The issues, challenges, and potential outcomes are significantly different for commercial and residential real estate lawyers.
As Canadians watched with shock and awe the havoc that the subprime mortgage fiasco reaped on U.S. property and financial markets, it was easy to be smug about the relative stability and strength of our markets and institutions. It seemed that it couldn’t happen here and it didn’t happen here. But the contagion has now spread and the worldwide credit crunch that followed the U.S. mortgage debacle has debilitated financial markets around the world. It could have a devastating impact on the Canadian economy as a whole and the property market in particular.
Real estate lawyers, many of whom have been struggling to survive even in a booming property market, are watching these developments anxiously. Many are already seeing signs of a slowdown and have started to think about how they will survive a real estate recession. Some still hope the fundamental strengths of the Canadian market will prevail. And others are optimistic that they will find work or find ways to work smarter no matter how the property market evolves.
The issues, challenges, and potential outcomes are significantly different for commercial and residential real estate lawyers. Here are views from both sides:
Commercial: Coping with the credit crunch
As a go-to lawyer for major real estate lenders, Jeffrey Lem doesn’t need a crystal ball to see where commercial property markets are heading.
“A lot of new development projects will come grinding to a halt,” says Lem, a partner at Davies Ward Phillips & Vineberg LLP in Toronto. Even though the subprime mortgage crisis was made in the U.S.A. and Canadian banks are relatively immune from catastrophic failure, there will be a significant knock-on effect north of the border, he says, as funds dry up from large U.S. lenders and Canadian financial institutions become more cautious and vigilant.
He reports that some lenders are already invoking contract clauses that will let them withdraw financing in bad market conditions, while anyone trying to renew a fixed-term loan can expect to be hit with higher interest rates, and some may find they are not able to renew their loans at all. Lem says, “then, they’re going to find it very difficult to refinance because nobody wants new deals these days.
“We’re going to see a lot more power of sale, foreclosure, insolvency, and workout. It’s as simple as that. We’re going to see it and it’s going to happen soon, if it’s not well underway,” he says.
And what does this mean for lawyers? “It’s not the end of the world for real estate guys,” says Lem, who is planning to “retool,” placing more emphasis on his insolvency-type practice, while also hoping to do some work with specialty lenders that will likely be offering help to cash-strapped developers with high-interest financing.
Nevertheless, Lem maintains, it’s a myth that lawyers make as much money on the downside of the market as they do in a real estate boom. A good insolvency practice can certainly help ameliorate the losses from lending or merger and acquisition practices, “but it’s second-best as far as volume and profits are concerned.”
Lem therefore predicts that hiring will become an employers’ market. Associates will probably be able to hang on to jobs, he says, “but it will be tighter than it ever was before and I don’t feel well for the students coming through right about now — they’ll have a much tougher time than the guys a few years ahead of them.”
A slowdown in property development will likely mean less work for commercial real estate lawyers, but it could also mean that each project they do work on will be far more labour intensive and require more detailed scrutiny, according to Harry Herskowitz, senior real estate counsel at DelZotto Zorzi LLP in Toronto.
“Everybody’s going to be looking harder at deals,” says Herskowitz, who frequently acts for builders and developers of subdivisions and condominium projects. He observes that the U.S. crisis will certainly result in short-term difficulties in getting development funding.
