The Potential Impact of the Coronavirus Pandemic on Landlords, Agents, Lenders, Tenants, Owners, Borrowers and Prospective Buyers in Both the Residential and Commercial Real Estate Markets is Discussed Below!
Appearing in the Connecticut Law Tribune, this article written by attorney Dwight Merriam, insightfully explores potential impacts that the coronavirus pandemic will have on various individuals and sectors in the real estate market!
While it was written from the perspective of an attorney practicing in Connecticut, the real estate issues discussed transcend state borders!
The Pandemic and the Crisis in Real Estate written by Dwight Merriam, Esq.
The pandemic has created a crisis in real estate of unknown dimensions and with few clear answers. Following the many networks of real estate lawyers nationwide, the issues that have surfaced thus far are many.
As with other calamities, there is often a cascading series of events and conditions, as with the Chernobyl disaster in 1986, and the “perfect storm” of 1991 that led to the loss of the Andrea Gale.
The people least able to pay their rent and their mortgages are likely to be the ones let go and left without incomes as businesses shut down. Evictions and foreclosures will increase. Will landlords and lenders extend the time to cure and avoid having to take action? The Mayor of San Jose has called for a moratorium for 30 days on evictions of residents who can demonstrate that they cannot pay their rent because of a substantial loss of income related to the virus. The council vote is expected in the next week or two. Italy is suspending mortgage payments throughout the country.
As businesses slow down, close, and fail, rents will evaporate, and the properties will become less valuable, altering the loan-to-value ratios, triggering default clauses, and making refinancings impossible.
Seeing what lies ahead, lenders are reducing their lending.
Potential homebuyers, skittish about the future, will withdraw from the market, decreasing demand, and driving down the value of homes.
And how does one market real estate in this environment? “Open houses” are going to be problematic. Does a seller want strangers coming into their home, possibly contaminating it? Will they wait to market their homes until the pandemic is over?
The effect has already been felt. The National Association of Realtors® surveyed its members on March 9th and its Realtors® reported an 11% drop in buyer traffic and 7% lower seller traffic. The NAR predicts a 10% reduction in sales, at least in the short-term, as a consequence of the coronavirus. The NAR also issued a guide for its members about what questions they can ask of those they are dealing with as to their exposure to the virus and warning them to avoid discrimination.
The market has already reacted strongly, with REITs in mall properties and hospitality hammered. Ryman Hospitality Properties was $90.30 a share on February 18th. On Monday, March 17th, it closed at $24.09.
Current contracts for sales and for leasing do not have provisions addressing the problems raised by the pandemic, particularly those relating to the time within which to perform. Suggestions have been made for an addendum to contracts. CATIC recently offered this advice, along with some suggested language regarding “excused delay”: “Given the uncertainty caused by increasing reports of quarantines, closures and other efforts to mitigate the effects of the coronavirus (COVID-19), it is also recommended that attorneys consider adding language to their real estate contracts that will address a situation where any party is under quarantine, prevented from travelling or meeting or otherwise cannot perform.”
Some have advocated for remote and on-line notarization and closings, and others disagree, fearing fraud. One suggestion is that the parties to any transaction grant powers of attorney to others to step in if they are sick or quarantined.
If city and town halls are closed or are short-staffed because people are working at home or sick, how does one record a deed or other document on the land records in a timely manner? Is this a problem, as Connecticut is a “notice” state: “No conveyance shall be effectual to hold any land against any other person but the grantor and his heirs, unless recorded on the records of the town in which the land lies”? Sec. 47-10(a) C.G.S. What happens if it takes days to record? An argument is that one has a “reasonable” time to record. Will that be enough? Is the solution a gap endorsement on the owner’s title insurance policy, if it is not already covered, as it apparently is as Risk 10 on the ALTA Owner’s Policy and in First American Title’s Eagle Owner’s Policy and probably others? That endorsement, by the way is not used for a loan policy, which covers it as Risk 14 on the ALTA Loan Policy. Of course, as a practical matter, if no one else can get in to record either, it is unlikely an encumbrance will get ahead of the recording.
What is a landlord to do if they discover an outbreak of coronavirus in their building? Do they have an obligation to shut down the building and decontaminate the space? Will they be liable for business interruption? Will the tenant be required to pay the cost of the decontamination? What if they don’t close the building, decontaminate, and prevent infected persons from reentering? Is notice to the other tenants sufficient, letting them make their own decisions?
Read the rest of the article at Connecticut Law Tribune here.
Attorney Dwight Merriam, www.dwightmerriam.com, who practices in Simsbury, is a Fellow of the American College of Real Estate Lawyers and member of the Connecticut Law Tribune’s editorial board.Google+