15 Apr Postscript: ASCAM Speaks
After writing last week’s piece on PPP and small business landlords, a new chapter quickly presented itself. The morning after I posted that article, I sent ASCAM an official notice of my inability to make rent payments. A trusted lawyer friend recommended I write the letter, following the example of larger companies, such as the Cheesecake Factory (link). Despite the clear size (among other) discrepancies between GTG and Cheesecake Factory, I agreed that a written statement made sense given the situation. ASCAM may have chosen not to communicate proactively, but I could act like the proverbial bigger person. Additionally, I struck some subtle blows in the letter, which made me feel like I have some power – even though I don’t. Or do I?
If we take the ASCAM lease at its word, the tenant (GTG) wields zero power. However, in light of the global context, landlords actually sit in an equal position of weakness. If their tenants fail to pay rent, retail property owner investments sour. As mentioned previously, they finance their investments through mortgage loans, and mortgages demand payments of interest and (usually) principal. Unpaid debt service on real estate loans will eventually trigger banks to foreclose on properties. In foreclosure, banks exercise their right to take ownership of the property. In foreclosure, a bank is hoping to sell the property for an amount that will satisfy the outstanding loan amount. The investor begrudgingly accepts a full loss when they forfeit ownership of a property. For obvious reasons, foreclosure represents a real estate investor’s worst nightmare. At the moment, very few tenants anywhere are paying rents, and landlords’ cash flow for debt service payments is dwindling as fast as my tolerance for dog walks. Banks rarely recoup loans in full when they foreclose on a property, so they generally prefer alternate remedies when debt service stops flowing. Therefore, a property investor will usually enjoy a grace period during which it may satisfy outstanding payments before the bank forecloses. Nonetheless, a landlord seeks to avoid any hint of trouble with its lenders.
The current situation raises the specter of debt service trouble which can portend foreclosure. If it is unable to meet lender obligations, ASCAM sits in a terrifying position. They cannot control their tenants’ ability to pay rent, their bank’s patience or, for that matter, a global pandemic. Wielding no control defines weakness. It follows that ASCAM and all landlords should provide any possible accommodation for its tenants. After I sent the official notice to ASCAM last week, I should not have been surprised to feel my phone vibrating within an hour. I was somewhat perplexed only because there had been no meaningful communication prior to this phone call.
If you even skimmed my previous piece, you probably caught the scent of vitriol wafting from my ASCAM thoughts. I understand their position, but they left me to assume the worst about them because they had offered no evidence to the contrary. So the vibrating phone caught me a bit off guard. Well, the tenor of the conversation proved even more shocking. The young ASCAM executive who called could not have been more kind or informative. In short he said, pay what you can, when you can. How understanding, how reasonable, how flexible… All of the qualities I implicitly demanded in my previous post.
My only complaint: why did I have to send legal correspondence in order to solicit ASCAM’s stance on this uncontrollable global situation? As with many inexplicable businesses decisions, the answer likely follows a road that leads to lawyers. In general, lawyers would rather corporations say less and avoid any statements that they might later regret (in court). Lawyers strongly advise against writing anything, unless a client pays them to write it. Everyone has to make a living. In litigation, written material provides evidence that may be difficult to dispute. He wrote differs drastically from she said. My local landlord is no dummy and is certainly consulting lawyers about his legal obligations and best courses of action. Nonetheless, he was willing to communicate proactively in writing with his tenants, potentially – gasp – to his own detriment. Again, we see a clear manifestation of contrasting approaches from landlords. Yet the approaches, it seems, yielded quite similar results. Both are flexible because they are afraid for all of the reasons discussed above. As a tenant I sure do appreciate proactivity. It enables me to manage my business more effectively. The local landlord’s communication enabled me to focus on important aspects of my business: the health of my employees, the cleanliness of my stores and implementing an operating strategy to serve our customers during a health crisis. Meanwhile, ASCAM left me guessing, fuming and vowing not to pay rent. Simultaneously, I felt myself wanting to help the local landlord. Sure, I know him and his family, and I want the best for them. But most of all, I appreciate the way he has operated in this unprecedented situation. Fearing legal or other problems, ASCAM seems to have been sitting on its hands, preferring silence over timely delivery of information.
Is contract law about to go the way of cocktail parties?
When it comes to contractual matters during this crisis, most professionals seem to be operating based on a rarely invoked principle: courts are likely to prefer decency rather than impose letter-of-the-law punishments. In other words, companies and landlords fear that the Coronavirus could halt the normal application of contract law just like social distancing has stopped concerts. I am out of my depth discussing contract law, but, perhaps anecdotes support, if not prove, my point. Over the past month, I have repeatedly heard real estate professionals (brokers, landlords, investors etc.) say something along the following lines: what court will convict a small business for defaulting on his rent during a government shutdown? Granted, I have been at least six feet away on these occasions, so maybe I’ve just misheard what they’ve said.
As we’ve explored, ASCAM addresses situations such as government shutdowns in the Force Majeure section of the GTG lease, but payment of rent remains a mandated tenant obligation. In effect, the word on the street is that courts could refuse to enforce such legalese. A court would only act in this manner out of compassion for smaller businesses. There is no doubt that the law favors the lessor when the lessee has signed a lease that properly mandates the payment of rent. Perhaps when the crisis is over, the rule of law will prevail, and I expect it will. But in the meantime, both landlord and tenant are operating in the murky waters of unknown outcomes. If ASCAM is unable to collect rents it had contractually guaranteed under any normal circumstance, they enter territory that they naturally fear. They would likely shift similar questions to their creditors, and then a never ending spiral of who should pay whom might ensue. None of us know. Decency and compassion sound great, until all hell breaks loose. I suspect my landlords are indicating flexibility because they fear their own precarious legal and financial positions.
All of this fear and uncertainty leads to one place: trouble. PPP may have (unwittingly) placed landlords in the most troubling position of all. Unfortunately, both landlord and tenant now need the government to replace our uncertainty with the ability to meet financial obligations. However, PPP is a payroll subsidy, not a rent subsidy. At best, I will deploy a portion of PPP funds to defray some rent. Right now that is as much as my landlords can reasonably expect. Most revenue small businesses lose during shutdowns will never materialize, even when the economy returns to normal operation. Unless adequate funds magically land in my lap, I will only pay what I can pay when I can pay it. For now that is all my landlords are requesting. The local landlord quickly understood the peril of his situation, while the other required more time to admit such implicit weakness. Unfortunately, there will ultimately be a fallout for somebody, and landlords share concern that they will lose a battle against small business tenants. Thus far, PPP does nothing to undermine that conclusion. Though this sequence may benefit my business, I am not a fan of destabilizing the real estate market. I’d love to satisfy all of my rent obligations. Right now, I am stuck in the same reality as my landlords. And It would be best for each of us if I could more fully devote PPP funds to rents. For now uncertainty will rule the day, and we can only wait and see what next steps, if any, legislators and courts may take.