A year ago, as many of us chased packed subway trains or sat in gridlocked traffic, it would have been difficult to imagine a world without a daily commute. The COVID-19 pandemic has transformed many aspects of our lives, with the sudden shift to a work-from-home environment being one of the biggest changes. Office workers across different industries have tried to make the most of this change by spending more time with family or embracing daily loungewear, but for those in the real estate industry, it has been impossible to ignore the disruption caused by this retreat from the office.
As COVID-19 continues to spread, many companies, including eBrevia, have opted to keep non-essential workers at home for the remainder of 2020, and some have instituted permanent work-from-home arrangements. This mass exodus from the traditional office has unsurprisingly had reverberating effects on landlords and tenants alike. Due to a lack of need, many landlords have struggled to maintain occupancy rates. The consequences for landlords with mortgaged property have been even greater. Without cash flow from tenant rents, many have struggled to meet the minimum financial obligations under their loan contracts.
The economic downturn resulting from the pandemic has also taken a significant toll on commercial tenants. Many companies experiencing a severe decline in business have struggled to pay rent or satisfy the contractual covenants they agreed to in their leases. Failing to meet such obligations can result in an event of default under the agreement, which can lead to serious repercussions for the defaulting party.
Landlords, tenants and lenders alike have recognized that these circumstances necessitate change. Many parties have already begun working to examine and reconfigure their existing contractual arrangements in order to adjust. One of the most important things that parties are doing is pinpointing their legal obligations in the event of unprecedented circumstances, such as a natural disaster or a global pandemic. Often, contracts contain language that provides flexibility to the parties if conditions change between the time the contract was formed and the time of performance (in legalese, these clauses are called “Force Majeure”). Understanding the scope of these protections can assist parties in figuring out what their immediate obligations are.
Parties in distress have also turned to restructuring. “Workouts” of existing leases and debt instruments are a powerful means of providing relief to tenants and borrowers who can no longer meet their contractual obligations.
A workout allows the parties to re-evaluate the terms of their agreement in light of the current circumstances and level the playing field, offering tenants reprieve and often granting landlords other favorable conditions. However, parties first need to understand the scope of the terms requiring amendment, in order to determine what type of mechanisms to negotiate for. Once parties have grasped the parameters of their existing legal commitments, then determining the structure and specifics of a workout becomes much easier.
During times like these, a contract analytics tool can be vital. Being able to quickly and accurately identify key obligations and liabilities can rescue parties from default and give them comfort that legal protections are in place to safeguard their interests. eBrevia makes it simple for all parties to a real estate transaction to streamline this process. Our tool has been pre-configured to extract hundreds of key data points out-of-the-box, including force majeure clauses, lease-specific provisions (such as Base Rent, Late Charges, Early Termination Option, and many others), and loan-related information. To accommodate asset- or client-specific needs, eBrevia also allows users to train our AI to pull out custom information so they are able to find the data points key to their analysis. Many of our clients are actively leveraging these capabilities as they navigate the changing real estate climate during this pandemic era.
After 6 months of working out of my apartment living room, office normalcy still feels a far cry away. However, as we all continue to adjust to this unpredictable landscape, the best thing we can do is try to get our feet on solid ground. Defaults and suspended cash flow have negative consequences for parties on both sides of a transaction. Being reactive to these threats is something within our control, and engaging in contract review early and quickly can be essential to helping businesses survive and thrive during these times. eBrevia is here to help, providing the tools needed to make contract review as painless as possible.
If you are interested in learning more about how eBrevia can assist you, please see the following resources on our website: https://www.dfinsolutions.com/products/ebrevia/real-estate.
You can also contact me directly at firstname.lastname@example.org for further information. Stay safe and healthy, everyone!