The Economic Crisis is a Deal Breaker

Posted by: Michael Orey on May 12, 2009

More news from “the recession ate my homework” front – this involving Southern California real estate and a surprising result. In February I wrote about the growing number of lawsuits in which businesses are arguing that they should be excused from living up to the terms of a deal because of the economic crisis. The current downturn is so severe and unusual, they argue, that it is a “force majeure,” like an earthquake or act of war.

But, I noted, judges generally greet such claims skeptically; usually, a deal is a deal, and a court will enforce it. But a recent ruling brought to my attention was sympathetic to the argument. The case involved a condominium and retail development in Long Beach, Calif. The loan agreement on the project allowed the lender to foreclose on the property if a certain number of condos were not sold at minimum prices. In fact, no units were sold, and the lender, Pacific CityHome, began foreclosure proceedings. In an arbitration proceeding, the developer, Gateway & 4th, argued that the current economic environment made it impossible to sell units at the prices required, and asked for an order halting the foreclosure. Like others in similar proceedings, Gateway invoked the words of former Fed Chairman Alan Greenspan, who told Congress last October that the country was experiencing a “once-in-a-century credit tsunami.” In an April 24 ruling, the arbitrator agreed and enjoined the foreclosure.

The Los Angeles Daily Journal quoted Gateway’s attorney Louis R. (Skip) Miller on the significance of the case. “Usually if the market changes, that’s life, that’s too bad,” he said. “Before, [developers] had no defense against a technical default. Not anymore. Because of the severity of this downturn, they do have recourse.”

Reader Comments

Mahagwa

May 14, 2009 1:38 PM

The problem is with the whole development life cycle. Prior to initiating a project -- after all the market research and site surveys are complete (which can take up to 2 years), there is very lengthy process involving permits (which can run up to 18 months). Hence, the project that looked viable, and garnered investments and financing 3 years ago, initiates. Problem is, that what was valid 3 years ago, may no longer be valid today. Whereas it might have made sense to build a shopping mall (Best Use of Land) 3 years ago at location Y; it might not make that much sense today. Where investors might have seen this as an attractive venture 3 years ago, they might not feel the same way today.
The whole development process needs to change. In these days of technology, there is no need to continue filing paper docs with the county clerk or waiting for months for responses from the City Engineer's office. This 3 - 5 year process needs to be streamlined and cut down to no more than 1 year from inception to 'start digging'.

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