By Andrew McIntyre

Law360 (February 26, 2021, 3:39 PM EST) -- A new wave of litigation is likely in March as disputes involving tenants, landlords and borrowers remain and parties are running out of alternatives, one of Fried Frank's real estate litigation leaders told Law360 in a recent interview.

Janice Mac Avoy, a partner in New York and co-head of Fried Frank Harris Shriver & Jacobson LLP's real estate litigation department, spoke to Law360 as part of a five-part series of conversations with female real estate leaders during Women's History Month, a year into the COVID-19 pandemic.

Mac Avoy, who's also a member of Fried Frank's pro bono committee, represents landlords, tenants, investors and lenders on a variety of real estate litigation matters.

This interview has been edited for length and clarity.

Where do you think we are right now in the real estate litigation cycle as it pertains to COVID-19?

At the very beginning. When the pandemic first hit, people assumed it would be short-term. And you had a lot of 90-day forbearances in terms of landlords forbearing for rent, lenders forbearing from collecting payments. Everyone's sort of holding their breath, waiting to see how long this is going to last.

The courts were also completely shut down, so you didn't have access to the courts for litigation. And the longer it dragged on ... the 90-day forbearances were extended, first for 30 and 60 days, and now that we're heading into a year, you have to now start dealing with the problems.

And you've got problems of all kinds of tenants being impacted, so landlords are struggling [to] make their debt service payments.

[Additionally], hotels continue to be battered by the pandemic, and we're going to be in a situation where there's essentially a year's worth of lost revenue that isn't going to be able to be made up. And while some folks have been able to work out payment plans and temporary abatements and then adding it on to the end, the longer it drags out, the harder it is.

I think a year ago, none of the hotel operators thought that they would be in a position where a year later, they were still having 20 to 30% occupancy.

So now what we're starting to see, and saw starting a couple of months ago, is the first wave of [Uniform Commercial Code] foreclosures, where mezzanine lenders were foreclosing on loans for all types of property. There was some litigation arising out of that. But on the whole, all of those UCC foreclosures were allowed to proceed. Some were delayed for a short time, but they were allowed to proceed.

And on Feb. 26, the [New York] commercial mortgage foreclosure moratorium will end [unless it's extended, which it now has been]. I think we'll see a huge wave of mortgage foreclosures at that point. And when all this happens, in bad times, joint venture partners start fighting ... I think we're really just at the beginning of the cycle in terms of litigation.

So with this wave of foreclosures that we may see, is it fair to say hotels may be the hardest hit among asset classes during that wave?

I think so, because I think office properties are generally in a pretty good spot. Work-from-home, while inconvenient in a lot of ways and lonely in every way, has enabled most office-using businesses to continue to a major degree other than travel, hospitality or travel-related office users.

But I think generally, most major businesses have been able to continue, and they're continuing to make revenue, and therefore they can continue to pay the rent.

So office I think will not be hit nearly as hard. Retail obviously was hit very hard. But now that stores are open, albeit at a lower level, and consumer spending is rising, I think retail will begin to make a slow recovery.

The other thing about retail is that most retailers also have online outlets. So people, even if they weren't able to go to the store or still aren't going to the store, they can still buy online. Hotels are the ones that can't make it up any other way.

So we have on the one hand the foreclosure issue, and disputes between lenders and borrowers. Let's talk about landlords and tenants. What are you seeing right now in terms of how those disputes are playing out?

So the first wave was really the wave of retail tenants suing for abatement under their leases. By and large, those claims have been unsuccessful. There are a few outliers.

There's one in Massachusetts, where a court held that the frustration of purpose doctrine allowed the tenant not to pay its rent during the time of the closure. There was a bankruptcy case in Illinois where the court granted a 75% abatement … The restaurant was allowed to do take-out, and its revenue was down 75%.

But on the whole, particularly in New York, those cases have been unsuccessful. There are two cases where a court actually denied a landlord's motion to dismiss and said that at least the tenant should be able to prove its case.

The overwhelming majority of those have been unsuccessful because most leases are written in a way that provides that the risk of something like this falls on the tenant unless the landlord caused the tenant's inability to use the premises. And so I think in most of the cases, those claims will be unsuccessful.

Now that said, I've also seen quite a bit of consensual out-of-court resolutions where landlords have granted [some relief]. We've very rarely seen total abatement, but [landlords] have granted relief, certainly for the period in which retail premises were forced to close and added it as being repaid over time.

And I've seen a number of those, and certainly the larger landlords were doing that. And then malls are a whole different kettle of fish — a disaster.

You mentioned frustration of purpose and that Massachusetts case. Of course, another big defense, or potential defense, is force majeure. What have we learned about that in the last year?

I think that honestly, we learned that force majeure is a very narrow doctrine. Courts will narrowly construe force majeure clauses. If there isn't a force majeure clause in a lease, then you're left with the common law doctrines of frustration of purpose or impossibility of purpose. And again, those are tough doctrines to overcome.

The interesting thing that you see in a lot of force majeure clauses is strikes, acts of God, war, terrorism ... or any other cause reasonably beyond the control of the parties. And courts read that phrase very narrowly. Even though it sort of sounds like a very broad catch-all, they say, "No, unless it is something that is similar to the enumerated clauses like war or an act of God or whatever, it's not covered."

And so there have been some cases that have held that a narrowly worded force majeure clause doesn't even cover the pandemic. Although I would certainly argue that the pandemic clearly comes within the act of God. I just point to the Passover Seder where they list the 10 plagues … Disease is certainly one of them. I think it would come within the typical definition of act of God if the force majeure clause is that broadly worded.

Are you seeing contracts written differently now when it comes to force majeure?

I think the two places you see that are different are force majeure definitions and material adverse effects or material adverse changes … It depends on negotiating power. So between a landlord and tenant, the landlord often has the superior bargaining power, and it can be sometimes hard for tenants to negotiate the inclusion of the pandemic.

But certainly they have been trying. But what we've seen in a lot of MAC clauses or force majeure clauses is they are including pandemics and public health emergencies, but specifically excluding macroeconomic events that may be caused by the pandemic or the public health emergency.

So it would have to be that your business is closed by the pandemic, not just that the overall economy is in freefall because of the pandemic. So you would have to show that it specifically is impacting you.

You mentioned retail earlier, and we've been talking about MAC clauses here. That leads me to the Simon-Taubman dispute, and I'm wondering what that taught us about how these contracts are enforced?

The Simon-Taubman dispute was settled, so there was never a ruling. But in the Anbang case [AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC et al.], there was a MAC clause that specifically did include pandemics, but it said that the acquired entity had to be impacted differently than the economy as a whole. And the court held, 'No, you're impacted in exactly the same way. And so there's no out,' but went on to hold that there had been material misrepresentations and changes in the way the business was run, and so there were different triggers to end the merger. And I think that is not a surprising result.

You said you think we're just at the beginning of the real estate litigation cycle. Where do we go from here?

So I think now what we're going to see, particularly after Feb. 26, is a wave of foreclosures. And this comes at a time when the New York courts just had a $300 million budget cut.

Although I think the courts have done an amazing job, they are not fully equipped to handle remote access. I think the New York Supreme Court, the commercial division has done an excellent job. Everything runs quite smoothly, frankly. And the appellate courts have gone quite smoothly in terms of handling remote appearances.

But some of the other courts — the landlord-tenant, the family court — they are just very ill equipped ... It leads to an overall crowding of dockets and a lengthier time to decide cases.

I know the courts have tried very hard to issue timely decisions, but the sheer volume and the cuts in funding and the number of judges ... I think it will lead to a huge backlog and delay in things getting decided.

There's been a lot of talk about lenders being patient, trying to work out agreements with their borrowers. Do you get the sense we're nearing the end of that stage, and that lenders may get more aggressive in the near term?

Either folks have been able to work it out because they see the light at the end of tunnel, they see the solution or … they simply cannot support that level of debt and it needs to be restructured, either through a foreclosure or in some other way.

Because particularly in the hotel asset class, you can't sustain a year's worth of lost revenue and then try to make it up ... I think it's not that the lenders have run out of patience — they've run out of solutions.

--Editing by Philip Shea.

Update: This article has been updated to reflect the New York commercial mortgage foreclosure moratorium being extended.

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