Tough Times for Lenders : Financial Services Lawyer & Attorney : Winstead Law Firm : Finance, Banking, Bankruptcy

Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

Is Landlord required to exercise its remedies and/or mitigate damages immediately once a default is declared under a commercial lease?

• No, Landlord is not required to immediately exercise its remedies under a commercial lease.

Assuming the original demand letter protected Landlord's rights with respect to exercise of remedies, Landlord is entitled to the immediate exercise of all available remedies or, at its election, to delay the exercise of some or all remedies until a later, more suitable date.

In rough economic times, Landlords may have concerns that compete with the traditional process of repossession or termination of the lease (or terminating the Tenant's right of possession without terminating the lease itself).
 

• For instance, where a mixed-use or retail development is still within its initial lease-up phase, it might be prudent for Landlord to allow a Tenant occupying a prominent location within the development to remain in operation, particularly through a holiday or other critical period, notwithstanding the existence of an event of default.  (Note the discussion of a forbearance agreement below.)
• Even in an office context, where "dark space" is less of an immediate concern, a Landlord might still be inclined to delay termination of a lease in favor of repossession or even to delay taking any action in order to avoid negative press coverage surrounding the exercise of remedies.

For a commercial lease in Texas, under applicable Texas law and absent an express agreement to the contrary, a declaration of a default does not give rise to an obligation for Landlord to mitigate damages.  A duty to mitigate arises (in Texas) only when Tenant has abandoned the premises and ceased the timely payment of rent or the Lease provides otherwise.

As such, Landlord is not triggering any additional burdens by completing the process for establishing an event of default and Landlord may, within reason, delay further action pending resolution of competing factors.

Even if termination or repossession are delayed, Landlord should make prompt inspection of the premises and address any immediate repair or maintenance concerns. Application can also be made of the security deposit to cover current deficiencies or Landlord expenses, subject to the specific terms of the lease.

Also, if the the relationship with the defaulting Tenant permits this approach and in the appropriate circumstances, the Landlord should consider entering into a forbearance agreement with the Tenant.  This agreement will expressly recognize the default, it will set forth the Landlord's agreement to NOT exercise remedies for a specified time, and it will confirm the Tenant's agreement to perform (on a going-forward basis) the terms of the lease - again, for a specified time.  After the time period ends, then the Landlord may exercise its remedies.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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Guest Writer, Laura P. Sims, Winstead PC

(CAVEAT: if this blog seems familiar, it probably is because after we posted it last week, it  "mysteriously" dropped off our site - after I messed up on the posting of March 7.  And I apologize.   So, here it is again!)

This is a series of blog entries [link] in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What are the risks involved in delaying the exercise of remedies?

A period of delay between declaration of default and exercise of remedies increases the chance that some action or omission by Landlord or its representatives will be claimed by Tenant as evidence that:

• Landlord has waived the default or
• Tenant reasonably believed (and relied on its belief) that Landlord did not intend to strictly enforce the Lease.

Either one is a bad, bad result.

So, what should you do during any time period when landlord remedies are being deferred (or not exercised)?

Here are some tips:

• avoid sending e-mail correspondence involving discussions of modification of the Lease
• avoid in-person meetings involving discussions of modification of the Lease
• don't accept partial or late cure
• don't promise to forgo exercise of remedies (in other words, don't say "we won't exercise remedies")

Ideally, if rent failure is the issue, then monthly notices of failure to timely pay and demand for payment in full can and should continue during the period of delay - in order to combat any suggestion that Landlord will not strictly enforce its rights.

One final word of warning: at some point, the Landlord will need to get off the stump and act - or waive the default.

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ).  Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What kinds of default will support termination of the Lease or repossession of the premises?

Most Texas courts (and courts in other states as well) are reluctant to enforce a Landlord's right to terminate a lease or repossess a Tenant's premises in the absence of a specifically negotiated or egregious non-monetary default, if the Tenant is otherwise in compliance with the lease.

By contrast, even a relatively small monetary delinquency will be enforced per the plain language of the lease.

Accordingly, where the lease provides Landlord the right to cure non-monetary defaults and obtain reimbursement of such costs from Tenant as additional rent, it may be expedient for Landlord to exercise such right to cure, so that if and when Tenant fails to reimburse such costs, Landlord can proceed on a claim of monetary default.

However, at least in Texas, non-monetary defaults such as abandonment, voluntary bankruptcy, failure to pay utilities to third parties, and allowing the attachment of liens have provided a basis for exercise of Landlord's more aggressive remedies.

Furthermore, if the lease sets forth termination or repossession as the specific remedy for a given non-monetary failure (such that Landlord is not relying on "catch-all" non-monetary default language), a court is more likely to enforce the parties' negotiated remedy.

• For instance, where Landlord and Tenant have negotiated an obligation for Tenant to open for business by a certain, critical date, with a clearly stated and unique right of termination for failure to perform by such date, the declaration of default and exercise of such termination right should be enforced.
• Conversely, even where a lease requires Tenant to take occupancy or open for business by a date certain, if no specific remedy is stated for that failure, it is unlikely that a Texas court would allow Landlord to terminate the Tenant's lease for such failure, particularly if Tenant occupies the premises or opens for business within a short period following the originally required date.

As a general rule for evaluating the strength of non-monetary defaults as a basis for termination or repossession consider:

1. Whether the breach affects the negotiated bargain between the parties
2. Whether the harm to Landlord is commensurate with the loss a termination or repossession would cause the Tenant
3. And further consider obtaining the opinion of an experienced litigator or real estate attorney before making a final decision about pursuit of remedies

If you have thoughts, suggestions or questions on this topic, please post a comment below.
 

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Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ).  Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases.  Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ - Is Landlord required to give notice of all defaults at the same time?

No.

Where multiple defaults exist, some discretion may be used in listing the individual failures, with clear emphasis on monetary defaults and material non-monetary defaults.

A default and demand letter that identifies

• defaults of a . . .
• nature and materiality that would support termination of the lease, or the exercise of rights of repossession if not cured, should suffice . . .
• so long as suitable language (which has been either developed or reviewed by counsel) is also included in the letter to reserve any and all Landlord rights with respect to other defaults, known or unknown, and to disclaim any intent to waive any such defaults.

The third bullet point is very, very important.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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Guest Writer, Laura P. Sims, Winstead PC
This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions related to tenant leases (FAQ).  Leases are "the" whole point of income producing property - and this series is pointed to the simple goal of helping you protect the basic value builidng block of your collateral - which are the leases.  Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ - What lease provisions are most important when determining the existence of a default and/or providing notice of a default?

In addition to the specific provision(s) which is the basis for the default, a thorough review should be made of provisions regarding events of default, remedies and notices, as well as all correspondence for purposes of determining if waiver or modification allegations may exist or if notice requirements or addresses have changed. 

Be aware that certain operational defaults may be addressed in provisions of the lease other than the default and remedies section, such as continuous operation clauses and surrender obligations, and the remedies for breach may appear with the operative language rather than being mentioned by name in the list of events of default. 

In order to avoid any alleged defense against claims for payment or performance, and to give the guarantor an opportunity to cure the default, copies of all default correspondence should be delivered to any lease guarantor (even if not required under the terms of the guaranty or the Lease notice provision). 

Also, requirements to provide notice to lenders and other third parties may appear in ancillary documents, such as Subordination, Non-Disturbance and Attornment Agreements, and thus a review of the entire Lease file is strongly recommended.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

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This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).  Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ #11 – What can I say to the Borrower?

Oral Communication Tips (Best Practices):

• Attitude – Be calm, cool and factual
• Truth – Stick to the truth, keep your statements fair and in good faith
• Loan Documents – Know your loan and do not contradict
• Notes – Take written notes, but be careful since they might be read in court
• Power of Two – All conversations should include at least 2 lender personnel
• Disclaimers – At the beginning of a conversation, state clearly that you have no authority to bind the lender and the call is merely to collect information
• No Threats – Never threaten a criminal complaint or civil suit
• No Oral Agreements – Make clear that all agreements must be in writing and you will follow up with a written agreement for their review
• Stick to Your Business – Only make statements within the scope of the lender's business – never suggest ways for the borrower to run or improve its business, i.e., avoid statements such as "you'd make more money if …"
• One-Sided Deals – Avoid suggesting structures that solely benefit you.  A decision that solely benefits the lender may come back to haunt you
• Do NOT record conversations

To read the entire Tough Times FAQ series, please click here

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This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ).  Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ #9 – How Do I Deal With The Borrower?

Analyze the borrower's perspective:

• What is the borrower's legal position?
• What are the lender's weaknesses?
• Can the borrower avoid personal liability?
• Who are the guarantors and what is their position?
• What is the borrower's tax position?
• Is the borrower concerned about forgiveness of debt (as income)?
• Does the borrower want to keep cash flow and therefore avoid bankruptcy?
• Is the borrower likely to file bankruptcy?

FAQ #10 – What Are the Risks for Lender Liability?

• Waiver
• Misrepresentation
• Good faith, fair dealing (breach of)
• Risk of improper disclosure (tortuous interference with business relationships)

To read the entire Tough Times FAQ series, please click here:

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This is a special series of blog entries in which we provide some quick answers to lenders' frequently asked questions (FAQ). Two things should be kept in mind.  First, none of these questions can be answered in a vacuum.  Questions should be considered with a thorough review of the file and an interview with appropriate loan officers.  And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

FAQ #7 - Should I pay the property taxes prior to foreclosure?
Taxes and Escrows: Escrows may be in your possession and available for tax payments.  Taxes should typically be paid prior to foreclosure in order to add them to the loan deficiency amount--unless it is your plan to sell at the close, subject to taxes to a third party.

FAQ #8 - What other legal issues or hurdles should I consider in proceeding with foreclosure
Each state's law governs when and how a lender proceeds with foreclosure.  The following questions should be considered:

• Is there an anti-deficiency statute or single cause of action rule?
• What are the mechanics lien filing periods?
• What are the content and timing requirements for sending notice of default and acceleration?
• How does my course of dealing affect the existence of the default?

To read the entire Tough Times FAQ series, please click here.
 

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Guest Writer: Brenda Brown, Winstead PC

More from ourTough Times FAQs series:

FAQ #4 -  Do I need to reduce the commitment amount after sending a Notice of Default?

• Typically, no – once the loan is declared to be in default, or once the maturity of the loan is accelerated, the lender has no on-going funding obligation – but confirm this in the documents.
• The lender typically is not required to fund current loan allocations or grant new loan allocations.
• Communicate clearly in writing to the Borrower that the lender has no further obligation to the fund and negotiations, inspections, administrations and even making future draws during a draw period (whether under a construction loan or a partial disbursed loan) do not amount to waivers of pre-existing defaults or can be considered obligations for future fundings.

FAQ #5 -  After a Default Notice, should I send statements showing Regular Monthly Interest or statements showing interest at the Default Rate?

• Statements to the borrower should reflect the Default Rate of interest (rather than the prior regular interest rate), late fees, and any other fees due the lender (such as legal fees) – all of which usually do not appear in the "standard" statement.
• So, typically it is best to STOP sending the regular monthly statements.

FAQ #6 -  What else should I put in writing?

• Agreements Regarding Interim or Protective Advances
• Forbearance Agreement

All of these first six questions underscore the fact that the status of the property and the loan must be looked at with current and fresh eyes so that the opportunities for solutions are enhanced, and the risks of encountering questions of waiver are avoided.

To read the entire Tough Times FAQ series, please click here.

Please post comments or questions below.
 

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Guest Writer: Brenda Brown, Winstead PC

This is a special series of blog entries in which we provide some quick answers tolenders' frequently asked questions (FAQ).  Two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file and an interview with appropriate loan officers. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

Without further ado:

FAQ #1 -  The Borrower is how far behind – now what?

• Analyze the entire situation: the collateral, the loan documents, the file, any co-lender or intercreditor agreements, financials on the parties, the market - in other words, the entire picture. Act like you're about to own it.
• Consider restructuring – But send a "Discussion Letter" – to help avoid waiver of lender's rights under the loan documents
• Determine whether a default – as defined in the loan documents – has occurred. If so, consider sending Notice of Default and Notice of Acceleration.
• Generally Borrower has "terminal euphoria" and no reason to change unless it is in default.

FAQ #2 -  What if the default was not a monetary default?

• "Default" vs. "Event of Default" – check defined terms in the loan documents.
• Look for Grace / Cure Periods to see if expired.

FAQ #3 -  What can I do besides calling a default?

• Alternatives to calling a default include à Restructure (i.e., amend the loan documents so the borrower is no longer in default – if the borrower's financial deterioration is not too great)
• Simple Notice of Default à Just to create a written record that it exists and is continuing.

To read the entire Tough Times FAQ series, please click here.

Please post comments or questions below.
 

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