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Potential Impacts of COVID-19 on Real Estate Purchase and Sale Agreements

March 23, 2020

Overview

COVID-19 has already significantly disrupted many businesses’ ability to operate in the United States and abroad, and parties to a pending or potential real estate purchase and sale agreement should consider those disruptions in the context of such transaction. Buyers and sellers may face key employees being unable to sign documents or take other actions necessary to close a transaction due to an illness or remote working complications. Additionally, third parties such as escrow agents and title companies, banks, local recording offices, and notaries may be closed, delayed, or otherwise unable to perform their obligations related to a closing.

For buyers and sellers that are currently considering entering into a purchase and sale agreement, or those that are under contract and may want to amend an existing agreement to address these issues, here are some key items to consider:

  • Due diligence activities may require additional time due to the buyer’s team being unable to travel to physically inspect the property and conduct other diligence tasks. Surveyors, contractors, inspectors, title companies, and environmental consultants may require longer lead times to provide deliverables as employees may be working from home or working with fewer staff. Site visits may be limited by health and safety concerns or by governmental mandate. Consider providing longer title review and diligence periods, or better yet given the current uncertainty, a limited right to extend the diligence period in the event disruptions related to COVID-19 prevent or delay the buyer’s due diligence activities. Sellers should take care to limit buyers’ rights to extend a diligence period for reasons unrelated to COVID-19, such as generally unfavorable market conditions, and limit buyers’ right to terminate after such an extension solely for reasons directly related to those diligence matters that were delayed due to COVID-19.
  • Recording offices may be closed or operating in a more limited capacity than usual due to government-mandated closures, illness, or voluntary closures related to COVID-19. Recording offices may also process documents differently during the outbreak; it may not be possible to have documents walked-in for recording by a messenger service, for example, or walk-ins may need to have an appointment. Moreover, not all jurisdictions allow electronic recording, and some do not allow it for certain types of documents, such as deeds. Consider contacting the applicable recording office to determine whether documents can be recorded electronically and if not, what other options are available.
  • Buyer and seller representatives working outside their usual office environments may not be aware that some conveyance documents must be notarized or signed in original. Provide extra time for execution of documents so any logistical issues can be addressed.
  • As many people are working from home, they are not receiving (or do not want to handle) mail sent to their business addresses, and may not be able to easily print or scan documents. Consider requiring notices to be delivered by email and allowing documents that do not need to be signed in the original to be electronically signed and delivered by email.
  • Buyers and sellers should consider adding a provision to the purchase and sale agreement allowing closing to be extended in the event that either buyer or seller, or any required third party, is unable to perform its closing obligations because of COVID-19. The following is a sample provision addressing this possibility:

Seller and Purchaser recognize and acknowledge that due to current and potential disruptions arising out of the novel coronavirus (SARS-CoV-2), which causes COVID-19, one or both of Seller and Purchaser may not be able to timely perform their closing obligations under this Agreement, and the closure or other unavailability of other third parties on whose performance the Closing depends (e.g., Escrow Agent, local recording office, notaries, etc.) (each, an “Essential Third Party”) may prevent a timely Closing. In the event that either Purchaser or Seller (i) will be unable to timely fulfill its closing obligations under this Agreement, or (ii) has knowledge that any Essential Third Party will be unable to perform its obligations related to Closing, in each case due to an unavailability of personnel and/or a closure arising out of COVID-19 (a “COVID-19 Event”), such party shall provide written notice thereof to the other party of such COVID-19 Event, and the Closing shall be extended to occur on the date that is ten (10) days following the date on which the COVID-19 Event is no longer continuing, as agreed to in writing between Seller and Purchaser (which writing may be in the form of an email). Notwithstanding anything to the contrary set forth in the foregoing paragraph, (a) a COVID-19 Event shall not excuse Purchaser’s inability to perform its obligation to close under this Agreement if such COVID-19 Event prevents Purchaser only from delivering the Purchase Price to Escrow Agent, and (b) in the event the Closing has not occurred on or prior to [date], either party may terminate this Contract by giving a written notice to that effect to the other party, in which case this Agreement shall terminate and be of no further force and effect subject to and except for the terms and provisions of this Agreement that expressly survive the termination of this Agreement, and Escrow Agent shall return the Deposit to Purchaser.

  • Many courts around the country have closed to all but family law and criminal matters. In the event of a default by a party under a purchase and sale agreement, it will be difficult for the non-defaulting party to enforce the purchase and sale agreement until courts restore normal operations. Even then, courts are likely to be delayed as they work through deferred hearings and trials. The parties should consider whether alternative remedies are available that avoid the need for judicial enforcement, and attorneys should advise their clients to expect delays in enforcing remedies dependent on judicial enforcement, such as indemnification or specific performance.
  • Finally, if the transaction will include post-closing obligations or deliverables, consider applying the same contingency concepts described above to avoid a default by the responsible party for reasons that are out of such party’s control.

As COVID-19 continues to cause concerns with regards to real estate purchase and sale agreements, please contact us with any questions.

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