News & Insights

CGS3 continues to monitor the rapidly changing landscape surrounding the COVID-19 pandemic, and we will continue providing reliable legal information and guidance to help protect you and your business during this time.

The focus of this alert is to provide a legal framework for negotiating and structuring purchase and sale agreements in light of the economic impacts of the coronavirus.  In negotiating and entering into new purchase and sale agreements, it is advisable to incorporate the following concepts and provisions:

Force Majeure

• Typically, we do not see force majeureprovisions in PSAs for stabilized operating properties as we do in leases.
• Consider incorporating carefully drafted, pandemic-focused force majeure provisions into PSAs – with caps and collars – benefiting both sellers and buyers. It is important to craft them narrowly so that time extensions are only granted for those obligations directly impacted by the pandemic.

Access

• With social distancing guidelines in effect (and in many jurisdictions being expanded and extended), it can be complicated to access a property where tenants are still present.Equally complicated will be the overall coordination of personnel for various property inspections.  Access rights are of particular concern with multi-family properties.
• A seller may want greater approval rights over whether, and to what extent, the buyer can gain access to the property, especially tenant-occupied areas.Accordingly, sellers should consider imposing new access protocols to protect against COVID-19 transmission and requiring appropriate insurance coverage to the extent available.
• In exchange for accepting more curtailed access rights, buyers should consider demanding more extensive representations regarding the physical state of the property (and possibly a holdback or other means of securing such representation).

Closing Conditions

• Buyers should consider demanding closing conditions related to material adverse impacts of a pandemic and/or material adverse changes to the property.
• Buyers should also consider requiring both financing andfunding contingencies.

Operating in the Ordinary Course. 

• Most purchase and sale agreements include covenants requiring a seller to operate the property in accordance with a particular standard, with most sellers agreeing to operate in the ordinary course, consistent with past practices, subject to casualties and ordinary wear and tear.Even this low standard, however, can be difficult to meet at this time due to closures of on-site leasing offices and routine building services being delayed or curtailed, either due to government mandate or otherwise at the discretion of the seller or service provider.
• Sellers should consider modifying this standard to address the unique issues of the COVID-19 pandemic (g.,by making seller’s agreement to operate in the ordinary course, consistent with past practices, subject to force majeure). Of course, the buyer will likely then insist that it have the right to terminate if seller’s failure of performance, even if excused, has a defined material adverse impact on the property.  In the end, the buyer may still have the right to terminate and receive a return of its deposit, but the termination will not be for seller’s default and, hence, seller will not be liable for damages.
• Conversely, buyers are advised to incorporate requirements intended to mitigate potential contamination from the pandemic, such as enhanced maintenance and operating controls in line with CDC-recommended cleaning and disinfecting procedures.

Title Insurance and Closing Issues

• As the situation is rapidly changing, both buyers and sellers should consult with their title companies regarding any potential delays in conducting searches (e., title searches, UCC searches, etc.); local rules governing electronic signatures, electronic filing, electronic notarizing; and insuring over the gap period between closing and recording, especially when a recording office is not operating at full capacity.
• At this time, most counties in California are still open (although front offices may be closed to the public) and still processing electronic recordings.Our contacts at various title companies tell us that they are closing and insuring transactions as usual; however, if the gap period in a particular county has been expanded due to the inability of a recorder to fully post documents so that the title company can update title before closing, title insurers may require a gap indemnity which covers the entire gap between the last effective date searched in the public records and the date of recording.
• Although not currently the case in Los Angeles County or San Diego County, closings in counties where a county recorder is fully shut down are being handled on a case-by-case basis.Obviously, a seller or buyer may be unwilling to close a transaction where documents cannot be recorded.  Similarly, title companies may be unwilling to insure these transactions until the recorder’s office is open for business.

Please contact us should you need any assistance negotiating a new purchase and sale agreement or navigating an existing transaction.  CGS3 has a team of experts ready to help you navigate your specific situation.

CGS3 Insight Alerts are curated with you in mind. They deliver focused, relevant, and timely information on trending topics to our clients, colleagues, and others in the industry.  Please note that they are intended for general informational purposes only, and should not be construed as legal advice for any specific situation.  Always remember to contact an attorney to obtain advice with respect to a particular issue or problem