State focus on moratoriums on commercial mortgage foreclosures
As government orders related to COVID-19 continue to be implemented and expanded across the United States, some states are now focusing on helping commercial real estate borrowers. Most states enacted measures early in the pandemic to protect individuals from residential property foreclosures and limit evictions of residential tenants and, in some cases, commercial tenants as they struggle to keep paying their rent. . Some states are now turning their attention to commercial real estate borrowers and enacting ordinances or statutes or considering legislation that would limit the ability of commercial lenders to exercise their rights of foreclosure and other remedies. Although not a 50-state survey, a few of these laws and bills are reviewed below to provide insight into how various states are addressing the COVID-19 pandemic and its effect on commercial real estate loans.
Oregon bars lenders from taking enforcement action
Oregon recently passed the broadest emergency law related to COVID-19 impacting commercial real estate borrowers and lenders in House Bill 4204. The law prohibits lenders from taking enforcement action during the COVID-19 “emergency period,” which is currently set to expire on September 30, 2020. A lender would be prohibited from taking enforcement action if a property was functioning before COVID-19. 19 and the borrower notifies his mortgage lender that he cannot make his payments. Mortgage lenders also have an obligation to advise their borrowers of their rights under this law. The September 30, 2020 date may be unilaterally extended by the Governor of Oregon no later than September 1, 2020. The law does not limit the amount of time the Governor may extend the emergency period. The law applies to any loan taken out before September 30, 2020, as this date may be extended.
There are other prohibited actions during this “emergency period”, including the implementation of cash management and the imposition of late fees, late payment interest or other penalties. Once a borrower has sent notice to their lender under the new law, during the emergency period, a lender cannot, among other things, collect payments under the loan or deal with the default under of the loan during the emergency period as a default. Any missed payments would be deferred until the due date. The law is silent on many important issues, such as whether interest can be charged on missed payments or how the law applies to portfolio loans secured only in part by property located in Oregon.
On August 13, the Oregon Bankers Association and three community state banks filed a lawsuit against the state. The lawsuit challenges the constitutionality of portions of the bill that amend the implementation of cash management, the imposition of late fees, default interest and other penalties, the retroactive application of the law, and the notice to be given to borrowers. The lawsuit does not challenge the constitutionality of the moratorium on foreclosures.
New York proposes new regulated banking rules
New York Governor Andrew Cuomo released Executive Order 202.28 on May 7, which expanded previous executive orders and imposed a temporary moratorium on evictions and foreclosures of residential and commercial tenants until August 19, 2020. A lender is prohibited from initiating foreclosure proceedings if the property is owned to a person experiencing financial hardship due to the COVID-19 Pandemic or eligible for unemployment insurance or state or federal benefits. A landlord would also be prohibited from bringing eviction proceedings against any tenant meeting the same criteria.
If passed, New York Senate Bill 8454 and New York House Bill 10876 would require any New York regulated banking organization or mortgage servicing entity to grant a 120-day forbearance period to any qualified commercial mortgagor experiencing financial hardship during the New York state of emergency. The forbearance period could be backdated to March 7. A lender would be required to defer any missed payments during the forbearance period, which would be payable by the borrower as a lump sum payment within 12 months of the end of the forbearance period. Late payments and interest would not be due on these missed payments. Deferred mortgage payments would be equally allocated to each tenant on a pro rata basis and such tenants would be entitled to have that amount deferred against rent payments during the forbearance period. Tenants would also have the right to repay deferred rent within twelve months of the end of the forbearance period without payment of interest or late fees. Meeting these restrictions would be a condition for a lender to start foreclosure proceedings due to missed payments during the forbearance period. The bill would also ban evictions of tenants during the forbearance period.
Ohio is considering banning some foreclosure filings
Bills are currently being introduced in the Ohio Senate (Senate Bill 297) and House of Representatives (House Bill 562) that would prohibit a residential or commercial lender from initiating foreclosure proceedings while the state of emergency declared by the governor of Ohio exists. The bills would also prohibit residential and commercial landlords from initiating eviction proceedings for the duration of the state of emergency. As of August 26, 2020, however, no bills have left their respective committees and no chambers are in session.
Whether and to what extent such state legislation would apply to federally chartered banking institutions or would be preempted by applicable federal law will require a case-by-case, fact-dependent analysis that, in some cases, can ultimately be determined by the courts. The US Treasury Department’s Office of the Comptroller of the Currency (OCC) recently discussed the matter in CCO Bulletin 2020-62. the OCC encourages states and localities to expressly exempt federally chartered banking institutions from these laws.
Lenders and borrowers should continue to monitor state legislation and executive orders and consult with their legal counsel to determine the impact on their rights under any applicable loan document. When determining loan closing dates, lenders and borrowers should consider progress in reopening the state and the likelihood of a state of emergency being extended when government orders or legislation have been enacted or proposed.
Lenders should pay particular attention to all reporting requirements to ensure compliance with any legislation or executive order for loans issued after the enactment of such laws and regulations. Lenders should also consider whether any additional recourse or structure should be included in their loan documents to adequately protect against a borrower availing itself of state legal and regulatory relief that negatively impacts lenders. recourse or the guarantee of the lender, whether they exist at the closing or which can be implemented thereafter. Similarly, borrowers should be aware of the provisions in the loan documents related to any relief legislation or decrees and ensure that they understand the implications of those provisions in the loan documents on their rights to seek relief.
Commercial real estate market advocates are watching closely whether this type of legislation will be a growing trend in the United States, particularly in light of Oregon’s law that effectively prohibits commercial lenders from seeking any recourse in under the loan documents or to implement other provisions designed to protect the lender and collateral. If states continue to extend their statewide emergency periods, laws like the Oregon law and proposed bills in New York and Ohio could continue to provide relief to borrowers and commercial tenants as the COVID-19 pandemic continues, but could also act as a deterrent to new lending in these states as lenders assess their risks in light of these laws.
Additional laws from across the United States can be found at Monitoring of CREFC state legislation and policies, published by the Commercial Real Estate Finance Council, or the MBA Coronavirus Status Resources Webpage, published by the Mortgage Bankers Association.