COVID-19 & Forbearance Agreements

With new times come new terms. Six months ago we had never heard of Coronavirus or social distancing.  Now, we hear those terms so often we look forward to the day we never hear them again. Another term we’re starting hear in the wake of the Coronavirus outbreak is forbearance. Prior to COVID-19, most of us probably didn’t know what forbearance meant. Unfortunately, the financial impact of COVID-19 will likely cause many businesses and individuals to seek forbearance agreements with their creditors.

Forbearance means the action of refraining from exercising a legal right, especially enforcing the payment of a debt. A forbearance agreement is an agreement between a lender and a borrower (or a creditor and a debtor) to temporarily suspend the payments owed by the borrower to the lender. Forbearance agreements are often entered into in lieu of the lender filing a lawsuit to foreclose a mortgage or trust deed.

Borrowers, or debtors, adversely affected by the Coronavirus outbreak may need to enter into forbearance agreements with their creditors if unable to make their payments when due. Pursuant to the CARES Act, persons who have a federally backed mortgage can seek forbearance of their mortgage payments for up to nearly a year (they can initially apply for 180 days and then seek a 180 day extension). Many mortgages are federally backed. Interested persons should contact their loan servicer to determine if their mortgage is federally backed.  Even if a mortgage isn’t federally backed, given the widespread financial impact of the outbreak, there is a fair chance the lender has some forbearance or other options available.

Technically, a forbearance agreement is not a loan modification. Forbearance generally means that the lender agrees to forebear from taking action to enforce the borrower’s failure to make a payment when due and triggering the default clause under the agreement for payment failure. Persons facing the inability to pay their debts as a result of the outbreak need to consider promptly seeking forbearance or a modification of the payment terms of the loan or debt. Whether the parties enter into a true forbearance agreement or a loan modification, there are a number of considerations and competing interests.

While it is incumbent on the debtor to seek forbearance or a loan modification if the outbreak is or will likely cause them to not be able to make payments when due, a forbearance agreement can actually benefit both parties. For the borrower, one of the primary benefits of a forbearance agreement is that it gives them some breathing room with regard to their cash flow, cash on hand and long term ability to pay their debts. A forbearance agreement gives the debtor some time to figure out their next steps.

From the debtor’s perspective, it is important to recognize that a forbearance agreement can actually also benefit the lender. While the lender would obviously prefer to receive payment in a timely manner, a forbearance agreement can add certainty to the lender and improve the likelihood and level of repayment of the debt.  It also allows the lender to avoid having to enforce the remedies under their contract, such as foreclosure. Enforcement of contract remedies can be expensive and time consuming. Furthermore, some remedies, such as evictions and foreclosures, have been prohibited by the government during the COVID-19 outbreak.

Some things to keep in mind with regard to forbearance agreements.

Forbearance Period: A forbearance agreement should include language with regard to how long the lender agrees to forebear the debt without taking action to enforce the terms of the agreement (e.g., accelerate the debt for failure to pay in a timely manner) and how much additional time, if any, the debtor might get to repay the debt. In most cases, the balance owed by the debtor continues to accrue interest while the debtor is not making payments pursuant to a forbearance agreement. The forbearance period may be for a specified time period or tied to the occurrence of a specified event (e.g., the governor of Oregon lifting the moratorium prohibiting on-premises consumption of food and drink and gatherings of more than 25 people).

Conditions: The lender will likely require the borrower (and, if applicable, personal guarantors) to meet specific conditions before the forbearance agreement becomes effective. Such conditions might include: providing financial statements; additional reporting requirements; an updated business plan; efforts to seek financial assistance or loans through available government and related programs; and the payment of a forbearance fee and the costs incurred by the lender while negotiating the forbearance agreement.

Acknowledgments and Reaffirmations: The lender will likely require the borrower, in consideration of the forbearance, to make acknowledgements regarding the validity and amount of the underlying debt. The reaffirmations usually also include language that the lender is not waiving the right to exercise their remedies under the contract in the event of future defaults by the borrower. Guarantors are generally also required to re-affirm their guaranties.

COVID-19 has adversely impacted the ability of many persons to pay their debts when due. Adversely impacted debtors should promptly inform their lender if they are encountering financial difficulties. Creditors understand that the outbreak has had a huge financial impact on many businesses and individuals. It is generally in the interest of the creditor to work with their debtors. Negotiated solutions between the parties, memorialized by a forbearance agreement or loan modification, are usually better than engaging in litigation, particularly given the current prohibitions and the fact that the courts are not operating at full capacity and won’t be for some time.

If you need any assistance with regard to a forbearance agreement or modification of a loan, whether you are a creditor or a debtor, please reach out to our team. We’re here to help you during the Coronavirus pandemic.

Van M. White III has more than 20 years of experience as a lawyer in Oregon and Washington. Van has been a partner at Samuels Yoelin Kantor since 2001 and has served on the firm’s management committee since 2010.

Construction Liens Explained

Today, Van White will be presenting at the Building Materials Dealer’s Association (BMDA) Washington and Oregon Lien Law Seminar. The presentation includes information on preliminary notices, perfecting lien claims, bond claims, post lien requirements, and licensing requirements. This begs the question – what are Construction Liens? Van explains.

Construction Liens (also known as Mechanics Liens) are a charge against or interest in privately owned real property to secure payment of a debt obligation. They are granted by statute to persons who have provided labor, materials, or certain services, which are incorporated into, consumed in, or contributing to the improvement of real property. When correctly placed upon real property, the Construction Lien gives the contractor or materials supplier the right to enforce a charge upon the real property they improved or that their materials were added to. The purpose of Construction Lien laws is to ensure that persons are paid for the value they add to someone’s property.

While Construction Liens are an effective collection device for contractors and material suppliers, there are a number of statutory requirements that must be followed in order to secure the right to file and foreclose a Construction Lien in the event of non-payment. Said requirements include: intent to lien notices to the property owner prior to or soon after commencing construction or providing materials; filing the lien in a timely manner; post-lien filing notification letters; and foreclosure of the lien in a timely manner. The requirements regarding intent to lien notices differ depending upon whether the subject property is residential or commercial, as well as the relationship between the lien claimant and the property owner. Construction Lien laws also differ by state.

If you are a contractor or provide materials to construction projects, you should familiarize yourself with the Construction Lien laws in your state. Please feel welcome to contact me if I may be of any assistance with regard to Construction Liens in Oregon or Washington. For over 20 years, I have been helping contractors and material suppliers with Construction Lien issues.

Van M. White is a partner at Samuels Yoelin Kantor. His practice emphasizes construction, real estate, and business litigation. His legal work regularly includes the drafting, review, and negotiation of construction and real estate contracts; construction liens and collections; the prosecution and defense of claims relating to construction projects; business disputes; bond claims; and general counsel to construction contractors, material suppliers, property owners, landlords, and business owners. Please contact Van directly at vmw@samuelslaw.com.

Laws In Place To Facilitate Online Contracts

In the course of my legal practice, I draft and negotiate many contracts. While doing so, my primary focus is on the words written into the document to memorialize the duties and obligations of the parties to the contract. However, in the new electronic age, I am learning that my focus must expand beyond the terms of the contract to the mode of how the parties are entering into the contract. More specifically, parties entering into electronic contracts over the internet. Fortunately, federal and state laws are in place to add certainty and reduce risks when entering into electronic contracts over the internet via electronic signatures.

The Electronic Signatures in Global and International Commerce Act (Electronic Signatures Act), passed in 2000, removed the uncertainty relating to entering into electronic contracts over the internet and helped facilitate electronic transactions. The Electronic Signatures Act gave electronic contracts the same effect as the traditional paper contracts. Since then, a uniform act (the Uniform Electronic Transactions Act, “UETA”) was created to standardize various state laws relating to electronic contracts and electronic signatures. Forty-seven states have adopted the UETA into their state laws (Illinois, New York and Washington haven’t adopted the UETA, but do have laws recognizing electronic signatures).

The UETA makes it relatively easy for parties to enter into enforceable contracts over the internet via electronic signature. An electronic contract is an agreement created and “signed” in an electronic only form, without the use of any paperwork. Pursuant to the UETA, an “electronic signature” is an electronic record, symbol, or process attached or logically associated with an electronic record and executed or adopted by a person with the intention of signing/agreeing to the record (i.e., the terms of the contract). An “electronic record” is a record created, generated, sent, communicated, received or stored by electronic means.

The UETA does not specify any particular form or type of electronic signature for the formation of an electronic contract. An electronic signature of an electronic contract can be effectuated in a number of ways — i.e., pressing an “I accept” of “I agree” button; digital certificates, smart cards, and biometrics. All such methods can satisfy the general contract law requirement of acceptance as long as the other party to the electronic contract can show that the electronic signature was the act of the person who they claim accepted the electronic contract. The act of the person signing electronically may be shown in any manner.

The UETA holds that an electronic record or signature may not be denied legal effect or enforceability solely because it was created electronically. However, the information being provided, sent, or delivered in an electronic record must be capable of retention (by storing or printing) by the recipient at the time of receipt.

Further highlights of the UETA which add certainty and reduce risks with respect to entering into electronic contracts are as follows:

(1) In order for an enforceable transaction to be conducted electronically, the parties to he agreement must agree to conduct the transaction by electronic means;

(2) If a law requires a record to be in writing, an electronic record satisfies the law;

(3) If a law requires that a contract be signed, an electronic signature satisfies the law;

(4) If a law requires a signature or record to be notarized, acknowledged, verified, or made under oath, said requirement is satisfied if the electronic signature of the person who performed the notarization, acknowledgement, or verification is attached to or logically associated with the signature or record;

(5) If a law requires that a record be retained, the law is satisfied by retaining an electronic record of the contract information if said information accurately reflects the information in its final form and remains accessible for future reference; and

(6) Evidence of a record or signature may not be excluded in a legal proceeding solely because it is in electronic form.

Summary

Most of us have already entered into electronic contracts without giving much thought to the legal requirements of contract formation or that contracts must be in writing. In our new electronic age, we should expect to see more contracts, for wider variety of goods and services, presented in electronic form rather than on paper. Rest assured that there are laws in place to protect parties who enter into electronic contracts rather than the old fashioned way. Hopefully, the laws can keep pace with the ever evolving world of e-commerce.

Contractor Forfeits Right to Construction Lien by Accepting Mortgage Or Trust Deed As Security For Debt

The Oregon Court of Appeals recently issued a ruling which made it clear that a contractor’s acceptance of a mortgage or trust deed as security for the debt owed to them constituted a waiver of their construction lien rights. While the ruling at first glance sounds fairly logical and straight forward, it could have negative unintended consequences for contractors who release their construction lien rights in exchange for a mortgage or trust deed.

In the case of Evergreen Pacific, Inc. v. Cedar Brooke Way, LLC, filed July 11, 2012, Case No. A146478, the owner of several parcels of land being developed hired a contractor to pave parking lots and perform related work. To finance the development, the property owner obtained a line of credit from a bank and provided the bank with a trust deed against the subject property as security.

The owner/developer failed to pay the paving contractor following the substantial completion of the paving contractor’s work. The paving contractor subsequently filed a construction lien against the subject property. A construction lien foreclosure lawsuit resulted from the paving contractor’s construction lien filing and owner’s failure to pay the paving contractor.

The parties settled their differences before the foreclosure lawsuit went to trial. Pursuant to the settlement agreement, in exchange for the owner’s agreement to pay a specified sum to the contractor (including an immediate payment of approximately 40 percent of the settlement amount), the contractor agreed to make some repairs to its original work, perform some additional work, and release its construction lien. In addition, the owner agreed to provide the contractor with a trust deed against the subject property as security for the remaining amounts owed under the settlement agreement.

After the parties entered into the settlement agreement, the owner made the initial payment to the contractor and the contractor released its construction lien. A trust deed in favor of the paving contractor to secure the remainder of settlement payment was subsequently recorded. The contractor then proceeded to complete all the new work contemplated in the settlement agreement, as well as some of the repairs. However, the owner failed to pay the remaining amounts owed to the contractor under the settlement agreement. Such failure caused the paving contractor to file a new construction lien against the property. The contractor’s attempt to foreclose its second construction lien, as well as it’s foreclosure of the trust deed, were the basis of the court’s decision that is the focus of this article.

The owner did not appear in the second foreclosure case and the court issued a default against them. However, there was a trial, which included the bank who had provided a line of credit to the owner, concerning the validity (and priority) of the paving contractor’s lien. The bank took the position at trial that the paving contractor’s lien was not valid because (1) the paving contractor waived its right to a construction lien when it released its first construction lien, thus precluding a second construction lien against the same project; and (2) the paving contractor had forfeited its right a construction lien when it accepted a trust deed to secure the project debt. The trial court ruled that the construction lien was valid, and per Oregon’s super-priority statute for construction liens, also ruled that it was superior in priority to the bank’s line of credit trust deed against the subject property. The bank appealed the trial court ruling and renewed its position that the construction lien was invalid because the paving contractor had forfeited its right to a construction lien by accepting the trust deed from the owner as security for the project debt.

The court of appeals, while citing a case from 1877 which held that a contractor waives its rights to a construction lien when they accept a mortgage or trust deed to secure the underlying debt, ruled that the trial court erred in finding that the second construction lien was valid. Accordingly, the court of appeals reversed the foreclosure judgment in favor of the paving contractor. In making its ruling, the court of appeals held that the 1877 case upon which their decision was based established a bright-line rule, which follows: When a contractor takes a mortgage (or trust deed) to secure construction debt, the contractor forfeits the right to a construction lien.

In light of the fact that the paving contractor received a trust deed against the subject property to secure the remaining project debt in exchange for the release of its first construction lien, the ruling of the court of appeals initially appears to be without negative ramifications. However, contractors could cause themselves some problems if they release a construction lien in exchange for a trust deed against the same property. The potential problems relate to the priority of the construction lien against other encumbrances on the subject property.

Oregon has a super priority statute for construction liens which holds, with exceptions, that a construction lien, once perfected, has priority over “all prior liens, mortgages, or other encumbrances against the property”. Said statute is contrary to the general priority rule of “first in time, first in line”. Thus, an unknowing contractor could lose the priority its construction lien has over other encumbrances by releasing its construction lien and accepting a trust deed in exchange for the released construction lien. As such, it is important that contractors consult with an attorney that is familiar with the intricacies of Oregon’s construction lien laws before they accept alternative security for their construction liens.