Real Estate Facing ‘Mayhem’ In The Courts As Legal Backlog Balloons

The legal system is the unsung hero of the commercial real estate industry, especially in times of conflict. Landlord-tenant disputes, foreclosures, contract disputes, tax complaints, partnership agreements – the everyday process for moving capital in the US real estate industry is based on a functioning judiciary.

But just as the coronavirus pandemic has changed the way a lot of society works, it has devastated the courts. Many courts stopped working for months before adopting new technology to enforce cases, albeit less than before. Meanwhile, cases piled up, creating a backlog that experts fear will take years to process.

“Once that window opens, it’ll be chaos,” said William Mack, a New York-based litigation attorney and arbitrator at Davidoff Hutcher & Citron.

Commercial properties, which may face more litigation than ever after the eviction and foreclosure moratoria are lifted, are already feeling the effects, either in slower resolutions or far more out-of-court settlements than before.

In the past year, cases have taken almost twice as long to find their way through the justice system. Between 2019 and 2020, the average number of months it took US District Court judges to hear and end cases from filing to prosecution increased from 14 to 27 months, according to federal justice.

The number of cases resolved and settled during the pre-trial increased from 33,000 in 2019 to 41,500 in 2020, according to the US courts, while the number of cases in which legal proceedings were held increased by nearly over the same period half decreased from 1,851 to 999.

“If you’re trying to get a trial at all, it’ll take longer than it did before Covid, and if you want a trial it’s even slower,” said Joshua Bowman, a partner who runs the hospitality practice in Boston. Sherin and Logden law firm.

Prior to the pandemic, Bowman said it rarely would take much longer than a year to go to court with a commercial lawsuit. “You talk to Covid for years.”

Despite the delays, the pandemic is expected to cause more legal problems, not less. Once landlords and lenders lose patience with tenants and borrowers who are behind on rent and collections, they may want to recoup their losses, even though they may have worked together on Band-Aid Covid-related losses.

“When they get to the end of this Covid period, which, if you knock on the wood, will end sometime in 2021, landlords will want full rent back,” Bowman said. “I think the landlord and tenant knowingly kicked the can down the street. Even the lenders kicked the can down the street. “

Aside from federal courts, which typically hear more complex and expensive real estate disputes, the state and local courts are also overwhelmed with a backlog of cases. The South Carolina Supreme Court recently issued guidelines for retrying collective courts after a year of prohibition. There is currently a massive backlog of cases. There have been similar residue reports in Kansas, Texas, and New Hampshire.

California courts resolved 1.4 million fewer cases between March and August 2020 than in 2019, according to a report by the state judiciary. The local Atlanta government has agreed to pump $ 60 million into the county’s judicial system to resolve a collection to dissolve criminal and civil cases. Without it, experts could say it could take up to three years to find a solution, the Atlanta Journal Constitution reported last month.

“I think there is a huge delay in state courts in bringing cases to justice and hearing. There’s only lateness, lateness, lateness, ”said Corali Lopez-Castro, bankruptcy and commercial litigation attorney at Kozyak Tropin & Throckmorton in Miami. “At some point you will win in court. But until you do, your tenant will be in your room and not pay any rent. “

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Bisnow / Miriam Hall

Richard Born, Co-Founder of BD Hotels, and Daniel Lesser, CEO of LW Hospitality Advisors

The time to go to court on civil cases will likely increase once residential evictions are enforced and when federal relief to stop small businesses ends, Mack said. Some landlords are now – despite the moratorium, Mack said – even filing eviction requests to the courts in hopes of being heard by judges before the flood of lawsuits if the eviction ban is lifted.

“There is going to be such a deluge and backup of cases that it will take much longer to finish,” he said. “It’s like taking it off [now], stand in line and wait. “

The courts have tried different ways to deal with the backlog. Some courts have quickly adopted the use of conference call software to handle aspects of cases that do not require juries, such as: B. Applications and first appearances in court or traffic violations and minor claims.

Courts in Florida and Washington state have begun experimenting with banking and jury trials using Zoom, although the practice is not yet commonplace. Technology has helped the courts expedite cases that would otherwise have rolled around the system had they been relegated to face-to-face hearings, which has reduced the backlog a little.

“There is something to be said when it comes to saving time and traveling to court instead of doing it with Zoom,” said Daniel Lesser, CEO of LW Hospitality Advisors, who is often employed as a litigation expert or arbitrator becomes. “I would tell you it was nerve wracking going through 40 jurisdictions to register as a recipient, but we did it.”

With the court overburdened, commercial property owners seek to resolve their disputes outside of the judicial system.

Radco Cos., Which owns 3,700 residential units in eight states, faced a buyer who stepped down from a deal last year, CEO Norman Radow told Bisnow. That buyer was demanding the money back, and at any other time the dispute would likely have been brought before a judge, Radow said.

Instead, the parties had to sit down at a negotiating table in a single afternoon after finding that it could take up to three years before the case even went to trial.

“Mediators weren’t even available,” said Radow. “Your mediator had Covid and then it would take a long time to get mediation.”

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Bisnow Archives / Cameron Sperance

The founder and chairman of Mount Vernon Co., Bruce Percelay

While negotiations can result in fewer possible awards than if a case were heard in front of a judge or jury, the increasing delays in the legal system – and the additional costs that come with them – make settlements more attractive, said Roy Carrasquillo, a real estate attorney in New York and managing partner of the Carrasquillo Law Group.

Landlords who otherwise could pursue lawsuits may also be more willing to settle down now, knowing that not only will legal proceedings take longer than normal, but their tenants will also be in poorer financial shape.

“Now if you want to play hardball all you have is an empty storefront because there’s no one to replace it,” said Bruce Percelay, chairman of Boston-based real estate investor Mount Vernon Co. “The problem is you can’t get blood out of one Get a stone. “

Adam Ifshin, the CEO of DLC Management, which owns 85 open-air shopping centers across the country, said he was noticing judges trying to force parties to the negotiating table rather than pushing a lawsuit last year.

“Judges generally don’t want to try civil disputes. However, they use all the tools available to them. Mediation, headbanging, handshaking, strict language for status calls. They are definitely using this to keep their file load down, ”said Ifshin. “It’s not that it can be said that this case would be tried in May, now it will be tried in August. You don’t know when “

But Ifshin also said the state of the judicial system, which is convincing real estate companies to appeal outside the courts, might not be a bad thing in the long run.

“Ultimately, I see going to court as a last resort. I’d rather find an agreement, ”he said. “Get it over with sooner, have to spend less; You may not feel like you are getting what you deserve, but you get the degree. “

Litigation isn’t just about maximizing returns for many landlords and lenders, said Lopez-Castro, the Miami-based litigation attorney. They can also be used to message other tenants and borrowers about how serious the threat of a lawsuit actually is.

“Landlords and bankers are very emotional people,” said Lopez-Castro. “If you represent the tenant or the borrower, you always want to be on their good side.”

But settlements are likely to become more common in the future, she said, as they offer a guaranteed solution. After the pandemic, no one knows how long it will be before a case is fully heard. For business litigation, this means the potential for infinite legal bills.

“Most business people are not professional litigators. They don’t handle the ups and downs of litigation well, ”said Lopez-Castro. “If you argue on principle, this principle expires after two calculations. Most people want security. “