The Impact of COVID-19 on Real Estate Practitioners and Transactions

Post Authored by Brian Bentrup

The world is in the midst of a global recession resulting from the COVID-19 pandemic.  In response to the spread of the virus, Governor J.B. Pritzker instituted a “shelter in place” order for the State of Illinois on March 20, 2020.  As individuals across the world are advised to self-quarantine or required by local, state or national mandates, the economic forecast appears dire for the foreseeable future.  One need only look at the United States stock market, which has lost all gains since 2017 and suffered some of its worst single-day losses in its history.

All industries will feel the ripple effect either directly or indirectly and the legal practice is no exception. While much of attorneys’ work can be done remotely, they are still dependent upon support staff and paralegals.  Real estate attorneys are no different and not only rely on their office support, but also on real estate brokers, lenders, title companies and municipalities.  The disconnect between real estate attorneys and these partners, the lack of continuity, and the disruption of ordinary business distributions will undoubtedly affect productivity.  There are some jobs or tasks that cannot be done remotely at all and the real estate industry is heavily dependent on physical interaction. When physical interaction is limited or precluded altogether, the volume of real estate closings suffers a dramatic decline.

The real estate industry will be affected in myriad ways as a result.  Some offices are closed entirely; others have limited staff or limited functionality.  The Federal Reserve’s (the “Fed”) monetary policy and uncertainty about the economic future will all contribute as well  It is impossible to precisely predict the nature, degree, and extent to which the practice of real estate field will be impacted, but this article discusses likely areas and practical considerations for the near future while COVID-19 is a daily and omnipresent reality.

Physical Interactions and Residential Listings

A typical residential or commercial real estate transaction usually begins with a client and broker physically viewing properties.  These viewings are an integral component and residential transactions, in particular, invite strangers into private homes at a time when individuals are advised to maintain at least six feet of distance between each other.  This is obviously problematic, as “social distancing” has become the key buzzword for 2020.

Currently, cities and states across the United States are limiting the number of people that can gather.  Some cities and states banned private gatherings of any number.  Illinois halted all non-essential work or travel. This means that the standard Sunday open house will not be permitted for the near future.  In Illinois, the stay-at-home order is in effect until April 7, 2020, but may still be extended.  Even in areas without such restrictions in place, brokers, homeowners, and prospective buyers should be extremely hesitant to interact with other individuals or allow people into their homes. Virtual showings using electronic video media may address some of these restrictions although this format may cause hesitation in buyers who will not submit offers until they have seen a property in person.

Evidence had previously suggested that buyers were undeterred.  ShowingTime, a company that tracks residential listings in North America, found that real estate showings tracked 2019 numbers, until March 11, 2020, when showings began to decrease by 4% per day.[1]  That inflection point coincided with recommendations or requirements that individuals self-quarantine.

Remote workers in Illinois will likely see a sharp decline in productivity as their work setting shifts from the office to home.  Working from home often means more demands placed on the individual and more opportunity for distraction.  Even for contracts executed before the quarantine and which have many of the physical components already complete (e.g., inspection and appraisal), there is likely to be a chain reaction resulting in fewer closings.  Even if all of the preceding steps or requirements had been satisfied, it will likely be difficult to conduct the actual closing.  Title companies are exempted from the stay-at-home order, but some may voluntarily close or have reduced staff, hours and services.

Without access to tools of the normal trade, attorneys may have difficulty satisfying attorney review deadlines, providing grounds upon which a contract could be canceled.  Lenders may have similar difficulty meeting a contract’s lending deadlines meaning fewer loans will be approved, providing another basis for cancelation.  The lack of availability of support staff may further create administrative delays.  Unfortunately, it is also statistically likely that someone with whom you work will contract COVID-19 and will thus be unable to work.  The real industry, like all others, must be prepared for such delays and missed deadlines, and exercise patience and accommodations accordingly.

One small, but overlooked, aspect of residential purchases is the satisfaction of municipality requirements.  This may include, for example, a final water meter reading or payment of all final municipally-supplied utilities, and obtaining the transfer stamp.  As local governments continue closing or reducing services, it may be more difficult to satisfy these requirements.  With Illinois initiating shelter-in-place for non-essential workers, municipalities may not be open to the public or perform these types of services.

Fortunately, there are ways that the impact of social distancing can be minimized.  Brokers can conduct virtual shows or Sellers can use FaceTime, Skype, or other digital video media.  Sellers can pre-sign their closing documents at their attorney’s office in heavily controlled and sanitized environments and buyers can sign their loan documents at their lending institution in similar environments.  Closings can be conducted remotely and electronically.  Transactions are likely to take longer from initial viewings to funding at the closing, but there are nevertheless workarounds to the limitations on physical interaction.

Mortgages

On March 15, 2020, the Fed cut the federal funds rate, which is the interest rate banks charge each other to lend Fed funds overnight, to the 0.0 – 0.25% range.  This rate is the primary mechanism by which the Fed can expand or contract the economy, and is a benchmark for interest rates for, among other things, mortgages and loans.  The last time the interest rate was this low was December 2008 in response to the burst of the housing bubble.

Lowering the interest rate to an effective rate of 0% means that banks are more likely to make lending more attractive to consumers because the cost of money is less expensive.  Banks are more likely to borrow from each other to meet their reserve requirements when rates are low.[2]  This is not likely to affect fixed-rate home loans, but adjustable-rate home loans are likely to be cheaper.  This will likely result in more purchases as prospective buyers who were previously on the fence may be motivated by the attractiveness of adjustable-rate loans.

Other Economic Factors

There is no single determinative economic factor that influences how the Fed’s monetary policy will affect the real estate market, but uncertainty about the future may be the driving force.  Just as earnings and expectations drive the performance of individual stocks, developers will be wary of purchasing, developing, or beginning commercial operations in the face of such great uncertainty.  It is uncertain when the COVID-19 pandemic will end when social distancing will be relaxed, or when shelter-in-place will be lifted.

The obvious historical analogy is the Great Recession of 2007-2008, which caused many lenders to pause all financial deals.  The expectation is that lenders will take a  conservative long view and adopt a wait-and-see approach.  This suggests that conducting business as usual in the face of such extreme uncertainty would not be advisable.  As a result, the lending market will likely slow.

Landlord-Tenant Considerations

Residential and commercial purchases and sales are not the only manner in which the real estate market will be affected by the COVID-19 pandemic.  Landlords and tenants will have their respective duties and obligations significantly altered as well.

Landlords rely on the certainty of knowing that, based on the set schedule prescribed in the lease, a tenant will make its rental payments.  Landlords plan capital improvements and maintain an operating account based on this expected income flow.  Given the economic uncertainty, residential and commercial tenants are likely to see their own income streams significantly reduced and may incur additional costs of their own.  Residential tenants are likely due to see their budgets constrained as they may work fewer hours or none if they contract COVID-19.  A monthly rental (or mortgage) payment is often a household’s single largest monthly expenditure and the one that would be most affected by economic conditions.  Commercial tenants may see their business income decrease due to lack of demand because either consumer cannot physically visit their businesses or lack the disposable income as a result of their own budgetary constraints.

Some commercial tenants may also seek to avoid an obligation to pay rent due to a contract’s “force majeure” clause. This contract provision may relieve the parties to the contract from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.[3]  While these clauses may be boilerplate, some leases or contracts may have prospectively contemplated such an event and have inserted language to address it. The question of who suffers the economic loss is critical, particularly in difficult economic times.  This should be a valuable teaching tool for attorneys drafting these clauses in the future.

Landlords and lenders are left with few options.  Cook County, for example, has closed virtually all of its courts excepting for certain emergency or necessary matters for 30 days.  All court dates scheduled within this window will be pushed back 30 days.  As of March 20, 2020, Governor Pritzker placed a hold on all evictions.  Once court operations resume, the calendars will be backlogged and enforcing rights under contracts or leases will be inevitably delayed.  The federal government is encouraging lenders to delay mortgage payments although no laws have been passed to this effect as of now. How this plays out will only be determined over time.

Summary

The real estate industry will be impacted by the COVID-19 pandemic. Limitations on physical interaction and the implementation of remote work will affect the real estate industry.  Residential and commercial buyers, sellers, brokers, lenders, title companies and developers will be adversely impacted.  Residential real estate attorneys, their staff and offices may be the most disadvantaged. Most Chicago-based real estate attorneys charge a flat fee between $500-$600 to represent residential buyers and sellers.  Given an average attorney’s hourly rate and that a standard closing takes about one hour, attorneys typically “lose” money on every file.  Many such attorneys are also agents of the title companies with which they work and rely on title agent commissions to offset this.  Real estate attorneys are highly dependent upon high volume because the margins are so slim.  If the real estate market mirrors the national and global economic recession, that volume of closings may be lacking.  With fewer deals, there are fewer title agent commissions as well.  Attorneys representing commercial clients will be similarly impacted.  This article assumes real estate transactions will come to a near standstill as a result of Governor Pritzker’s shelter in place declaration, but below is a summary of practical suggestions that may alleviate some of the distress once the declaration has been lifted:

  • Conduct virtual tours of residential and commercial properties using FaceTime, Skype, or other electronic media
  • Encourage prospective buyers to obtain preferable lending terms while the Fed’s interest rates are historically low
  • Conduct residential closings electronically and remotely
  • Sellers should pre-sign their closing documents in a heavily controlled and sanitized environment
  • Buyers should pre-sign their loan documents to the extent permitted in a heavily controlled and sanitized environment
  • Limit the transmission of physical documents only to the extent necessary, e.g. Powers of Attorney for Property and lending documents
  • Immediately sanitize documents upon receipt or quarantine the documents for a sufficient time period based on recommendations of the Center for Disease Control
  • Review leases and contracts for force majeure clauses and determine if a global pandemic is contemplated
  • Exercise common sense and understand that accommodations may be necessary given that vindication of legal rights may be delayed
  • WASH YOUR HANDS WELL AND WASH THEM OFTEN!

[1] Impact of COVID-19 on Real Estate Showings in North America, https://www.showingtime.com/impact-of-coronavirus/

[2] Fed Funds Rate, Its Impact, and How It Works, https://www.thebalance.com/fed-funds-rate-definition-impact-and-how-it-works-3306122

[3] Janice M. Ryan, Understanding Force Majeure Clauses, Venable, https://www.venable.com/insights/publications/2011/02/understanding-force-majeure-clauses

About the Author:

bentrup pic

Brian Bentrup is a graduate of Loyola University Chicago where he triple-majored in Economics, Political Science, and Psychology. In 2015, he obtained his law degree from The John Marshall Law School. In law school, Brian was selected to be an extern for the Honorable Laura C. Liu in the Mortgage Foreclosure and Mechanics Lien Division as well as the Illinois Tenant Union.

Brian joined Pluymert, MacDonald, Hargrove & Lee, Ltd. in January 2018. His practice includes estate planning, probate and trust administration, and residential and commercial real estate. Brian also focuses on guardianships of minors and disabled adults and has been named to the approved Guardian ad Litem lists for Cook County, DuPage County, Kane County and Lake County. Brian dedicates time to pro bono work with Chicago Volunteer Legal Services representing or advocating on behalf of minors and disabled adults.

Brian is a member of the American Bar, Illinois State Bar, Cook County Bar, DuPage County Bar, and Chicago Bar Associations. He is also a member of the Justinian Society of Lawyers and the Phi Alpha Delta Law Fraternity.

Brian is a regular writer for the Chicago Bar Association’s @theBar blog where several of his articles have been published on estate planning and the minimization of tax liability.

Brian is licensed to practice in Illinois and Missouri. When not practicing law, Brian enjoys spending time with his wife, daughter and son, and exploring new and different culinary experiences.

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