With the COVID-19 pandemic requiring ever-evolving responses from government and businesses, the commercial real estate sector is also navigating new challenges in advancing various interests. For purchase and sale agreements, for example, parties can rely on protections available at certain stages of the process to help them navigate the challenges, but certain provisions may require special consideration during negotiations.
Due Diligence Period
The due diligence period is the time during which a buyer conducts a diligence review of various aspects of the property, which may include title, survey, zoning and permitting, environmental and structural condition, operations, tenancy, and financial analyses. If at the end of the due diligence period the buyer is unsatisfied with its review, the deposit typically paid at the signing of the purchase and sale agreement is returned to the buyer. The virus and mitigating responses to the virus may impact a buyer’s ability to conduct meaningful and timely due diligence and protect the buyer’s deposit. Several scenarios must be considered, including the following:
- Third-party vendors preparing due diligence reports may have limited capacity to conduct necessary analyses in what—under normal circumstances—would be a typical time frame;
- Governmental office closures may affect the availability of permitting and zoning research and analysis and/or the ability to obtain necessary permits. If these government offices do not make materials available online, then title, zoning, environmental and other diligence analysis reliant on such information will also be delayed;
- Construction moratoriums, permitting extension orders, and/or legislative acts may impact permitting availability and analysis;
- Travel restrictions and shutdown orders may limit access to the subject site for inspection. For example, physical inspection of nursing homes or assisted living facilities with strict no-access orders will not be possible;
- Closed buildings—by order of either the owner or the government—and tenants working remotely may not be available for inspection or interview, respectively, and books and records maintained at a physical location may not be accessible for review; and
- Potential illness of key officers and staff of the seller necessary to the due diligence review may delay determinations on diligence.
- Negotiating the due diligence period and associated provisions should take into account some of these known, and other foreseeable, limitations to the diligence process. Provisions should be drafted sufficiently broad to capture what may unfold but sufficiently tailored to keep the deal together. For example, parties could extend the diligence period on the occurrence of certain events, or provide for extensions of the diligence period if particular diligence analyses are more likely to be delayed.
Aside from protections built into the due diligence period, purchase and sale agreements typically include closing conditions that, if not met, excuse a party’s performance. Parties will want to carefully draft both common and special closing conditions to more accurately reflect a given party’s needs at closing.
For example, a material adverse change clause may provide some protection to a buyer, but usually only in situations where the change could not reasonably be foreseen at the time the purchase and sale agreement was executed. A material adverse change closing condition agreed to before the start of the COVID-19 pandemic within the United States may potentially apply to excuse performance, depending on the language used. However, now that the pandemic is impacting the marketplace, buyers or sellers in future purchase and sale agreements that intend to include a COVID-19-related condition should consider a COVID-19-specific closing condition that expressly identifies the intended conditions that must be met at closing.
Similarly, while force majeure provisions are not commonly included in a standard purchase and sale agreement, such a provision may be useful to appropriately delay or excuse the performance of either party in the event the pandemic prevents any party from performing its obligations or exercising its rights under the purchase and sale agreement. Such force majeure provisions should be drafted such that they will be triggered by the occurrence of COVID-19-related events.
Most purchase and sale agreements do not include a financing contingency under which a buyer may terminate the contract if the buyer is unable to obtain a financing commitment under specified circumstances related to time, financing amount, and other conditions. Buyers may need to negotiate such financing contingencies. However, the effect of COVID-19 on the markets may impact the ability of a lender to issue a commitment, or possibly even, to fund the closing on an issued commitment. If fluctuating markets negatively impact the valuation of the property, even after the due diligence period expires, any required loan-to-value ratio may be out of balance, leaving a financing condition unmet. If a buyer wishes to include a financing contingency in the purchase and sale agreement, the buyer should consider potential disruptions to financial markets in drafting the condition.
Representations and Warranties
Purchase and sale agreements typically include representations and warranties of the seller and, to a more limited degree, of the buyer, that need to be true both on the date of signing of the purchase and sale agreement and on the closing date. Buyers and sellers should pay close attention to even the most typical representation and warranty provisions to be certain they do not lay a trap for an unwitting party. With regulations and laws shifting during the COVID-19 pandemic, a seller, for example, would want to carefully craft representations that may be modified to comply with then-current laws. Similarly, market fluctuations and other variables may affect whether a seller remains in compliance with its leases consistent with a representation made in the purchase and sale agreement.
If a subject property is occupied by one or more tenants, consideration in a purchase and sale agreement should be given to what impact COVID-19 may have on (a) tenant and landlord compliance with leasing obligations, (b) the ability of the buyer to conduct tenant interviews, (c) provisions to be included in tenant estoppel closing deliverables and whether such deliverables can even be satisfied, and (d) other tenant-related matters.
Closing Date and Logistics
Parties may also wish to account for logistical issues that may arise to effectuate the closing. Practical questions that may be addressed in a purchase and sale agreement include the following:
- whether land record registries will be open and available for physical or electronic recording of lien releases, mortgage disclosures, the deed, authority documents, and financing collateral documents;
- whether the title insurer will be able to perform a pre-closing title rundown and issue a title policy, and whether a gap endorsement is available in the jurisdiction;
- whether the closing will occur in person or remotely, and whether documents can be delivered in escrow in advance of closing;
- whether a notary will be available to notarize documents under current law or as may be revised in the relevant jurisdiction to permit remote online notarization; and
- whether funding wires can be initiated and timely received.
Parties negotiating a purchase and sale agreement may also want to focus on the definition of “business day” when calculating the closing date or any other time period, and consider whether a business day should include, for example, whether local public offices are open to the public.
Regardless of the circumstances, each purchase and sale agreement presents unique issues and negotiation requirements.