By Andrew McIntyre

Law360 (June 10, 2020, 3:42 PM EDT) -- In this edition of Coronavirus Q&A, Becker & Poliakoff PA's real estate leader discusses the ways force majeure clauses are changing and the process of reopening businesses in Miami and across Florida.

Philip Rosen, a Fort Lauderdale-based shareholder at Becker & Poliakoff and chair of the firm's real estate practice, works on purchase and sale, lease and financing deals across Florida and nationally for a wide range of clients.

He shared his views as part of a series of interviews Law360 is doing with lawyers to examine the ways the COVID-19 pandemic has impacted businesses and brought about a new set of legal questions and considerations.

This interview has been edited for length and clarity.

Where is Florida right now on the question of reopening businesses?

South Florida is sort of on a little bit of a different path, it seems, from the rest of the state because we have high population density. So we've got the highest density of cases here. I've got friends in Northern Florida who tell me that there's almost nothing going on up there [in terms of COVID-19 restrictions]. Compare that to South Florida, where there are still a tremendous amount of restrictions. I had to go pick something up from my office [recently] and I couldn't even get into my office without having my temperature taken. There are signs all over.

They're sort of getting ready for us to come back, but I think it's going to be a slow go in South Florida. I went to Las Olas the other day, just to drive there, just to see what was going on, because I'm stir crazy. And there's no parking on the street there, so they've sort of given that space over to pedestrians. And if you get a quick look inside some of the restaurants, you'd think there was really nothing going on. And then if you look a little more closely, you see that the tables are more spread out and the servers are wearing masks.

But for the most part, people, I think, want normalcy. On the street, less than half the people were wearing masks, which I don't know if that's good or bad. So I think people are wanting things to get better but I don't know that they are. We have a medical problem. Nothing's changed. And once there's a vaccine or a treatment that we know really works, then that's when I think things will really change. Other than that, we'll be playing whack-a-mole with this until we get that vaccine or treatment.

What's your sense of the approach Miami is taking in terms of timelines for potential reopening?

Our government group has been really helpful. They send us guidance often. I don't know the exact date, but they're pushing to get things opened up in the next few weeks. But that could all change depending on the medical statistics. I know that the governor hasn't allowed South Florida to open up yet. But people are pushing for it, and things are going to happen soon rather than later. Whether or not it's the right decision remains to be seen. And there's going to be a lot of Monday morning quarterbacking going on over the summer.

What are questions you're commonly hearing from clients right now as it relates to reopening or to other pressing real estate matters?

So a lot of different things, right? So I represent clients across a broad spectrum of asset classes — multifamily, office, retail, industrial, small-bay industrial. It really runs across. And so as far as the office clients are concerned, they're asking, can I open up my building? Do we have liability? If we open the building, the questions two months ago were, do we have insurance for this? Are we covered? And unfortunately for them, most of the time, the answer was no.

So we're also getting clients who are looking to potentially sign new leases as tenants or as landlords, and they're having us look at those contracts to tighten up the force majeure provisions, because they don't want to get caught with this again. And it's possible that this stays around for awhile and if buildings get shut down again, they want to be covered in a way that they likely weren't covered before the pandemic hit. And I'm still getting calls on the landlord-tenant and lender workout side, because right now we're in this weird space. We have sort of this false economy in a way, right? A lot of companies got PPP money. And we've got clients who got PPP money in the millions. We've got people getting stimulus checks to their houses, which is great.

And then you've got people on unemployment getting these bonuses and they're making more money, many of them, than they were before. I've got a friend who's an oral surgeon, and he has highly skilled staff. And he can't get some of his staff back to the office because they don't want to work. And these are highly skilled professionals. And they don't want to come back to work because they're making a lot of money and they also just don't want to be in a work environment where they don't feel safe. So there are all these different issues wrapped up into one. So clients are nervous about a lot of things. But at least we know more now than we did before, and we can help guide them to the best of our ability right now. And I think you're going to see a lot of heavy negotiations on these force majeure and pandemic provisions going forward, in every document we write.

How do you see force majeure changing? You alluded to the force majeure clauses being written differently now that we know what we know, as opposed to what we didn't know three or four months ago. How have these clauses changed and what do you think is the new norm for how a force majeure clause will be written?

Well, it depends if you ask an attorney on the landlord side or an attorney on the tenant side, or the buyer or the seller. So I don't think there's a standard. But it's really going to be market-driven, right? When you have a tenant-driven market, where landlords are really needing tenants — which is going to be [the case] going forward, especially in retail — I think you will have provisions that perhaps give the tenants a right to maybe not pay rent if the municipality forbids them from opening. And that was the crux of the issue, right? Because most of the provisions state there's some sort of act of war, or a weather-related issue that doesn't allow them to perform, but we were in this weird space where the government said you can't go to work but there wasn't war. There was really no real place for this in the clauses.

So I think you're going to have language that specifies if there is a government-mandated shutdown or lockdown or stay-at-home order, if you have that, that's the language that's going to be negotiated. Haven't had it come up yet, but it came up in our meeting with our practice group just the other day. We've got two attorneys who agreed to take the lead on trying to redraft some provisions and send them out to the group for people's comments. So I'm curious to see what they ultimately come up with. It'll center around the phrase 'government-mandated shutdown or stay-at-home order.'

And if force majeure clauses going forward were to cover payment of rent, that would be a game changer, right? Because force majeure historically has not covered payment of rent, right?

Right. And so here's the next issue, right? As the landlord, you'd like to say, 'Well, then you need to get your business interruption insurance. You need to obtain a policy that covers you for a pandemic.' The landlord, they might take the position that we're not going to excuse performance of payment of rent because you need to just go get insurance coverage that gets you paid in the event of a pandemic. So landlords might be able to kick that can back to the tenants, right? So it's going to be really interesting. I think it's going to play out, and it's going to play out pretty quickly. That's why every day new articles come out, and my litigation team especially loves sending me stuff. And then I write back, in essence, to say, 'Please bottom-line this for me.'

With these landlord-tenant discussions, where do you see subleasing fitting into the picture? Do you think we'll see an uptick in subleasing as a way for tenants to shed some of their space?

Are you talking about office space or just in general?

We can talk about it in the office or the retail context.

I think in the office context, it's going to be very interesting, because there's two forces at play here. On the one end of the spectrum, it's very logical to think, 'Well, everybody's working from home.' Like our firm, for instance, we're still working from home in our Broward, Miami-Dade and West Palm offices. The other offices throughout the state are either open or are opening [soon]. And it's been really successful, and we haven't really had much loss of productivity. As a matter of fact, some people think they're more productive. So you've got the sense that, 'Wow, we can have all these people working from home, which can be fantastic.' But then you have the other side of the coin, where you say, 'Well, even if less people are able to go to the office or need to go to the office, will you need to be distanced in the place of work?'

So like for instance in our offices, we're doing I think two teams, an A and a B team. They're alternating days or weeks. I'm not sure yet. So you have this space, but now everybody has to be a certain distance from each other. And those open floor plans that are so en vogue may not be really conducive to that. Or maybe they are, but you have to keep people far apart from each other. So then maybe the offices need the same amount of space, or maybe more, depending on their configuration. So it's going to be interesting to see. So as far as subleasing is concerned, I think it could just turn out that ultimately the ability of businesses to shed space while still following the social distancing rules results in a glut of office space. I think you'll see a lot of space sublet. However, I think if you're a tenant and you're subleasing, you may, just like the landlord, require that your subtenant take business interruption insurance to cover you as a hedge. Because you become a landlord when you start subleasing your space out.

As far as retail's concerned, [from] the general consensus among the people I talk to and just from seeing the deals my clients have done, retail is overbuilt. Tremendously overbuilt. And so I think people won't need to sublease. I think there will be so much space available. I think that high-end retail, that'll be fine. I think it's going to be these functionally obsolete buildings, these old but maybe nice B shopping centers or even C shopping centers, that are going to at some point get torn down to make way for some other sort of use, whether it be industrial, in maybe some of the C areas. If this pandemic has shown us anything, it's that online delivery is here to stay and more and more people are going to be comfortable with it, but with that we need a lot more industrial space. So you may see some C shopping centers converted into some sort of industrial. You may see some D retail centers, these hundred-thousand-square-foot centers, maybe get carved in half and you put maybe affordable housing on them, workforce housing.

So I think that is something that clients are already talking about. But they cannot do that alone. They're going to need the municipality to step up and give them incentives to do that in the form of fast-tracking changes of use, fast-tracking their permits, and making it financially feasible for them to be able to do these types of projects. You can kill a bunch of birds with one stone. You could reduce the oversupply of retail. You can create the housing that we desperately need in the country. And you can clean up areas that maybe could use some rejuvenation.

We haven't talked about the transactional market yet, and I'm curious about Miami. Are you seeing purchase and sale deals getting done in Miami at the moment?

So [recently] I've seen my clients start dipping their toes into the water. The actions with the brokers have started to pick up a little bit, meaning the brokers are getting calls. Clients are calling brokers. People are saying, 'OK, it's been three months, what's happening? What's for sale?' I'm seeing things for sale on the off market, meaning either a seller's trying to sell themselves or hasn't done a formal listing. The biggest issue with transactions right now is there is no ability to have any true measure of price discovery, for a few reasons. I was listening to a webinar, was watching a webinar [recently] and it did a survey. There were quite a few people on this webinar, and they said, 'If you own property and you're selling right now, what type of discount would you be willing to take to sell your property if you need to sell?' And it came in at about 5%. But people who were buying, they said that they would only be interested if there was a discount of 10-20%. So just based on that survey alone, you see the sellers don't feel like they need to reduce their expectations and buyers have these expectations that, 'Gee, I should really get a discount here.'

Plus lenders are really not lending now. They say that they are lending, and when a deal gets done, it's sort of a ticker-tape parade. But truth be told, the lenders right now, they were first so busy with the PPP loans, but now the lenders are back and the banks are really busy right now with the applications for the forgiveness of the loans. So the banks have dedicated so much of their staff to these PPP loans that they're not in a place where they're really doing loans. Now, if you wanted a 50% loan-to-value loan and you didn't mind putting a year's worth of reserves in, they'd figure out a way to get that deal done. But right now as far as getting a loan from a local bank, a community bank, or even some of the bigger banks, right now it's got to be a real soft ball in order for them to talk to you. And then the agency debt is the same thing. It's just been very slow. It's been hard to get appraisals done, and just like I'd tell you the buyers and sellers don't have the ability to have true price discovery, the banks are sort of unsure as to what property is worth.

It goes back to what I said in the beginning, because our economy is sort of artificially propped up right now. Unless there is an additional stimulus package — I think the president [recently] said he's going to propose another trillion dollars — if there's no stimulus package passed for June, you're going to have a lot of things happening, right? You're going to have a lot of people get furloughed because the PPP loans require people to be employed through June 30. So you could have unemployment skyrocket. Maybe they're not extending the unemployment benefits. You are seeing already throughout the country the foreclosure and evictions moratoriums slowly get lifted. And once those things are happening, if people don't have that backside protection, well then you're going to see the evictions on multifamily go way up.

You're going to have about 90 days from when the banks started giving most borrowers 90-day forbearance, whether in residential or commercial. So if the banks don't extend those again and the rents aren't coming in, or people are unemployed, you could have this really bad effect which could cause evictions, foreclosures, all of a sudden to happen all at once. So I'm really paying attention to what's happening with the government right now. And unless they come out with some sort of stimulus package to kind of soften that blow, that's when I think you'll start seeing this distress that so many of my clients have been waiting for. They feel bad about the pain that people are in, but my clients are all using the phrase dry powder very freely these days, since they're expecting that there will be some level of distressed property to choose from going forward.

So it sounds like it may be some time before we have price discovery?

Yeah. Yeah, it could be awhile. A lot of my clients reminded me what happened in '08. I was in a different place in '08. I was in Florida, I owned a law firm, I did a lot of residential, I had a very busy title company. So I wasn't thinking along the lines that a lot of my clients are thinking now. And it was a shock what happened to everybody, because times were so good, right? There were always people who were smarter or just had the foresight to realize that this couldn't last. Or at least people that were ready to admit to themselves it couldn't last. It took the government an extraordinarily long period of time to respond with stimulus last time. This time, the government was on. To their credit, they had the playbook, they opened it up, they did what they had to do, and it was pretty easy for them in that sense. This time, I feel like there are a lot more people waiting on the sidelines for this type of event to happen. You don't have just mom-and-pops waiting. You have institutions waiting. You have Wall Street money waiting.

In 2008, there wasn't a lot of Wall Street money waiting. It took a year. It took almost two years in some cases for Wall Street to realize, 'Hey, the returns on these real estate deals are beating anything else we can be involved in.' Real estate's been institutionalized over the last 12 years or so in ways that we've never seen before. So I think that you'll see distressed deals happen in the next maybe three to six months. I think Starwood just did a deal. They helped recapitalize one of the major REITs. So that was, I think, the first publicized distressed deal. But you'll see the deals.

I think there's going to be a shorter period of time during which we have all this distress. I think the banks learned their lesson that they shouldn't try to foreclose and own as much property as they did last time. My guess is that they're going to sell off their bad debt way more quickly than they did in the past, because it doesn't pay for them to become owners of houses. There are plenty of buyers out there who'd be happy to buy passages of thousands of notes and work with the borrowers or foreclose and be the owners. The banks are going to be really smart about it this time as opposed to last time. Again, like the Fed. They kept the play book. They could dust it off, and they know what worked last time.

--Editing by Kelly Duncan.

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