“Construction and Conversion Deadlines in the Time of COVID-19: Check Your Loan Documents”
Indianapolis Bar Association Real Estate and Land Use News 06/17/20 Courtney S. Lynch
Since the COVID-19 pandemic gripped the United States in March 2020, many developers and borrowers with real estate construction or rehabilitation projects underway are faced with the critical question of whether they can adhere to the construction, conversion and other deadlines set forth in the project’s loan documents. Similarly, lenders are reviewing the loan documents to determine what, if any, extensions, amendments, or remedies might be available in case a borrower has experienced or is still experiencing delays in construction or rehabilitation of a project due to the pandemic. The types of deadlines, extensions available, fees that may be required and force majeure/unavoidable delay provisions will vary from project to project. However, here are some key items to review if COVID-19 may cause the project to miss a critical deadline.
First and foremost, state and local stay at home orders may have required, or may still require, certain construction and rehabilitation efforts to delay or cease efforts. Especially in cases where rehabilitation projects must work around existing tenants or residents, such work may be significantly delayed due to social distancing. Many loan documents include provisions that indicate that abandonment or delay in construction for a certain period of time, typically 30 days, is an event of default. Such provisions may provide an exception in cases of force majeure or unavoidable delay, but an excuse for nonperformance based upon force majeure or unavoidable delay will be reviewed closely by a lender depending on whether those terms are specifically defined in the loan documents and whether the situation fits the definition of force majeure or unavoidable delay.
Second, nearly all construction loan documents include a deadline by which the construction or rehabilitation of the project should be completed. Borrowers should review whether the construction deadline can be extended and under what circumstances and whether not meeting the construction deadline can be excused under the concepts of force majeure or unavoidable delay, as further described below. Similarly, if the loan has a concept of converting from the construction to permanent phase, the loan documents will include conditions to the conversion and a deadline to complete the conversion in many instances. One major condition to conversion will be completion of construction or rehabilitation of the project. Often, conversion deadlines, unlike most construction deadlines, may be extended under specific provisions in the loan documents, but such extensions usually require payment of extension fees and a showing of good cause to the lender.
Finally, whether loan documents drafted prior to the pandemic specifically define force majeure or unavoidable delay or provide these concepts as excuses for nonperformance or delay should be reviewed carefully on a case by case basis. Force majeure or unavoidable delay provisions, generally, are unforeseen circumstances or events out of the control of the borrower. Some force majeure or unavoidable delay provisions will specifically delineate what qualifies as a force majeure event or unavoidable delay, while other loan documents will reference the concepts without providing a specific definition. Either way, a borrower that intends on using force majeure or unavoidable delay to excuse a delay or nonperformance under the loan documents should carefully consider the wording of the provisions in light of that borrower’s circumstance.