Weitz Commercial - 150 Lake Street S; Ste 216 - Kirkland, WA - (206) 306-4034

Wednesday, August 19, 2020

Washington Options for Lease negotiation for COVID.






Force Majeure

What is force majeure?

Unlike many countries, English common law provides no universal concept or definition of force majeure, which instead operates only to the extent contractually agreed. Accordingly, the ability of a party to invoke force majeure (and the effect this will have on the contract in question) will depend on the presence of a force majeure clause and its terms within your lease or contractual agreement.

Though each force majeure clause may vary and must be considered on its own terms, there are various common elements.

NOTE THE TYPICAL COMMERCIAL BROKERAGE ASSOCIATION (CBA) LEASE DOES HAVE A PROVISION FOR GOVERNMENTAL INTERFERENCE. 

Typical elements of force majeure

The onus is on the party relying on the clause to demonstrate that it has been engaged in the particular factual circumstances.1

1.    Occurrence of event

First, the party suggesting force majeure will always need to establish that one of the prescribed events has occurred. Typically, such events include such as war, natural disaster or acts of god will be included. It is not uncommon for a pandemic or epidemic to be included as a qualifying event, which plainly would cover the outbreak of COVID-19. Clauses may also list a change in law or compliance with any government regulation or order. These triggers are particularly relevant in the current circumstances, where many governments are imposing unprecedented restrictions in response to COVID-19.

2.    Impact on performance

Once established that a trigger event has occurred, the party seeking to rely on the force majeure clause must also show that the event has impeded their ability to perform their obligations to the necessary degree.

Where there is a requirement for the event to have “prevented” performance, the defaulting party will need to demonstrate that it has become physically or legally impossible to perform, and not merely more difficult or unprofitable.

3.    Sole cause

As regards the necessary extent of the causal link between the force majeure event and a party’s inability to perform their contractual obligations, the defaulting party must demonstrate that the event is the sole and operative cause of the impediment.11

Causation is likely to be a heavily disputed factor. If a party was already facing issues that would impact their obligations, it may be difficult to prove that the force majeure event was the sole cause.

4.    Mitigation

Force majeure clauses will commonly require a party to mitigate the effects of the trigger event, for example by imposing a duty to use all reasonable endeavours to do so. What constitutes reasonable endeavours is fact-specific and will vary depending on the type of business and the surrounding circumstances.

5.    Contractual consequences

The consequences of a party validly calling force majeure will depend on the wording of the clause. The clause may entitle a party to suspend or extend time for performance, or allow for termination of the contract. It is common for a force majeure clause to allow suspension of obligations for a certain period of time, after which one or both of the parties have the option to terminate the contract.

In addition, force majeure clauses often include notice or other procedural requirements

Frustration

What is frustration?

In the absence of a force majeure clause, contracting parties may consider relying on the common-law doctrine of frustration {of purpose}. Frustration discharges a contract where an event occurs that renders it physically or commercially impossible to perform, or transforms the obligation to perform into one radically different than envisaged at the time of contracting.

Elements of frustration

The test

Frustration applies only in extreme scenarios, and the threshold for establishing that a contract is frustrated is very high. Though there is no definitive test for frustration, generally a contract may be frustrated where:

·         the frustrating event occurs after the contract has been formed;

·         the event is beyond what was contemplated by the parties on entering the contract and is so fundamental that it strikes the root of the contract;

·         neither party is at fault; and

·         the event renders performance of the contract impossible, illegal or radically different from that contemplated by the parties at the time they entered into the contract.

For frustration to occur, it must be demonstrated that the event affects the main purpose of the contract.

All relevant factors, including the wider contract and factual circumstances, will be taken into account by the court when considering whether a frustrating event has occurred.

Events leading to Frustration

Types of events that have been to held to frustrate a contract include war, incapacity or death, cancellation of an event, a change in law, or destruction of subject matter.

COVID-19 could be considered a frustrating event, however, it will more likely be the consequences flowing from the COVID-19 outbreak that qualify (ie. Government Restrictions).

Unforeesable

Frustration requires that the supervening event was unforeseeable. The courts will take into account all factors when considering the parties’ knowledge, expectations and assumptions regarding the risk that a particular event might occur at the time of contracting.16

Impossibility

Generally, to prove that a contract has been frustrated, performance of contractual obligations must be shown to be genuinely impossible. It is not enough that obligations have become extremely difficult, even if they would result in devastating hardship on a party. If any manner of performance remains an option, this must be taken, regardless of the burden it would inflict on the party.

Many of the effects and the measures introduced as result of COVID-19 will be temporary. Depending on the nature of the contract, it may therefore be difficult (though not impossible) to show that performance has become genuinely impossible and not merely temporarily delayed.

Consequences of frustration

Where frustration is successfully invoked, the contract is automatically terminated and all parties are released from their obligations. As the contract is terminated immediately, the parties are not restored to their pre-contractual position. This may result in an unfair or uncommercial outcome. If the Law Reform (Frustrated Contracts) Act 1942 does not apply, then money paid before the frustrating event is only recoverable where there has been total failure of consideration.17

The Act applies to commercial contracts, with the exception of contracts that have expressly excluded it. Certain shipping, insurance and perishable goods contracts also fall outside the scope of the Act.

Where the Act applies, money paid before the frustrating event can be recovered and unpaid sums that are due cease to be payable.

A party may also be able to retain an amount of the money paid to cover incurred expenses. Additionally, the court may require a party to pay a just sum for a valuable benefit received under the contract.

Relationship with force majeure

Where a contract contains a force majeure clause, it is unlikely the parties will be able to argue frustration. This is because the parties will be viewed as having already made express provision for the consequences of a particular supervening event in the contract itself.

However, because force majeure clauses are viewed in a restrictive way, the courts will need to be satisfied that the wording of the force majeure clause covering the event is “full and complete” before concluding that frustration is not applicable.

Conclusion

If your business has been effected by COVID regulations, you may have options to postpone/ stop your lease obligations. You can reach us directly at:

Weitz Commercial

150 Lake Street S; Ste 216

Kirkland, WA 98033

Scott@WeitzCommercial.com

T: (206) 306-4034

Wednesday, October 23, 2019

Negotating Washington Commercial Leases


What are main portions of the Commercial Lease? 




As an attorney for almost 15 years, I've seen just about every type of lease you can imagine. In general, many leases are fair to both tenants and landlords. In the residential setting, the Washington Landlord Tenant Act provides a lot of protection for Tenants, but in a commercial setting, most tenants (especially small business) owners end up with terms less than ideal as they either don't try to negotiate or don't negotiate well enough. Below are some key points of a commercial lease worthy of focus in your business discussion.  

Rent: This sounds obvious, but the commercial brokers of the world have created their own language that takes time to adapt to. For instance, why call it $2000/ month when we can call it $20/ SF? What does that even mean?! Why no transparency? 



Rent is absolutely a negotiable thing in most leases. A .50 decrease in price/ SF can make a huge difference over the course of a lease. Use close comps and DON'T be afraid to negotiate at lease renewal if market conditions have changed. 



What is CAM? 

Common Area Maintenance charges, or CAM for short, are one of the net charges billed to tenants in a commercial triple net (NNN) lease, and are paid by tenants to the landlord of a commercial property. A CAM charge is an additional rent, charged on top of base rent, and is mainly composed of maintenance fees for work performed on the common area of a property. Bluntly, CAM is not really negotiable if the property has multiple tenants. That said, you should seek historic CAM charges to get a sense of what can be expected in the future. 



Ability to Sublease? 



Most Commercial leases provide the ability to sublease your right to a premises. The key is the standard by which the landlord may approve? Do they have the subjective right to deny the sublease at their discretion or must they allow a commercially reasonable tenant? 

Parking/ Signage/ Hours of Operation: 

Some of the most overlooked portions of a commercial lease are parking, signage, and hours. I had a restaurant that wanted to stop lunch service because it just wasn't profitable. The Landlord forced them to stay open and lose money because the lease said they needed to be open from 11-9. They wouldn't allow them to open later for liquor sales, but forced the lunch opening. In the end, the business struggled until we were able to renegotiate their lease to reflect their business needs. 



Negotiating the Personal Guarantee:


For most small businesses, negotiating the Personal Guarantee is crucical. If the business fails, this can be the difference between huge financial loss and just moving on. If you can get away without a personal guarantee, that is obviously the ideal situation, but frankly very rare with most leases. Some alternatives we like to suggest to landlords are as follows: 


Rolling PG: This allows for a PG for a period of time (6 months/ 1 year) past default for the Tenant to be responsible. This will help mitigate the loss for the business owner in the event of a breach of a longer lease. 


Set period of Time: I really like this because it protects both the LL and the T. An example here is that we had a client sign a 10 year lease for a start up business. We were able to cap the personal guarantee to 4 years. Once that four year mark was met, the Tenant was able to celebrate that even in the most case scenario of business decline, they would be able to move on without a crushing financial blow. 

There are many other items worthy of discussing, but I will focus on those in future Washington Commercial Real Estate blog posts. 



For more information on Negotiating a Washington Commercial Lease, consider contacting a Kirkland Commercial Real Estate broker

My Contact information: 

Scott Weitz
Designated Broker/ Attorney
Rylee Park Properties
C: (206) 306-4034
Scott@ryleepark.com



Monday, September 23, 2019

Seattle/ Everett Commercial Real Estate Financing

Commercial Lending is a beast all onto its own. Everything you thought you knew about lending (as it relates to residential lending at least) can be thrown out the window in deciding whether to dip into the commercial real estate world

Most banks will consider all or most of these in deciding whether to issue a loan to a borrower:

1) Larger Down Payment - many have stories of residential loans at 3% (FHA options). Simply put, you won't see that in commercial real estate absent some extenuating circumstance. Those low down payments are general made possible by governmental programs not applicable to commercial funding. While each situation can be different

2) Track Record - Many will want to see a track record of some type - accordingly, first time borrowers may want to team up with a first time investor to gain a track record in the industry or similar projects. If the borrower is well funded enough, this may be something that would warrant an exception, but it certainly doesn't help to have experience.

3) Net worth - If you are a solo borrower, the net worth of the borrower will absolutely be taken into account in the underwriting process. This may sound shocking, but the higher the net worth, the higher the chance of getting the loan as personal guarantees can be utilizing and provide the lender with more security.

4) Strategy of the borrower as it relates to improving the property or maintaining/ maximizing the property will likely be taken into account. This may goes without saying, but banks want to see a plan/ business plan. .

5) Lending Options: Learn the lending desires of different lending options. Private Equity, Banks, private lender. There are so many different options that one needs to consider options beyond simply approaching the local corner bank to determine if a loan may be issued and what the best terms may be.

6) Type of Asset: Apartments or other more stable assets may be easier to finance than, say, retail lending. This will vary asset class to asset class and market to market, but will likely play a role in the underwriting review.

For more information on finding an Seattle/ Everett Commercial Real Estate Broker, consider emailing me at Scott@Ryleepark.com or calling / texting me directly at 206.306.4034.

Our Info if you'd like any more information regarding Seattle Commercial Real Estate or Everett Commercial Real Estate.

Rylee Park Properties
150 Lake St S, Ste 216
Kirkland, WA 98033
T: (206) 306 - 4034
Scott@ryleepark.com






Wednesday, January 2, 2019

Interest Rate hikes effects on Commercial Real Estate

Excerpts from a recent AP article and our comments surrounding it:

An important indicator in the U.S. commercial real-estate market is signaling that a decade long bull run is on shaky ground heading into the new year.

The gap between long-term borrowing rates and what some types of commercial properties on average yield is the narrowest it has been since 2008, according to data firm Trepp LLC.


In the past, this tightening spread has often presaged a drop in property prices, sometimes with dire results. “In 2007, looking back, that was a real red flag,” said David Steinbach, chief investment officer for Houston-based Hines.
Hines, one of the country’s biggest investors in office buildings, was a net-seller of that property type this year partly because it believes values are near their peaks, Mr. Steinbach said.
Too Close for ComfortThe gap between commercial property yieldand borrowing cost is narrowing.Source: Trepp LLC
%Average property yieldAverage lending rate2012’13’14’15’16’17’1845678
Other big investors and lenders are also reducing risk. Terra Capital Partners, a New York investment firm that specializes in commercial property debt, is offering fewer construction loans and making more first mortgages, which are safer.
Prudential Financial Inc. said it is cutting its exposure to property types that typically get hammered in a downturn—like office and fashion-oriented retail—and buying more recession-resistant property types, like housing that targets lower-income renters.
Commercial real-estate prices have increased steadily since 2009. In more recent years, as the economy has expanded, landlords also have enjoyed rising rents and falling vacancies.
But many are now thinking that prices have peaked. A Green Street Advisors value index of property owned by real-estate investment trusts increased only 2% in the 12 months ending Nov. 30, compared with the earlier years of the recovery which showed annual growth rates of as much as 20%.
At the end of the third quarter the average rate borrowers paid on loans packaged into commercial mortgage-backed securities was 5.03%.
One year earlier it was 4.52%, Trepp said. That increase “is a big deal on multimillion-dollar properties,” said Joe McBride, Trepp’s research director.
Rylee Park: As a general rule, a 1% increase in interest rates leads to a 10% decrease in purchasing power. Obviously this is a huge generalization as there are many cash purchasers, but the morale of the story is that the recent uptick in lending rates is a concern for short term asset appreciation. 
Not everyone thinks it is time to head for the exits. A still expanding U.S. economy and the amount of money sloshing around the market suggest the bull run can continue.
Investors purchased $152.7 billion of U.S. commercial property in the first three quarters {of 2018}, up 17% from the same period in 2017. 
Meanwhile, developers are building more, intensifying pressure on the supply side. JLL is projecting that this year more than 250 million square feet of industrial space will be delivered, compared with more 232.7 million in 2017.
Some major banks are also turning more bearish. Wells Fargo & Co., the country’s largest commercial property lender, has reduced its exposure to the sector to $110 billion this year, down over 5% in the past two years.
RPP: it is our contention that interest rate hikes will certainly play a role now and always in both the Real Estate and Equities markets. That said, the argument can be made that the Federal Reserve has been increasing rates recently simply as a measure to have 'bullets' in the recovery chest should the market slow down continue or increase. Given the amount of cash on the sidelines, commercial real estate and its creative 'triple net' structure will most certainly be a stable investment long term despite the short term hiccups it may encounter. This may not be true in the retail world as online stores continue to take market share, but will most certainly be the case in office/ industrial/ medical, etc on a market by market basis. 
For more information on Kirkland Commercial Real Estate, consider contacting us. You can reach me directly at Scott@ryleepark.com or via cell phone at 206.306.4034.
Scott Weitz - Designated Broker/ Attorney
Rylee Park Properties
www.ryleepark.com