May 21, 2020 – UPDATE: In her weekly update on the Court’s response to Covid-19, Chief Judge Difiore announced that starting the week of May 18, 2020, New York City Housing Court Judges will begin scheduling and hearing virtual conferences in pending eviction cases where both sides are represented by counsel, in an effort to mediate settlements and reduce the caseload prior to what is expected to be a large influx of new eviction cases.
May 18, 2020 – Original Post: New York is one of the most expensive and active real estate markets in the world, attracting huge amounts of investments and processing a high volume of transactions. The COVID-19 pandemic has, however, severely disrupted the market. Commercial tenants are unable to access their space, working from home, and looking for breaks on the rent. Commercial landlords are developing policies and altering infrastructure to comply with “social distancing” guidance and laws. Closings for sales and purchases are still happening, though not in traditional “closing-room” settings, as remote closing rules are being worked out by trial and error. New York State is preparing to re-open its housing courts, having previously placed, and extended, a moratorium on evictions and the prognosticators are expecting a surge in real estate litigation. This article answers a few basic questions concerning New York real estate during the COVID-19 pandemic.
Are commercial and residential tenants able to obtain refunds or re-negotiate lease terms?
The answer to this is that there is no definitive answer. The results so far have been mixed. Some Landlords have flatly refused to re-negotiate terms of the lease, asking their tenants to seek governmental assistance instead of rent relief, while others have been working with their tenants to come up with a compromise. Such compromises have been in the form of (i) a rent freeze; (ii) a rent deferral; and/or (iii) allowing the tenant to use their security as rent. One thing the tenant should be cognizant of is being prepared when approaching the landlord with such a request. The commercial tenant should be prepared to show the landlord viable proof that their business has been affected by the shut-down and be able to provide comparative metrics to support their position. The residential tenant must be able to show the landlord how their income has been negatively impacted. One thing to keep in mind is that demand and rental rates are expected to fall, so landlords, both residential and commercial, might be willing to agree to concessions in exchange for lease extensions.
What do commercial landlords need to do to re-open?
While residential real estate has taken a hit from COVID-19, some might argue that the commercial industry has taken an even greater hit. While many mom-and-pop retail and restaurant businesses are being forced to close down, a surprising amount of corporate chains are also facing their own struggles when it comes to paying rent. That leads to a domino effect that severely impacts a commercial landlord’s bottom line.
Of further concern to commercial landlords, is how to make their property compliant with the myriad of regulations and requirements that have been in place and that have been promulgated due to COVID-19. While Landlords have always been required to maintain a safe space for their tenants, they will now need to review and be familiar with all new federal (e.g., CDC/OSHA), state (e.g., NY Division of Safety and Health), and city (e.g., NY Citywide Office of Occupational Safety and Health) guidance and regulations during this time and they need to remain vigilant as these regulations and requirements are constantly changing and evolving. The larger commercial landlords in New York City are sending out directives to their tenants to prepare them for the eventual return to work and to make sure that both sides are in compliance with the regulations and requirements. Some forward-thinking landlords are already implementing advanced safety measures, such as requiring all employees to wear masks and gloves, revising visitation policies, installation of temperature scanning devices, and advanced cleaning protocols.
How are closings being conducted?
The traditional structure of New York closings typically has all parties in one room (purchaser, seller, attorney for purchaser, attorney for seller, title company, lender, brokers, etc.) so that the exchange of documents and notarization of same can take place efficiently and effectively. Obviously, this cannot be accomplished while maintaining social distancing requirements and while non-essential businesses are ordered closed.
The government, seeing the need to keep the purchase and sale of real estate moving forward during this time, has created guidelines to allow for “remote” closings. Under very strict rules, documents can now be notarized by video, thus making remote closings possible and safe. In a traditional cooperative closing, the closing would take place at the managing agent’s office and the old Stock and Proprietary Lease would be cancelled and a new Stock and Proprietary Lease would be delivered to the purchaser or the lender if financing is involved. Now, most managing agent’s in the city have been flexible in allowing closings to occur in escrow, whereby the cooperative documents would be pre-delivered to a party in the transaction, under the terms of strict escrow agreements, and once all requirements of the escrow agreement have been met, documents can be delivered and closings can take place. Real estate professionals, largely creatures of habit, have struggled through the myriad of issues that have arisen, but have adapted to the new reality and closings have increased every week since the shut-down and will continue to do so. The key to remote closings is communication, preparation and coordination to ensure that the many parties involved are all on the same page, working toward the common goal.
When and how will the housing courts re-open?
New York State continued a moratorium on evictions when, on May 7, 2020, Governor Andrew M. Cuomo signed Executive Order 202.28, which provides in part:
There shall be no initiation of a proceeding or enforcement of either an eviction of any residential or commercial tenant, for nonpayment of rent or a foreclosure of any residential or commercial mortgage, for nonpayment of such mortgage, owned or rented by someone that is eligible for unemployment insurance or benefits under state or federal law or otherwise facing financial hardship due to the COVID-19 pandemic for a period of sixty days beginning on June 20, 2020.
The order does not specify what qualifies as financial hardship or the proof required to establish it, nor does it address holdover proceedings. The moratorium has now been extended through August 20, 2020. The courts presently remain closed for all but essential matters like landlord lockouts, reductions in essential services, and applications addressing serious code violations, serious repair orders, and for post-eviction relief. Virtual proceedings and mediation will play a large part in addressing what will inevitably be not only a back log, but also a surge in proceedings when the courts fully re-open.