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Florida Banking Law Blog

Legal developments impacting banking, finance and loan enforcement in Florida

Welcome to the Florida Banking Law Blog!

Posted in Uncategorized

Rogers Towers, P.A. welcomes you to its Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, P.A., and we look forward to your comments in response to our blog.

The Lender as Landlord? Issues for a Lender to Consider in Reviewing Commercial Leases

Posted in Commercial Real Estate Lending

Leases can be complex commercial contracts. When a lender is reviewing a loan, the reviewer should keep in mind that the review is not only for things that may affect a borrower’s ability to pay the loan, but also for obligations a lender may step into if – and when – it becomes a landlord. Just like there can be different lease forms, there is no one-size-fits-all approach to reviewing leases. Below are some questions that a lender should ask when reviewing leases to understand what obligations the lender may step into if and when it steps into the shoes of a borrower/landlord.

  • Is the lease complete? Ensuring that all of the documents were actually signed, signed by the correct tenant legal entity, and that the lease relates to the correct premises are preliminary steps, but are important items to confirm. Further, the lender should confirm that all copies of leases include all exhibits, amendments, or addenda. These could affect the financial terms of the lease, the length of the lease, and other important matters.
  • What is the lease term? When does the lease expire and what extension/renewal rights does the tenant have? If tenant has a renewal option, the lender should confirm that borrower/landlord has sufficient notice of Tenant’s intent to exercise or not exercise its renewal option so that the borrower/landlord still has enough time to re-let the space without risk of interruption in rent.
  • What is the rent? Together with verifying the rent in the borrower/landlord provided rent roll, the lender will want to understand whether there are any free rent periods. The lender will also want to understand whether there are any significant exclusions from operating expenses or taxes that form part of the additional rent. Commercial leases will often contain a provision allowing a tenant the right to “abate” rent: to stop paying all or a portion of rent for a period of time. The tenant may also have a “self-help” right: the right of the tenant to cure the landlord’s default and offset the costs against rent. A lender will want to understand the tenant’s right to self-help and set-off, especially if the borrower/landlord is not maintaining the property.
  • Are there tenant improvement obligations? Where a building is under construction, or as a tenant inducement, the borrower/landlord may have obligations under the lease to pay for construction or improvements. The lender should ensure that it understands the costs of these obligations, then tenant’s remedies for late delivery, and whether the lender would be liable for the borrower’s/landlord’s failure to provide a tenant improvement allowance.
  • What are the termination rights? Lenders concern themselves about the effect that a tenant’s termination right may have on a borrower’s ability to meet debt service obligations. Tenant termination rights could arise from several provisions in a lease: landlord’s breach of a restrictive use covenant; landlord’s failure to complete leasehold improvements timely; landlord’s failure to make major repairs; or landlord’s failure to restore the demised premises soon enough after a casualty. The lender should also review the landlord’s termination rights as this will help assess the flexibility a lender may have upon enforcing a lease if it steps into the shoes of the borrower/ landlord. Further, the lender should understand cure rights for a landlord default that may help to preserve a favorable lease.
  • Is there a “go dark” or “co-tenancy” provision? The lender should understand landlord’s rights if a tenant closes its doors and ceases operations. Although the tenant will typically be required to continue paying rent if it goes dark, the collectability of rent may be in doubt. Another question a lender should ask is what impact does a “going dark” provision have on other tenants in a multi-tenant property should the tenant exercise this right. If it is an anchor tenant, the other tenants may rely heavily on the anchor being open so as to generate traffic in the property and business. The lender should also determine whether the lease contains a “co-tenancy” provision. These provisions allow a tenant to exercise specified remedies if certain conditions regarding the presence and operation of other tenants in the building are not met. The lender should understand the impact a co-tenancy provision could have on the entire property if any one tenant’s closure or failure occurs within the property.
  • What are the landlord’s obligations to rebuild or restore? The obligation to rebuild or restore after a casualty usually falls on the landlord’s shoulders. This can be an extremely expensive undertaking for a landlord, especially if insurance coverage is inadequate. Another related area is understanding when and how the lease allows a tenant to abate rent after a casualty.
  • Are there rights of first refusal or first offer? These tenant rights can limit a landlord’s ability to lease vacant space. In multi-tenant buildings, tenants with these rights may be entitled to notice when other spaces become available in the building and a landlord may not be able to offer vacant spaces to desirable tenants without first offering it to existing tenants holding these rights.
  • Is the lease self-subordinating or is there a requirement for a subordination, non-disturbance and attornment agreement (SNDA)? The SNDA subordinates a lease to the lender’s security interest in the property. This subordination is usually given by tenants in exchange for a promise by the lender not to disturb the leasehold rights of the tenant in the event of foreclosure as long as the tenant is not in default of its lease. A key provision for lenders in the SNDA is “attornment”, which provides that in the case of a foreclosure, the tenant will attorn to (recognize) the lender (or the buyer at a foreclosure sale) as the new landlord under the lease with all the same rights of the prior landlord. A lender will want to be sure that any tenant that has an interest in the property that is earlier than a new mortgage is obligated in its lease to provide an SNDA in connection with the new mortgage.
  • Is the tenant obligated to provide an estoppel certificate? Many leases provide that either landlord or tenant will execute an estoppel certificate upon request of the other. The estoppel gives a lender notice of existing issues in the landlord-tenant relationship and any defaults by either party that might need to be cured. A lender should confirm whether the leases require tenants to provide estoppel certificates. The lender should review the estoppel certificate to be sure there are no unexpected issues with the property or the relationship between landlord and tenant that would prove costly to resolve by the landlord, or later by the lender if a foreclosure becomes necessary.

The above items highlight just a few of the commercial lease provisions that lenders should look for when reviewing leases not only for items that may affect the borrower’s ability to pay the loan but also for obligations on the lender if – and when – it becomes a landlord.

Time is Running Out for a 2015 Interest Rate Increase

Posted in Banking Operations

Despite indications from the Federal Reserve in as early as March that rates would be raised in 2015, the window for the Fed to hike interest rates this year is quickly closing.

The Federal Open Market Committee (“FOMC”) makes decisions over monetary policy, including setting the benchmark interest rates. The FOMC meets eight times a year to make key decisions that increase (or decrease) the money supply, including supplying more credit to banks for lending, setting interest rates, setting banks’ reserves and the discount rate. To date, it has been more than nine years since the FOMC raised interest rates, with the last hike in June 2006. The current benchmark interest rate—which is near zero—has held steady since 2008, when the Fed lowered it to fight the recession.

At its meeting in September, the Fed kept its benchmark interest rate near zero, citing global economic weakness. Following its decision, a recent September jobs report showed that employers in the United States created fewer jobs than expected, which analysts believe could reduce the likelihood of a rate hike this year. Some Fed officials said recently that despite the weak employment report, they still expect to raise interest rates this year, but others have cautioned that if unemployment rises or the economy’s performance remains slow, it is likely that interest rates will not be raised until at least next year.

There are only two FOMC meetings left this year, with the next one in late October and the final meeting in mid-December. Many market participants believe that the final meeting in December could be the most likely date for the Fed to raise rates, although some analysts suggest that the Fed has already waited too long and that raising rates this late in the year will harm investors and impair consumer confidence. In any event, whatever happens with the interest rates will have an impact on everyone, so lenders and borrowers alike should keep a watchful eye on Fed reports for the remainder of 2015.

Southern District Revises Mortgage Modification Mediation Program

Posted in Bankruptcy

Creditors take note; the Southern District of Florida Bankruptcy Court recently revised procedures for its Mortgage Modification Mediation Program. The new changes relate to individual debtors who are unable to settle at mediation with the lender for real property in which the debtor has an interest or is obligated on a mortgage or promissory note.

The revision affects debtors filing under chapter 12 or 13 and is triggered when a creditor fails to settle at mediation with a debtor. A debtor is now required to show one of the following: (1) if a proof of claim has been filed, the debtor must conform to it; (2) provide that the real property at issue will be “treated outside the plan”; or (3) provide that the debtor will surrender the real property. The debtor must make these amendments or modifications within fourteen days after the mediator files his final report. For individual debtors choosing to conform to the creditor’s proof of claim, the debtor may still object to the claim and proceed with a motion to value.

The Mortgage Modification Mediation Program provides mortgage modification options for creditors and debtors. Its goal is to encourage and facilitate settlement with the assistance of the Bankruptcy Court.