continue to pay as long as
Speaker 1: they can under a reservation of rights. We're seeing some
Speaker 1: of that um in others like the cheesecake factory and
Speaker 1: H and M examples that you gave, Uh, they're not
Speaker 1: They're not gonna pay, and they're going to take their
Speaker 1: chances and see what happens, but I don't think any
Speaker 1: of those will result in immediate term evictions. Is there
Speaker 1: any relief from the federal government or the state government
Speaker 1: for example the Cares Act? Is there any relief there? Well,
Speaker 1: I understand that there's three fifty billion dollars that has
Speaker 1: been devoted to small business loans. Obviously they're a lot
Speaker 1: of devils and those details. Um, but uh, I don't
Speaker 1: I don't know that it's directed specifically towards um towards
Speaker 1: payment of rent, but I think that's the The idea
Speaker 1: is it's to keep small businesses afloat so they can
Speaker 1: pay their rents. And some landlords are taking the view
Speaker 1: that well, you know, you can either look to the
Speaker 1: government for help that you can't afford the rent, or
Speaker 1: you can look to business interruption insurance, which is a
Speaker 1: source of recovery for some businesses if if they're fortunate
Speaker 1: enough to have it. Um. But you know, we expect
Speaker 1: that our rents do because we have our own obligations.
Speaker 1: So uh if that's um. You know. What I've also
Speaker 1: read is that only something like a quarter of landlords
Speaker 1: or banks are offering any kind of rent reduction or
Speaker 1: deferral to the small businesses that can't pay. That's a
Speaker 1: pretty big looming collision. You know, half the half the
Speaker 1: businesses aren't paying, and only um you know half of
Speaker 1: those involve landlords who are willing to compromise with them. Uh.
Speaker 1: Then then there's gonna end up being quite a lot
Speaker 1: of disputes. What kinds of calls are you getting from
Speaker 1: your clients? Sure, so we're we're talking to uh, you know,
Speaker 1: commercial tenants. UH. So we're talking to you know, I
Speaker 1: won't have old any client names. We're talking to household uh,
Speaker 1: you know name retailers. We're talking to um, fortune five
Speaker 1: type companies, you know, large employers that have a need
Speaker 1: for massive office space. UM. Candidly, we also talked to
Speaker 1: uh landlords, we talked to reachs, we talked to um
Speaker 1: uh commercial brokers, UM, you know, across the landscape of
Speaker 1: what they can do. UH. And you know, these are
Speaker 1: uh frequently very tailored situations. UH. And it depends, you know,
Speaker 1: how much their cash flow is hit it and how
Speaker 1: much their business is hit, and whether there's any degree
Speaker 1: to which the property can be salvaged or put to
Speaker 1: other use during this time period. So it's a it's
Speaker 1: a case by case circumstance. Um. But we're seeing it
Speaker 1: as a problem from every direction. Lenders, uh, you know,
Speaker 1: the actual commercial landlords, and of course the tenants whose
Speaker 1: businesses are completely disrupted by this. You have this reverberating
Speaker 1: effect or cascading effect. So the landlords are any of
Speaker 1: them already coming up against problems because they can't pay
Speaker 1: their loans. Well, I can't say I have seen that
Speaker 1: quite yet. They've talked about it as a potential problem, um.
Speaker 1: And you know, the large commercial landlords may be well capitalized.
Speaker 1: A lot of buildings are structured in a way where
Speaker 1: they're held in special purpose vehicles. So it's sort of
Speaker 1: a self contained economic unit which relies on uh, you know,
Speaker 1: relies on rent to be paid. Uh. That's going to
Speaker 1: be funding in turn, what the commitments are to the lenders,
Speaker 1: what the commitments are too if there's a master lease
Speaker 1: on the property on the ground lease owner, what the
Speaker 1: commitments are for utilities, for taxes and so and so forth.
Speaker 1: So there may be circumstances where, despite the health of
Speaker 1: the uh commercial landlord, that the particular property has business
Speaker 1: risk associated with it, and that all depends on um,
Speaker 1: how tight the economics are of that property, and and
Speaker 1: you know, how long this crisis goes on for buildings
Speaker 1: makes you know, certainly survive. I'm on for two or three. Uh,
Speaker 1: you know, at some point the building is you know,
Speaker 1: the building economics itself may not survive. How do you
Speaker 1: handle this when you don't know how long this could take?
Speaker 1: I mean, every day it seems like they're any another
Speaker 1: week and their month onto how long will be you
Speaker 1: know shuttered, which means that business activity is low or nil. Yeah, no,
Speaker 1: it's it's an impossible situation because you know, one has
Speaker 1: a crystal ball in terms of how long this crisis
Speaker 1: is going to keep everyone sheltering in place. So it
Speaker 1: seems like the markets are you know, frankly paying more
Speaker 1: attention to the daily press conferences of Governor Cuomo than
Speaker 1: almost anything else because they're trying to get a handle
Speaker 1: on how long we're gonna we're gonna live like this,
Speaker 1: um you know, all hermited to ourselves and our homes,
Speaker 1: and and they're being you know, no commerce on a
Speaker 1: lot of sectors of the economy, at least none remotely
Speaker 1: like what we're used to. So that's you know, that's
Speaker 1: almost impossible for folks to predict and you know, it's
Speaker 1: a circumstance where I don't know, frankly, either landlords and
Speaker 1: tenants are going to be working with each other, um,
Speaker 1: and working with lenders to try to come up with
Speaker 1: short term resolutions or there there's gonna be a lot
Speaker 1: of brewing disputes. And where push is going to come
Speaker 1: shove is you know, where you've got the tenants who
Speaker 1: absolutely don't have the ability to pay, Um, we'll just
Speaker 1: stop paying and um, you know, and then the dominoes
Speaker 1: fall from there. When can landlords claim their property has
Speaker 1: been effectively taken by the government? You know, there is
Speaker 1: this concept that's embedded in the system endment of the
Speaker 1: Constitution of a taking by the government. The government cannot
Speaker 1: take your property without giving you just compensation. So the
Speaker 1: classic example of eminent domain, they decide that they're going
Speaker 1: to uh condemn your house since they were building a
Speaker 1: high way that's needed for public use, and then they
Speaker 1: have to pay you the market value of your house.
Speaker 1: So what happens if you have uh some government restriction
Speaker 1: that diminishes the value of your property but doesn't quite
Speaker 1: destroy it, or that temporarily makes it unavailable. There are
Speaker 1: concepts in some jurisdictions of regulatory takings. So the idea
Speaker 1: of the government puts a constraint on your property that
Speaker 1: greatly diminishes its value or its use, and those have both,
Speaker 1: you know, potential effect of making claims against the government
Speaker 1: in certain circumstances. I would think this would be a
Speaker 1: difficult one, since this is you know, the government exercising
Speaker 1: its police power, or it can be ones that trigger
Speaker 1: rights under the lease. So casualty clauses under leases have
Speaker 1: language frequently that allows for non payment of rent in
Speaker 1: the event the property is uh to froid. Uh. Some
Speaker 1: of them have much more broad language that includes the
Speaker 1: properties impaired or that the property has restricted use by
Speaker 1: a virtue of a government regulation. Uh. And in those circumstances,
Speaker 1: that may well be a basis for tenants to not
Speaker 1: have to pay, at least on a temporary basis. Thanks Andrew.
Speaker 1: That's Andrew Rossman, a partner at Quinn Emmanuel. Thanks for
Speaker 1: listening to the Bloomberg Law Podcast. You can subscribe and
Speaker 1: listen to the show on Apple Podcasts, SoundCloud and on
Speaker 1: Bloomberg dot com slash podcast. I'm June Brasso. This is
Speaker 1: Bloomberg ye