COVID-19 Checklist – Issues to Consider for Commercial Real Estate Purchase Contracts and Closings

[1] In the contract provisions dealing with default and cure, consider the following provision: “If the default is inability to perform because of Coronavirus/COVID-19, the party adversely impacted shall be entitled to a reasonable period of time, beyond the [stated] cure period, to cure the default.

[2] Consider the following: “Each party agrees that time is of the essence with respect to all deadlines provided herein, provided, however, if a deadline is missed because of Coronavirus/COVID-19, the deadline shall be extended a reasonable time.”

[3] For example, as a condition precedent to closing, add: “The applicable Register of Deeds, Tax Office and/or Clerk of Court are open for business as usual with no limitations impacting the public, such as closure caused by Coronavirus/COVID-19.”

[4] Although beyond the scope of this article, there are already many cases and articles on the impact of business interruption insurance on COVID-19 losses.

[5] See Zhang v. Paris Baguette Family, Inc., No. 507099/2020, 2020 WL 3060880 (N.Y. Sup. Ct. June 08, 2020), which strictly enforced a forum selection clause in a Franchise Agreement. The Court concluded “[w]hile the COVID-19 pandemic has presented challenging circumstances for litigants, the parties remain constrained by the express provisions of the Franchise Agreement to which they agreed upon.”

[6] See In re Hitz Restaurant Group (2020 Bankr. (N.D. Ill. June 2, 2020))(“The Court therefore rejects Creditor’s three arguments and concludes that the force majeure clause partially excuses Debtor’s obligation to pay rent for April, May, and June 2020. Nevertheless, Debtor is not off the hook entirely. Governor Pritzker’s executive order did not prohibit Debtor from performing carry-out, curbside pick-up, and delivery services . . . The Court therefore holds that Debtor’s obligation to pay rent is reduced in proportion to its reduced ability to generate revenue due to the executive order.”)

[7] After a traditional due diligence paragraph calling for buyer to deliver a title objection letter by a stated deadline, consider adding: “provided, however, that in the event of delay in buyer’s delivery of a title objection letter to seller by [the applicable deadline] resulting from the impact of Coronavirus/COVID-19 (such as the closure of the applicable Register of Deeds, Tax Office and/or Clerk of Court), buyer shall be entitled to deliver the title objection letter as soon as reasonably practical after [the applicable deadline].

[8] See Frederick Klein and Skyler Anderson, “How COVID-19 Will Transform Real Estate Loan Docs: Part 1,” https://www.law360.com/articles/1282801/how-covid-19-will-transform-real-estate-loan-docs-part-1

[9] Here is a recent sample provision from a Freddie Mac loan requiring a “Borrower Certification” as to the condition of the Property:  “Due to the global pandemic of COVID-19, commonly referred to as the coronavirus, Lender, the Federal Home Loan Mortgage Corporation (together with its successors and/or assigns, “Freddie Mac”), and/or their respective consultants were unable to conduct complete onsite inspections of the Property. In connection with the foregoing and to induce Lender to make the Loan, I __________________, hereby certify for the benefit of Lender and Freddie Mac that: (1) I am the _________________ of Borrower and am competent to address the matters set forth in this Certification, (2) each of the statements made in this Certification is true, complete and correct and made in good faith, and (3) I have reviewed such documents and have made such inquiries and investigations as I have considered necessary and advisable to verify the matters set out in this Certification. I further certify, represent and warrant to Lender and to Freddie Mac as follows:___________________________.”

[10] Here is a sample included in a recent sale of a commercial property: “Delay in Settlement. In the event that a government entity (such as the Register of Deeds, Tax Office, Clerk of Court, Federal Reserve System, etc.) closes its offices, suspends operations or otherwise prevents the Closing Attorney from acting as settlement agent, from timely performing any obligations required for Closing (a “Governmental Disruption”), the Closing shall be delayed until such governmental entity resumes operations sufficient to permit the Closing Attorney to conduct the Closing. If a Governmental Disruption causes a delay in Closing for more than thirty (30) days, then either party may terminate this Agreement without liability to the other (but only by notifying the other party within thirty-five (35) days following the original date of Closing), and the Earnest Money shall be returned to Buyer.”

[11] GAP closings are dependent upon a negotiated indemnity from the seller to the title insurance company. In the event of COVID-19 delays, what is a reasonable period of time for the indemnity to survive? Will the title company agree to accept a GAP indemnity for an unspecified period of days (1) after receipt by the certifying/recording attorney of the documents, and (2) after re-opening of the applicable Register of Deeds?

[12] For a case with a harsh result, see Martorella v. Rapp, 2020 WL 2844693 (Mass. Land Ct. June 1, 2020), in which the Court held that purchaser forfeited his earnest money deposit for breach of contract. Despite the COVID-19 pandemic, the Court showed no sympathy for the inability of a sophisticated investor to obtain the necessary financing to close (especially given the absence of a financing contingency). Even the hospitalization of the purchaser’s wife for COVID-19 during this time did not garner sympathy, as the Court pointed out the plaintiff’s wife was not a party to the purchase contract.