As we all practice social distancing to avoid the spread of COVID-19, businesses cannot escape the economic impact of the pandemic. With an economic recession on the horizon, the depths of which cannot be fathomed, it is crucial that businesses act proactively to address their obligations owed to creditors. The most crucial creditors on the list are a business’ lender and landlord.
Whether a default has already occurred or one is imminent given the damage being caused to the economy by the pandemic, now is the time to address these issues.
COVID-19 requires business owners to address multiple issues concerning loan agreements, including:
- Are you in breach of financial covenants in your loan documents?
- Have you missed a payment?
- Has a default under another agreement triggered a cross-default provision in your loan documents?
- What can be done once the lender has accelerated the amounts due on the loan?
- Can you obtain an increased credit facility or a line of credit as you struggle to resume business operations?
- Do your loan documents contain a material adverse change clause, and if so, will your lender attempt to utilize that as default?
Addressing any one of the above issues requires open communications with your lender. There are options available to business owners as large and small banks are offering debt relief plans, which are not simply for individuals seeking to save their homes from foreclosure.
If you are already in default, the negotiation of a forbearance agreement is possible. Under a forbearance agreement or standstill agreement, a lender refrains for a specified amount of time from taking any action to enforce its rights (including commencing a lawsuit, recovering collateral, or foreclosing on real property) in exchange for payment. A borrower may utilize the time to wait out the pandemic, refinance the loan or if possible, simply cure outstanding arrears on the loan and reinstate the loan with the original maturity date. Bankruptcy protection is also an option, but an option that we explore as a last resort.
Similarly, COVID-19 raises a host of issues for business owners concerning a lease agreement, including:
- Does the lease agreement contain a force majeure provision, which relieves a party from performing under an agreement as a result of circumstances beyond its control, which can be relied upon? If so, does the force majeure provision apply to payment obligations?
- Is there a casualty clause in the lease which excuses performance?
- Does the company maintain a policy of business interruption insurance coverage?
In New York, there is currently a moratorium on commercial eviction actions and, as such, the time is ripe to negotiate with your landlord.
The attorneys at Norris McLaughlin, P.A., have significant experience negotiating lease modifications, loan modifications, forbearance agreements, and loan workouts. Our best advice is to stay ahead of how COVID-19 could affect your businesses and address these issues now by contacting one of our experienced attorneys, who are prepared to help provide some stability in this time of uncertainty.