Paused – Real Estate: Navigating the Boundaries of Evictions and Foreclosures | Womble bond dickinson
Across the country, the federal government as well as state and local governments and courts are taking action to limit evictions and seizures. Financial institutions, service providers and owners facing early defaults in their portfolios should keep abreast of the limitations in order to avoid heightened risks. Tenants and mortgagors also have contractual obligations at stake and should understand recourse options.
The main considerations for these ON PAUSE problems are:
- The once well-established procedures for dealing with real estate-related defaults are now evolving.
- On the residential side, a 60-day moratorium imposed by the federal government on evictions and foreclosures is now in place for FHA, Fannie and Freddie single-family loans. Mortgage assistance and relief guidelines are also in place.
- Few states operate at the state level, with more activity at the city and county level.
- The limitations are not limited to residential properties, and restrictions on remedies and default procedures have also been imposed for commercial properties.
- The limitations are also not uniform in duration, and extensions of moratoriums of 30 or 60 days are possible.
- There is no indication that the guidelines seek to limit contractual payment obligations or default remedies that accumulate after moratoriums end, but relief programs may prescribe new rules.
- Real estate relationships are generally oriented towards the long term. For landlords, tenants, landlords and lenders, communication is essential to limit the temporary impact and prevent irreversible long-term consequences. Understanding the options for a deferral, forbearance, increased credit facility, or line of credit are important considerations.
- If your real estate interests span multiple jurisdictions, compliance is a major concern and aggressive action carries higher risks, as well as feasibility and reputation issues. A conservative approach to default remedies can help maintain long-term relationships, avoid litigation, and prevent a contract issue from turning into tort litigation.
- Extensions and modifications are likely. Compliance planning should therefore anticipate the regular updating of policies based on the duration of the limitations that affect your business.
Moratoriums – Federal level
On March 18, 2020, the FHA announced a 60-day moratorium on foreclosures and evictions for owners of single-family homes with FHA-guaranteed loans. The guidelines apply to all FHA Single-Family Mortgage (Reverse) Mortgage (Reverse) Mortgage and Home Equity Conversion programs. The move aims to respond to the financial impact homeowners face, as well as recognize the importance of families’ ability to stay in their homes to comply with containment measures.
This federal announcement is probably having the biggest impact on the home loan market, but many homeowners may not be sure whether or not their loan is FHA insured. Communications between services should be aware of potential knowledge gaps. Even for non-FHA loans, the risks are heightened based on a shifting focus of compliance with eviction and foreclosure rules varying at the state, city, and county levels.
Moratoriums – state and local
Inconsistency is a problem because few states operate at the state level. More activity is observed at the city and county level, both by city governments and local courts. In California, the governor issued an executive order on March 16, 2020 to curb evictions and foreclosures. But the scope and impact of the ordinance is really left to the local municipalities. Governments in large population centers such as Los Angeles and San Francisco have already issued moratoria on evictions resulting from COVID-19, and many other local governments in the state are doing the same.
This patchwork of moratoria is emerging in other states as well, starting with those hardest hit by COVID-19. In New York, the governor issued an executive order on March 20, 2020 prohibiting “the execution of either an eviction of any residential or commercial tenant or of a foreclosure of any residential or commercial property for a period of eighty -ten days”. In Washington, the governor issued an executive order on March 18, 2020, suspending residential evictions for a period of 30 days. However, other municipalities in the state have imposed more severe restrictions. For example, the mayor of Seattle issued an emergency ordinance on March 16, 2020 imposing a moratorium on residential evictions for 60 days.
Likewise, court closures in all jurisdictions present feasibility issues for foreclosure and eviction proceedings, with an inevitable backlog of proceedings to be dealt with along the way. Many courts, state and federal, have emergency orders in place to stay non-essential proceedings. The orders themselves vary and there is debate about the impact of evictions and foreclosures.
For example, in Fulton County, which encompasses much of the Atlanta Metro, the Fulton County Magistrate’s Court and Marshal on March 20, 2020 announced coordinated efforts to ensure that all evictions are suspended for the duration of the limited judicial emergency, declared by the Supreme Court of Georgia (currently, until April 14, 2020). The announcement came after the chief magistrate had formally suspended the eviction hearings. But these measures are not consistent across the 159 counties of Georgia.
In contrast, in South Carolina, on March 18, 2020, the chief justice of the state Supreme Court issued an order “to deal with statewide evictions and foreclosures” based on concerns that “Increased housing insecurity and homelessness exacerbate the threat posed by the disease.” Under the ordinance, then-ongoing evictions must be postponed to a date of May 1, 2020 or later, and an indefinite moratorium is imposed on future eviction proceedings, foreclosure hearings and sales.
These guidelines involve the intersection of law, politics, health and safety and are very emotional. The resulting uncertainty and risk justify prudence in practice, necessitate communication with parties whose interests may differ and, depending on the circumstances, is facilitated by consultation with a lawyer.
Tenants, landlords, and lenders are aligned to seek the continuation of real estate relationships that tend to be long-term oriented. For lessors, the implications of the suspension of performance obligations are often specific to the lease. In addition to payment issues, more complex issues relate to exposed or contaminated properties, particularly for multi-tenant properties or properties with common areas. An agreed temporary rent deferral can be the perfect solution for resolving short-term payment issues and maintaining good tenant relationships. Many larger retailers have reportedly already made such requests, but the downstream impact is that it potentially involves the owner’s relationship with their lender. Tenants and landlords should consider whether rent payment issues violate loan covenants or require disclosure.
Lenders also seek to maintain the performance of their portfolios. From a practical standpoint, foreclosures and default remedies are unlikely to be feasible in the coming months, either due to government limitations, court closures and backlogs, or reputational risks. Deferrals are probably the most sensible tool for loans with no history of default and facing temporary cash flow issues. Adjournments may relate only to interest or to principal and interest. Other alternatives may be for landlords to restructure rental obligations around interest obligations or to contract additional financing to deal with temporary cash flows.
The moratorium measures discussed above include calls on financial institutions to make loan assistance options available. For homeowners, Fannie Mae and Freddie Mac have guidelines in place to provide affected homeowners with forbearance options that include waivers of penalties and late fees, suspension of credit reports for certain defaults and l offer of loan modifications. Similar policies in the mortgage sector could follow. The California Executive Order, discussed above, contains provisions directing financial institutions to “identify the tools to be used to relieve Californians from the threat of foreclosure and residential displacement” and calls for financial institutions to voluntarily implement moratoria. immediate.
For small businesses, the SBA issued a notice on March 10, 2020 “to remind” SBA lenders “of their unilateral power to provide temporary relief in the form of deferred payments to existing borrowers in certain circumstances.” Small business borrowers with SBA loans may have options to request temporary deferrals. For SBA and other commercial loans, doing so as early as possible may be the right decision as loan protocols may impose limits on loans that have already been in default for more than 60 days and deferrals are often subject to review. current finances. To be viable, lenders and borrowers must document the temporary nature of the cash flow problem and the expected recovery.
While evictions are squarely targeted by interim moratorium measures, it is less clear whether the same level of restrictions will be placed on foreclosures. Even so, moving forward with foreclosures in today’s environment presents risks far beyond pure legal exposure. And whatever the case today, the rapidly evolving events in the field mean that operators must remain agile and expect to make significant changes in loss mitigation practices during this period ON BREAK.
IN PAUSE, Anticipate
Consider seeing a lawyer if your business is helped by the following:
- Assess compliance for the loan department in light of the evolving legal ramifications of default remedies.
- Examine lease obligations to address “shelters in place” or other implications of government orders and potential force majeure issues.
- Drafting of a suspension agreement to deal with a short-term rent deferral.
- Review loan documents for restrictive covenants and formulate disclosures to lenders.
- Negotiate a forbearance agreement or loan modification in order to understand and document short-term performance issues.
- Continue to expand credit agreements to manage cash flow.
- Understand the potential problems with insurance coverage.