We are closing in on Week-1 of the “social distancing” fight against the COVID-19 virus hallmarked by business shutdowns, work stoppages, court closures, grocery store lines and home-schooling, just to name a few.
As creditors’ rights attorneys, we have been inundated with calls and inquiries from Lenders, Borrowers, Landlords and Tenants each inquiring as to their rights and obligations in light of anticipated financial defaults.
The truth is that no one really knows what the future holds. Leasehold and lending agreements do, however, set out a road map for the parties. For example, if you are a party to a line of credit, we invite you to pull out the loan agreement that established the credit line and look for a provision that resembles the following language, “‘Cessation of Advances’ – If Lender has made any commitment to make any Loan to Borrower, Lender shall have no obligation to make Loan Advance or to disburse Loan proceeds if there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan.” This clause means that a lender has a right to decline to make future advances on a credit line if it perceives that its Borrower, Guarantor or Collateral is impaired. At this juncture, and if widespread business shutdowns prevail, it is axiomatic that most Borrowers, Guarantors and Collateral may become impaired.
Just as we saw in the credit crunch associated with the 2008 Recession, we warn that credit and lending may become slowed or, in some cases, frozen, as Lenders do not want to risk making loan advances that do not have a reasonable likelihood of being repaid in a timely manner.
If you are a Landlord or a Tenant, the COVID-19 crisis presents a different dilemma. Many commercial leases contain “go dark” provisions, resulting in technical defaults under lease agreements if there is a cessation in business. In jurisdictions where there are government-imposed shutdowns, we doubt that a landlord could make a colorable lease violation claim resulting from cessation of business. But what about cessation of business in an area of the country that is not under a government-imposed shutdown? The reality is that landlords will have no choice but to be flexible, as there will be a lessened demand for new lease space as businesses fold or cut back on expenses, including looking for new space. Simply put, good tenants may become even harder to find. Landlords cannot, however, allow a tenant to violate lease provisions with impunity and some give and take between the parties may be necessary.
What is the federal government doing to provide aid in light of COVID-19? Yesterday, March 19, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was unveiled. The legislation focuses on four major priorities: (1) Direct financial help for the American people; (2) Relief for small businesses and employees; (3) Steps to stabilize the economy and protect jobs; and (4) Support for health care professionals and patients fighting the coronavirus.
While this is currently only a Senate Republican proposal (backed by the Administration) and will see changes through negotiations with Democrats in both the Senate and House, it does give us a good roadmap of where this legislation is headed. Please find details below on each of the categories of the proposed CARES Act.
Further, it is important to note that the legislation, as currently proposed, makes no provisions for or mentions business interruption/business income insurance. It is the authors’ hope that as the legislation progresses through Congress this glaring hole will be filled. Nevertheless, a summary of the CARES Act follows.
If you have questions about the matters set forth in this article or have concerns about potential financial defaults related to leases, loan agreements or other types of financial agreements, please do not hesitate to reach out to us. We invite you to consider us as part of your support system in these challenging and uncertain times.
The CARES Act Provides Direct Assistance To America’s Families
The CARES Act:
- Provides recovery checks to most taxpayers by providing cash immediately to individuals and families. Individuals are eligible for checks up to $1,200 and married couples filing jointly are eligible for checks up to $2,400, with an extra $500 for each child. So that relief is focused on those who need it most, eligibility for recovery checks is reduced starting at $75,000 in 2018 income for individuals and $150,000 in 2018 income for joint filers. Individuals with 2018 income exceeding $99,000 and joint filers with 2018 income exceeding $198,000 are ineligible.
- Extends the traditional April 15th tax filing deadline to July 15th and allows individuals required to make estimated tax payments to postpone them until October 15th.
- Waives penalties for early withdrawal from qualified retirement accounts for coronavirus-related purposes of up to $100,000.
- Allows the Secretary of Education to defer student loan payments and allows students who were forced to drop out of school due to coronavirus to keep their Pell grants.
- Grants colleges and universities flexibility to continue work-study payments to students who cannot work due to coronavirus closures.
The CARES Act Provides Relief For Small Businesses And Their Employees
The CARES Act:
- Provides cash-flow assistance through federally guaranteed loans to employers who maintain their payroll during this emergency. If employers maintain their payroll the loans would be forgiven, which would help workers to remain employed and help affected small businesses and our economy to quickly snap-back after the crisis.
- Expands the allowable uses for certain small business loans to permit payroll support, including paid sick leave, supply chain disruptions, employee salaries, mortgage payments, and other debt obligations to provide immediate access to capital for small businesses who have been impacted by the coronavirus emergency.
- Fixes burdensome regulations in the paid leave mandate for small businesses.
- Makes unemployment insurance applications more easily accessible.
The CARES Act Helps Stabilize Our Economy
The CARES Act:
- Does not provide grants or bailouts, only loans that must be repaid to the government.
- Allows the Treasury Secretary to provide loans and loan guarantees to passenger air carriers, cargo air carriers, and other major industries severely impacted by government health restrictions to combat the coronavirus.
- Prohibits companies receiving assistance from increasing executive pay or providing “golden parachutes” for two years.
- Directs the Treasury Secretary to ensure the U.S. government is compensated for the loans to these industries.
- Provides tax relief to businesses affected by the coronavirus emergency. Allows deferred payments on estimated taxes and some payroll taxes, increased deductibility for interest expenses, immediate expensing of qualified property improvements, especially for the hospitality industry, and corrects errors in the Tax Cuts and Jobs Act that inadvertently affected certain businesses.
The CARES Act Bolsters The Health Care Response To Coronavirus
The CARES Act:
- Addresses supply shortages for drugs and critical equipment, including ventilators and medical masks.
- Expands testing and ensures coronavirus tests are free for patients.
- Speeds the development of new vaccines and treatments, such as reducing barriers to work with the private sector.
- Permits patients to use health savings accounts to cover telehealth services and expands telehealth access for Medicare beneficiaries.
- Increases Medicare payments to hospitals treating a patient admitted with coronavirus.