Experts say lease disputes often require not just counsel from real estate lawyers and litigators, but also insurance, labor and employment, tax and bankruptcy expertise. The newest practice groups to sprout up also represent a range of clients, with some firms focusing on tenants, others on landlords and others with relatively equal emphasis on both sides of the coin.
Cozen O'Connor, Baker McKenzie and Wilk Auslander LLP are among the firms that recently set up lease restructuring groups amid a surge of new legal work, in part due to certain federal benefits ending. Many landlords and tenants were able to avoid litigation or lease restructuring in the initial months of the pandemic due to Payment Protection Program assistance, but those benefits ended earlier this month.
"This is just the beginning and tip of the iceberg. I am already beginning to see, and fully expect this to evolve into, a tsunami of litigation concerning these lease disputes," said Perrie Weiner, the partner in charge of Baker McKenzie's Los Angeles office who set up the firm's new lease restructuring group. "Our clients are presenting us with all of these issues that they need addressed quickly and efficiently, and they want those issues to be addressed fully and completely, given all of the moving parts."
Weiner said he got the idea for the group, which Baker McKenzie announced earlier this month, when many clients started ending conversations by asking for help with lease matters. Some clients were getting sued, others were looking to file lawsuits, and others still were seeking to restructure leases, he said.
Clients also had questions about insurance, chiefly whether business interruption coverage could apply during a pandemic, according to Weiner. But there were also labor and employment questions, such as whether air circulation at new spaces met requirements, as well as tax and bankruptcy issues, he said.
Roughly a dozen partners work in the new group, and several associates are also part of the practice.
Weiner said the group, which mainly represents tenants but also does some work for landlords, mainly helped retail clients at first, but has since expanded to counsel New York hedge funds, physicians that have surgery centers and even other law firms. He declined to name specific clients.
Cozen O'Connor also recently set up a group. Matthew Weinstein, chair of the new practice, told Law360 the idea came two or three weeks into the pandemic, when someone on a firmwide call half-jokingly suggested the law firm could change its distressed real estate practice to focus on leases instead of assets.
The idea was that assets — or, in the case of the pandemic, leases — are in trouble, and parties need counsel to figure out their best options moving forward. Early on, the firm got dozens of requests for help with loans from clients who were hoping to get extensions or terminations, or add caveats like abatements into the new agreements.
Cozen O'Connor's group has roughly 30 lawyers, about 20 of whom had been in the firm's leasing group, while the rest specialize in other areas of the law, Weinstein said. He said the firm is uniquely situated to have such a group due to its expertise in tax, bankruptcy and labor and employment work alongside real estate.
"On the lease restructuring piece, we tend to represent more landlords than tenants. Many of the tenants seem to either use in-house counsel or simply the real estate directors within their company," he said. "My firm happens to represent a lot of developers and [real estate investment trusts], which funnel more of the landlord work. That being said, the work from other departments … tends to be more tenant-based."
Weinstein said one goal of the new group is expediting requests for counsel. But the new group also aims to eliminate traditional silos between practice groups in order to better serve clients. For example, Cozen O'Connor has bankruptcy lawyers in New York who now focus heavily on lease restructuring and litigation.
And labor and employment has also become central to the new group, given that part of the current question is getting workers back into office spaces.
Weinstein said that on the labor and employment side, parties need counsel on matters such as whether their HVAC systems are appropriate amid the pandemic and whether floor plans are in compliance with new local and state rules. And questions like requirements for taking temperatures in the lobby as employees enter are also relevant.
"This is not just a real estate restructuring issue," Weinstein said.
He declined to name specific clients the new group has helped, but did say he recently represented an owner of a space that had been leased to a gym. Once the pandemic hit, the gym was no longer viable, and Weinstein helped the owner work out a deal for the gym to leave and a grocery store to take the space.
While law firms at present are largely focusing their attention on landlord-tenant disputes, many owners are also having difficulty making mortgage payments, and lawyers say owner-lender disputes could be the next phase.
At hotel and retail properties, roughly 18% to 24% of commercial mortgage-backed securities loans have recently gone into delinquency, Jim Butler, a partner and chairman of the global hospitality group at Jeffer Mangels Butler & Mitchell LLP, recently told Law360.
"Like the bankruptcy work, firms are banking on the restructuring practice being strong," said Peter Zeughauser, chairman of legal consulting firm Zeughauser Group LLC. "Landlords are going to start to force action … and I think, generally speaking, that will be good for the real estate practices across the board."
The combination of difficulty paying mortgages and collecting rent is changing the nature of the real estate work that's coming to law firms.
"Real estate lawyers generally are nimble, flipping from the deal side to the restructuring side," Zeughauser said.
Wilk Auslander also announced its new practice last month. Alan Zuckerbrod, a partner in the group, said clients in New York are facing a unique set of challenges, as landlord-tenant disputes in the New York courts are severely backed up.
"After the COVID[-19] crisis hit in March, we were just inundated on both sides," Zuckerbrod said, noting that the firm was fielding questions from both landlords and tenants.
New York has a dedicated civil court that deals with summary proceedings like nonpayment of rent and eviction, but plaintiffs have increasingly been bringing such disputes in New York Supreme Court, Zuckerbrod said. And he expects both courts to be backed up with such disputes once courts reopen, and cases likely won't be handled as swiftly as they would have been absent the pandemic.
Zuckerbrod said the new group, which has roughly half a dozen lawyers, counsels clients on how to navigate the New York court system, but also draws expertise from its bankruptcy lawyers to help clients figure out how they might restructure leases. He declined to name clients, but said the new group represents roughly an equal mix of landlords and tenants.
"It's a little bit of an unknown world," Zuckerbrod said, regarding navigating the New York court system.
--Additional reporting by Elise Hansen. Editing by Alanna Weissman and Alyssa Miller.
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