By Andrew McIntyre

Law360 (April 30, 2020, 5:54 PM EDT) -- In this edition of Coronavirus Q&A, Akerman LLP's real estate leader discusses force majeure, landlord-tenant talks and why certain real estate funds are likely to ramp up their deal activity during the pandemic.

Eric Rapkin, who chairs Akerman's real estate practice group and works in the firm's Fort Lauderdale, Florida, office, shared his thoughts as part of a series of interviews Law360 is conducting with lawyers about the way COVID-19 has impacted business and brought various legal questions and considerations to the surface.

Rapkin handles purchase, sale, leasing and financing deals across the country and across different asset classes, and also has expertise on opportunity zone and construction matters.

This interview has been edited for length and clarity.

What sorts of questions are you getting from your real estate clients during the pandemic?

The first part of the absolute shock of the basic economic shutdown was dealing with rent relief nationally. Landlords and tenants, and tenants saying, "We need rent relief," while at the same time, landlords being sensitive to the fact that they also have lenders, and the lenders need to be paid their mortgages. And similarly, if landlords weren't getting the rents from the tenants, are they going then to their lenders to look for forbearance?

While the pandemic is obviously a completely different animal than the Great Recession was, which was just a financial meltdown, this is a financial meltdown because of a pandemic. But as far as some of the economic consequences, in some ways, it's similar. There are rent relief questions. Will you give some tenants relief, and then what structure will that take? Does it involve a lease extension?

What you saw in the recession is mostly what you're seeing now, which is really every one of these is a case-by-case basis. And most prudent landlords are wanting to know what else is the tenant doing. Is the tenant dealing with its other vendors? Most importantly, is the tenant continuing to pay its executives all of their salary and bonuses? In other words, mostly for the landlord, it's asking, "Is the tenant asking me as landlord to bear all of the burden?" So in a lot of ways, that part is similar to the recession, except, what you have here now is, because of the pandemic, so many states and counties have enacted in one way or another moratoria on the ability to file evictions and foreclosures.

Our clients are asking about what is available under the CARES Act and the Paycheck Protection Program. We're all of a sudden examining all sorts of legal issues. Immediately, everyone in the country was talking about what force majeure is and what force majeure clauses say. And then there are issues people are looking at of whether this is a casualty under leases or a condemnation under leases.

In a lot states, they have been trying to pass statutes that in one way or another require insurance companies to cover these losses. But I think in any case, just like after Sept. 11 when it came to terrorism coverage, what we normally see is that these kinds of issues get resolved through the courts.

To the extent that the landlord-tenant disputes go to litigation, how do you see that playing out?

Most landlords and most tenants are, for the most part, rational market actors. They're not looking for an over-advantage, let's say. And I think that when this ends, even if the landlord says, "I think I win on all arguments and I have a right to evict you now that the courts are open," why do you want to do that when it's unlikely, at least in the short term, that you'll be able to find a tenant that can come in and pay you rent? It could be to everyone's benefit to work these out.

We know some tenants hadn't paid in April, but I think most did. But now, this week, May 1 happens. Which tenants are paying May rent, and if it goes on into June, how much is that going to change? But I think what's going to happen is — and I'm not saying once it's business as usual, because it's not going to be business as usual — once the lockdowns end, I think what you'll see is landlords and tenants working out the situation, rather than litigate who's right and who's wrong, because that could take a year. Or more. So what's the point of that?

What do you expect to see in May and then in June, in terms of landlords who may be struggling to make their debt payments? How do you see that playing out with lenders and landlords?

I think that in that way, that's a parallel to the recession. If landlords are unable to make their May mortgage payments, they will approach their lenders for forbearance, and whether the lender is a community bank, a national bank, an insurance company, whatever, they're basically looking for a warm body to speak to and say, "Look, this wasn't anyone's fault. This project was really performing well before this event, and we need help to get through this." Lenders I guess can say, "I'm sorry, you owe me the full mortgage on the first, and so just put in more equity, and keep paying me."

But I think most lenders will be amenable to some kind of forbearance. I think the problem is, and I'm not picking on [commercial mortgage-backed securities] lenders, but I think similar to the recession, just because of all of the stakeholders, it will be harder for CMBS special servicers to quickly work out issues. So that will take longer for CMBS loans. But I think that, similar to landlords, most lenders will be cooperative and try to work something out here, at least to get us through the worst of the total economic shutdown.

You mentioned force majeure. While it may not apply to rent disputes between landlords and tenants, it has wide application. How do you expect to see force majeure disputes play out as they go to litigation?

The force majeure clause might not be something on its face that you can rely on as far as rent payments. But I think that going forward, we're going to start to see updates to force majeure clauses which we probably haven't seen in at least a generation, which will be that force majeure clauses will also address waivers of other potential remedies such as frustration of purpose or impossibility of performance, so where basically you'll have a force majeure clause that then essentially says, "This is the entire world of remedies should something like this happen." You won't be able to look outside the lease for potential remedies.

I think in commercial leasing, we're also going to see some more attention paid to a lot of other boilerplate [in documents] that often is very much overlooked. So force majeure but also the casualty and condemnation clauses and the quiet enjoyment clause in a commercial lease. And then, of course, whether insurance clauses are going to change.

Are there lessons from the Great Recession that apply going forward during the pandemic?

I think a lot of the lessons learned on the insurance side are, "Is this something that really should have been covered?" Even if you have to pay a fortune extra, maybe now people will.

If there's a lesson though, it's trying to be in some way prepared for the next one. During the recession, capital markets froze. In general, the prevailing thought was that it was way too frothy of a market and in fact underwriting standards were just not appropriate. There was way too little equity, too much debt, faulty underwriting and pro formas, just too aggressive. And deals were not underwritten well. But I don't think there are any investment professionals, analysts, economists, who look at this and say, "Well, this isn't a surprise we're in such distress because of the way these deals were underwritten."

The projects that have been going forward in the last let's say five to eight years, I think the prevailing view is that they were underwritten pretty well with not excessive debt and a sufficient amount of equity, and through really no fault of their own, they're now whacked with an inability to refinance and a loss of 25%, 30%, 40% in value of a project.

It's not happening just yet, but we're going to see a lot of distressed transactions. In the recession, you didn't feel so sorry for investors because there was too little equity, too much debt. Here, investors are going to be writing down or losing the majority of or maybe all of their investment simply because this pandemic hit. And so there will be a lot of distressed opportunity and you'll see a lot of distressed funds really starting to ramp up looking for deals over the next several months. It's a shame because these deals were initially underwritten well.

--Editing by Aaron Pelc.

Check out Law360's previous installments of Coronavirus Q&A.

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