Following up on the introductory COVID-19 blog post from last week on rent deferrals for commercial leases (see link to article), I will continue to cover experiences I have encountered in the real estate world relating to COVID-19 and how I have counseled my clients to handle same. In this blog post, I cover how COVID-19 has affected the negotiations of commercial purchase and sale agreements (“PSAs”).
Yes COVID-19 had a negative effect on the real estate world, but that has not stopped existing deals from continuing or new deals from being signed up. Real estate professionals have adjusted and now negotiate differently certain provisions (or new provisions) to their PSAs. Here are examples of what I have personally seen and helped clients negotiate:
Force Majeure
I begin with the newest clause that has shot its way to the forefront of all real estate negotiations: the force majeure clause. In Florida, this clause was negotiated and included in many real estate PSAs to mainly account for the possibility of extreme weather (i.e. hurricanes) and its effect on a real estate transaction. Because of COVID-19, these provisions are now being negotiated to specifically include COVID-19 and other things such as “pandemics” and “government shutdowns, delays, closures, etc.”. If negotiating in favor of a COVID-19 force majeure clause, the more specific the better; as this can help avoid disagreements later over whether COVID-19 related events constitute broad force majeure terms such as an “Act of God”. Generally, Sellers will want force majeure to be as limited as possible, while Buyers will want them to be more expansive and specific and allow them the flexibility to navigate a transaction in this current climate.
The parties must also negotiate what happens should a force majeure event occur. The two (2) most common options are (i) deadlines (such as closing date) being automatically extended and/or (ii) the parties having the option to terminate the PSA. From the Seller’s perspective, you want to limit the amount of time such extensions can extend out and you want to give the Buyer limited options when it comes to termination. Conversely, from the Buyer’s perspective, the longer the extensions and right to terminate the better.
Deposits
The actual amounts of the required deposits can be negotiated between the parties, however, the timing for such deposits needs to be taken into consideration. Since the COVID-19 outbreak, I have seen multiple times banks either be slow processing and sending out wires or requiring additional security protocols for the release of such wires. This has caused delays in the transfer of deposit monies to the escrow agent. To avoid a late deposit through no fault of any party, the timing for deposits to be made should be extended and the expectations relaxed. A few business days minimum is the standard I have seen.
Due Diligence
Even more important than timing on deposits is timing for a Buyer’s due diligence. Whether it is conducting normal due diligence (such as title, survey, other third-party reports, etc.) or getting approvals from governmental authorities, COVID-19 has caused a widespread slow down. These can result from third-party vendors not functioning at full capacity, remote working, travel restrictions, governmental orders or shutdowns, and other general closures. Clients need to cognizant of this when negotiating the amount of time for due diligence and try to build in as much extra time as possible. Having extension rights (without the need for putting up non-refundable deposits) is another recommendation I am making to all my purchasing clients.
Financing Contingencies
Commercial Buyers are not always successful negotiating into their PSAs any sort of financing contingencies. However, because of COVID-19, the need for these provisions are increasingly important. The lending market has been severely affected, resulting in a tighter underwriting standard and an increased amount of time to secure financing. Buyers are strongly encouraged to negotiate with their Sellers some sort of financing contingency into their PSA. The strongest form of financing contingency will allow the Buyer to terminate the PSA and receive a return of all deposits should it be unable to secure financing by a certain date; but even built-in extensions allowing extra time for diligence and/or closing as it relates to financing are highly beneficial to any Buyer.
Tenant Considerations
Tenant-backed commercial properties (multifamily apartment buildings, office buildings, shopping centers, triple-net properties, etc.) are still being bought/sold, but the ability to examine their current financial positions and project into the future is increasingly difficult. This is leading to certain requirements being considered and negotiated into in every PSA:
Due Diligence Documents
The due diligence documents relating to tenants (leases, financials, historical operating statements, rent rolls) are as important as ever, and Buyers want these delivered as early as possible for review. Consistent with the extended due diligence timeframes, Buyers need updated information farther after PSA execution to properly scrutinize how the property and its tenants are performing.
Estoppels
These are imperative for Buyers in order to have confirmation from the tenant(s) of the relevant terms in the lease and their current status. Buyers should request that if unsatisfactory estoppels are provided (currently in default, nonpayment of rent, inconsistent with lease terms, etc.), that Buyer has the right to terminate the PSA and get a full refund of its deposits. Also, Buyers should negotiate against Seller’s ability of providing landlord estoppels as a substitute for tenant estoppels. For multiple tenant properties, Buyers need to negotiate to have as high a possible threshold (whether by number of tenants, rentable square feet, etc.) for estoppels as possible. Lenders in today’s environment are also not relaxing their tenant estoppel requirements, so getting transactions done without them is almost impossible.
Operations
It is common for PSAs to contain requirements for how the Seller operates the property while under contract and if the Buyer has any approval rights as it relates to the operating and possible dealings with current/prospective tenants. Buyers may want to negotiate more specific requirements for how the Seller handles the property to account for COVID-19 considerations, as well as wanting increased influence in any lease modifications with tenants. Similar to pre-COVID-19 negotiations, we advise that the best middle ground is that before the PSA goes hard for the Buyer to be able to review/approve any proposed lease modification in their “reasonable discretion”, with the standard changing to “sole discretion” after the PSA has gone hard.
Open for Business
A common request in PSAs from the Buyer side is that the tenant(s) at the property be open for business at closing. The inclusion of this requirement as a condition precedent is important to Buyers, but dangerous to Sellers who may have tenant(s) whose businesses are either closed or severely affected by COVID-19. A middle ground I have seen is to limit such requirement to only if the tenant is closed due to “any closures required pursuant to local law due to COVID-19.” This gives Buyers protections against government required closures but does not subject the Seller to possibly losing a Buyer because a tenant has closed on its accord.
Representations and Warranties
Sellers need to always review carefully the specific representations and warranties it is making in any PSA, but the importance has only increased because of COVID-19. Sellers need to make sure they are not violating typical Seller reps and warranties, especially as it relates to tenants/leases, existing laws/ordinances, and compliance with governmental authorities. Sellers should negotiate the ability to be able to provide notice of any change in any rep or warranty and provide a cure period for same. Knowledge qualifiers are also highlight recommended. On the Buyer side, be sure to include the important reps and warranties in the PSA and consider increasing the survival period for same.
Casualty/Condemnation
There have been arguments made that COVID-19 related effects (such as closures, tenants not being open for business, etc.) can be considered a casualty or condemnation under a PSA, and thus give the Buyer the right to possibly terminate the PSA and receive a return of its deposit. Accordingly, Sellers should protect themselves in PSAs and include specific language that COVID-19 or anything related to same (pandemics, government mandates, closures, etc.) are not considered a casualty or condemnation. From the Seller’s perspective, these provisions need to strictly cover physical damage/taking of the subject property.
Indemnities
Indemnification language is common in PSAs. Because of COVID-19, the parties need to be cognizant of the possibility of increased exposure through an indemnity claim. Accordingly, it may be beneficial to both seller and buyer to insert a statement that neither party is assuming liability for, nor waiving any right it may have to assert future claims for COVID-19 related matters.
Closing Procedure
Attorneys, title/closing agents, title companies, and every other closer has had to adjust in how they conduct closings. In-person closings are difficult because of the fear of catching and spreading COVID-19. Escrow closings have likewise been difficult because of the difficulty of notarizing and signing/delivering original executed documents. Although difficult to expressly cover these situations in PSAs, parties should at a minimum discuss at the outset the closing procedure and how each side envisions the closing procedure taking place with their respective clients. The PSA can include requirements that closing documents are drafted and exchanged a certain amount of days ahead of closing to avoid delays and the need for a “rush” closing. Specific closing date extension rights relating to COVID-19 delays can also be included in the PSA.
The above is a basic introduction to changes PSA negotiations have undertaken as a result of COVID-19. Every situation is different and demands the proper attention and handling to navigate these uncertain times. If you are a buyer or seller and want to discuss any of the above or have a similar situation and would like to discuss with an attorney, please do not hesitate to contact me.
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