On April 1, 2020, Ohio Gov. Mike DeWine signed Executive Order 2020-08D (the Order) addressing commercial evictions and foreclosures in Ohio during the COVID-19 public health emergency. Broadly stated, the Order “request[s]” that landlords and lenders provide Ohio commercial borrowers and small-business tenants facing “financial hardship due to the COVID-19 pandemic” with a 90-day reprieve on rent or mortgage payments and evictions.
The Order does not apply to consumer tenants or borrowers. It is instead intended to provide some benefits to commercial borrowers similar to what federal law provides to consumers with federally backed mortgage loans; e.g., the 60-day foreclosure moratorium and 180-day forbearance provisions in Sections 4022-23 of the CARES Act. The Order is grounded in the governor’s position that “during this public health emergency, commercial evictions and foreclosures destabilize local economies and threaten designated essential businesses and operations.” (Order at 2.)
Who and What Is Covered?
The Order applies only to commercial real estate borrowers for properties located in Ohio, and small business commercial tenants in Ohio. (Order at ¶ 1-3.) The Order, notably, applies only to “small business” commercial tenants – and not to all commercial tenants – but leaves the term “small business” undefined. Similarly, the Order applies only to those tenants or borrowers who face “financial hardship due to the COVID-19 pandemic”; borrowers or tenants who do not face such a hardship are not eligible.
What Does the Order Request of Landlords and Lenders?
Landlords are asked to provide two forms of relief to their small-business commercial tenants who face financial hardship due to COVID-19. First, the Order requests that landlords “suspend” rent payments for affected tenants for a period of 90 consecutive days from April 1, 2020, i.e., through June 30, 2020. (Order at ¶ 1.) Second, the Order requests that lenders provide a “moratorium of evictions” of such tenants for the same time period. (Id. at 2.) The Order provides, however, that it is not intended to “negate the obligation of a small business commercial tenant to pay rent or restrict a landlord from recovering rent at a future time.” (Id. at ¶ 6.)
Lenders are requested to “provide commercial real estate borrowers with a commercial mortgage loan for property located in the State of Ohio an opportunity for a forbearance of a term of at least 90 consecutive days for said mortgage...” (Id. at ¶ 3.) The Order broadly defines the term “lender” to include, among other things, any “banking organization,” “credit union” and “mortgage loan servicer,” specifically including commercial mortgage-backed securities. (Id. at 4.)
The term “forbearance” is also defined in the Order and prescribes the essential terms of the forbearance the governor has requested that lenders provide. First, it provides for a forbearance from the exercise of any remedies following a monetary or nonmonetary default, including “the filing of suit against any borrower, maker, co-maker or guarantor, the filing of foreclosure, appointment of a receiver, impounding of reserve or other funds deposited in accord with any loan or security documents, or termination of any license to use cash.” (Order at ¶ 5.) Second, it provides for a forbearance from “sweeping and/or seizing any cash by reason of cash sweep trigger events regardless of default or the existence of circumstances that may give rise to a cash sweep trigger event arising as a result of the COVID-19 epidemic.” (Id.) Finally, it requires forbearance from any requirement that a borrower waive any legal rights or admit any default. (Id.)
Some Practical Tips
The Executive Order’s terms are not automatic. A tenant or borrower who is incurring financial difficulties due to COVID-19 should request assistance from its landlord or lender. Terms of a forbearance will have to be negotiated, and it is a best practice to reduce any such agreements to writing. Tenants and borrowers should also be aware that the Order does not extinguish the obligation to pay rent during the time period of the moratorium: The obligation is simply “paused” for the 90-day period to afford parties an opportunity to work out “sensible solutions.” (Order at ¶ 7.) Many lenders and borrowers, as well as landlords and tenants, are already working proactively to negotiate forbearance terms that allow for payment relief while protecting collateral position and mitigating longer-term default risk.
For lenders and borrowers, now is the time to discuss risks and availability of future funds, and to make contingency plans. Notice provisions within a loan agreement may have required that the borrower notify the lender of material delays in business operations or a material adverse effect. The borrower should be able to explain to the lender how the borrower is managing and mitigating the impact of COVID-19 and may seek waivers, extensions or other modifications from its financial covenants. For a more detailed analysis, BakerHostetler has prepared a FAQ addressing questions of lenders and borrowers.
In addition to the forbearance provided for under the Order, businesses incurring financial difficulties resulting from COVID-19 should evaluate the available financial assistance provided for under the CARES Act. Namely, the Paycheck Protection Program provides U.S. government-backed, fully forgivable loans to businesses and 501(c)(3) organizations with 500 or fewer employees. In addition to payroll costs, a commercial tenant or borrower may use the loan’s proceeds for mortgage interest, rent and utility costs over the eight-week period after the loan is made. Beginning April 3, borrowers may submit application materials to SBA-approved lenders. More information can be found here.
For those commercial tenants and borrowers with greater than 500 employees, the CARES Act also endeavors to establish a midsize lending program with favorable terms such as interest rates capped at 2 percent, and no principal or interest payments are due during the first six months after the loan is made. BakerHostetler’s summary of the program can be found here.