A successful conservatorship involves numerous factors, including the lawyers and the courts, lenders, construction and design professionals, and, where necessary, real estate professionals. Each has been impacted by COVID-19 and the response thereto. Parties considering or engaged in the Act 135 process should consider the following in developing their strategies or plans.
The diligence process is critical to a successful Act 135 conservancy. With governmental agency functioning limited, it may be difficult to obtain complete title reports and background information regarding code violations and liens. The real estate market is in flux and the economic outlook unclear, making it more difficult to determine if an Act 135 action ultimately will be cost-effective.
For viable actions, governmental and business closures have impacted the basic prerequisites for filing. For example, an action may not be maintained against a property that has been “actively marketed” within the last 60. With real estate sales at a standstill, an owner who may have wished to market a property has not been able to. Another requirement of Act 135 is that a property not be in foreclosure. Pursuant to a May 7, 2020 Executive Order, Governor Wolf suspended until July 10, 2020 all notices prerequisite to institution of a foreclosure action required under the Loan Interest and Protection Law (Act 6) and the Homeowners Emergency Assistance Act (Act 91). Accordingly, any foreclosure actions that require compliance with Act 6 or Act 91 cannot commence until July 10, 2020. This may expand the availability of conservatorship actions against certain properties. Alternatively, lenders who wish to begin the process of recouping losses related to properties that otherwise qualify under Act 135 could utilize the conservatorship process if they deem it cost effective.
Court closures have and will continue to impact the litigation process. Courts in Pennsylvania have been closed for all but emergency actions since March 18, 2020 (and in some counties were closed before that date). This has impacted the ability to file actions in some counties and delayed ongoing actions through the cancellation of interim hearings. Although the Pennsylvania Supreme Court ordered that courts around the Commonwealth could reopen on May 4, many counties remain closed through the end of May under their own emergency orders. Even with courts re-opening, the limitations on litigation remain unclear. Initially, it is likely the courts have a backlog of emergent issues to address. While Act 135 requires that hearings be scheduled within 60 days of filing, litigants may experience further delays of actions already in progress.
Act 135 allows for a property owner to obtain to abate blighting conditions under court supervision; this is called “conditional relief.” Typically, conditional relief includes (1) a certain scope of remedial work, (2) a court-ordered timeframe to perform the work, and (3) the threat that if the owner fails, the court will appoint a conservator. Act 135 also requires that an owner post a performance bond to secure the performance of the work. In many instances, however, the bond requirement is waived or not enforced as it may materially increase the cost of work.
COVID-19 may cause for the delay or inability of an owner to meet the requirements of conditional relief. Even though conditional relief is court-required, those performing the work must abide by the health and safety standards applicable to regular construction work, including COVID-19 protocols and closure orders. It is very likely that COVID-19 will impact the completion and cost of the work under a conditional relief order. Thus, prudent owners must consider transparently updating the court and other interested parties of delays attributed to COVID-19 and updating cost estimates to account for increases in labor or materials prices.
Whether performed by an appointed conservator or an owner under conditional relief, the repair work contemplated by Act 135 is generally construction work, which under business closure and stay-at-home orders was not deemed “life sustaining” or “essential” in Pennsylvania. Since May 1, 2020, the Governor and Department of Health have allowed construction activities to resume but with important requirements and restrictions, including
In addition to the state guidance above, some municipalities may offer their own restrictions. For example, except in cases of emergency, in Philadelphia, projects involving underpinning, demolition of attached structures, and/or projects that require support of an existing party wall are not permitted. Except for emergency repairs, work in occupied dwellings is similarly prohibited. In addition, all construction permit applications must now be applied for online, only those projects with permits issued online may start construction and permits for projects that require ZBA action cannot be issued until further notice. Further, no construction work may commence on any projects for which building, or demolition permits were issued after March 20, 2020, and such projects will be the subject of future guidance from the city. In addition to the above, parties to a conservatorship action should expect and plan for delayed inspections by governing authorities.
The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.