With the coronavirus spreading across the world, Bill Siegel has compiled the following list of  best practices companies can follow to maintain some semblance of operations and deal with potential legal issues.

Issues with Lenders and Loan Documents

Material Adverse Effect/Material Adverse Change Clauses:

Some Material Adverse Effects or Change clauses deal strictly with the financial condition of a business and others may deal with past performance or future prospects.  In some instances, the borrower is required to make representations that no material change has occurred when drawing down on a line of credit.  Upon a material change, an event of default can be triggered prohibiting further borrowings, accelerating the loan, which may result in a foreclosure.

Borrowing Base:

Loans that are secured by collateral are usually determined by a borrowing base where the collateral must be a certain percentage of the outstanding loan.  Issues may arise if a portion of the collateral consists of accounts receivables and inventory, and customers are unable to pay, and the borrower is therefore unable to sustain its inventory or pay its own debts when they come due.  In some instances, appraisals will be required to ensure the value of the collateral is accurately reflected.  When the borrowing base declines, the lender may require the borrower to pay back a portion of the loan to comply with the borrowing base.  If the lender is unable to do so, the lender may issue a default notice resulting in an acceleration of the loan and ultimate foreclosure.

Letters of Credit:

Letters of Credit contain expiration dates.  If the lender deems itself insecure, it may draw on the letter of credit or refuse to extend the maturity dates.  Therefore, beneficiaries holding letters of credit should be mindful not to delay requesting any draws on the line.

Financial Covenants:

The most common financial covenants found in financing agreements are leverage ratios and interest or fixed-charge coverage ratios. Both of these are usually based on net income or specifically Earnings Before Interest, Taxes, Depreciation or Amortization (“EBITDA”). The leverage ratios increase when revenues decline giving rise to either an increase in interest or a default.


When more than one loan exists with one lender, typically the loan agreements have cross-default provisions whereby a default in one loan gives rise to a default on the other loans leading to acceleration of the loans and foreclosure rights.

Communication with the Lender Is Essential:

Lenders don’t like surprises. Communication with the Lender is essential to maintain the trust of the lender.  Lenders need to fully understand the financial condition of the Borrower as, at the end of the day, the lender will be entitled to reports and requests and audits.  It is better to work through these issues now, than face the wrath and surprise of a lender who has not been informed.

Board of Directors Corporate Oversight

The Board of Directors is charged with the duty to oversee the business.  Essentially, this is a good faith requirement to implement a system to oversee and monitor the business.  In rare cases, directors could be personally liable for failure to observe this good faith requirement. Therefore, it is necessary for the Board to assess the immediate and future risks of the business.  In addition to officers reporting to the board, the Board may need to retain outside consultants.  In this regard, the Board needs to analyze liquidity, budgets, customer relations, the future outlook of operations (revenue and expenses), key personnel, relationships with lenders, suppliers and/or customers and set up a contingency plan.  Boards that handle these matters, may do so through committees, such as risk management or oversight. In light of COVID-19, Boards should meet sooner rather than later.

Force Majeure and Acts of God

It is now more important than ever to review the force majeure/Acts of God Clause.  These provisions have generally been ignored and have generally been boilerplate force majeure/acts of God provisions in customer, supplier and service provider agreements.  If a contract has a force majeure clause, the precise language and scope are important. Generally, there is a definition.  Sometimes performance is excused.  That said, is it permanent or temporary?  Also, does the contract require the nonperforming party to undertake certain actions in an attempt to perform in order to overcome the force majeure?  Also, are there efforts to mitigate damages by the other party?  Even if there is no force majeure clause, there may be other provisions in the contract excusing performance in the event of impossibility or impracticability.

Employment Issues

It goes without saying that COVID-19 has had a huge impact on the employee/employer relationship.  It is essential to recognize and deal with employment issues moving forward.

Under the Occupational Safety and Health Act, employers have an obligation to provide a safe working environment for employees.

Businesses need to limit the transmission of COVID-19.  For example, prohibiting nonessential business travel and setting up virtual meetings and interactions.  Other issues to address are

(a)  requiring employees or members of their families with symptoms to stay home and self-quarantine,
(b) providing special accommodation for at-risk employees,
(c) deep cleaning the offices and facilities,
(d) encouraging employees to work remotely, and
(e) accommodating employees who refuse to report to work due to fear of potential exposure and in doing so, determining how to treat such refusal, i.e. paid sick leave, short-term disability, the Family and Medical Leave Act, paid family leave, vacation and paid time off, and other applicable leave laws and policies.

The Federal Emergency Paid Sick Leave Act of 2020 requires employers to provide up to two weeks of paid leave to employees who miss work because of COVID-19-related issues. In addition, the new legislation provides for paid FMLA leave for specified COVID-19-related absences (after the first 14 days of absence) in an amount of not less than two-thirds of the employee’s regular rate of pay.

If the Employer shuts down, there are potential WARN Act issues that need to be addressed.  Worker Adjustment and Retraining Notification (WARN) Act

Real Estate Closing

Issues may arise in connection with the sale of real property.  For instance, will the contracting parties be able or be required to renegotiate the price, extend the due diligence period or the closing?  There may be issues regarding the ability or timeliness to obtain financing.  If tenants are involved, the seller may have difficulty obtaining the appropriate representations or estoppel letters from tenants.  There may also be force majeure issues.  Finally, there may be issues involving the title company in terms of title searches if government facilities are closed.

Real Estate Financings


Borrowers may want to start the refinancing process now as it may become more difficult to do so later.  In addition, the borrower may have difficulty obtaining the low interest rates currently available or maintaining its limited guaranty, if one is already in place.  Terms may be better now rather than later.

As for current loans, borrowers may be in violation of their covenants.  Perhaps force majeure or similar provisions might come into play.  As discussed, it is important to keep the lines of communication open with the lender and request a temporary solution.


When originating loans or refinancing, lenders may want to button up their covenants and representations — for instance, a reduction in revenue or cash flow, or an increase in expenses.  The Lenders may want to revisit their force majeure clauses and tenant occupancy ratios relating to square footage.  They may want to require approval of a tenant’s request for rent relief or require a formula.


The April 15 deadline to pay federal taxes owed for many individuals and business has been extended by 90 days. Taxpayers must still file their income tax returns by the April 15 deadline or seek an extension, but individuals may defer payment of up to $1 million of the income tax liability reflected on such return, and corporations may defer up to $10 million of such tax liability, for up to 90 days without penalties or interest.

See our COVID-19 Quick Reference page for additional articles.

By Published On: April 14, 2020Categories: Business LawTags: ,


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William L. (Bill) Siegel is a Shareholder and Section Head of the Cowles and Thompson Bankruptcy and Creditors’ Rights Practice Group as well as a member of the Corporate and Business Practice Group.