How Do I Navigate Real Estate Transactions During the COVID-19 Pandemic?

Whether reviewing or negotiating documents or closing the transaction, there are many questions you should consider to best set yourself up for success during the COVID-19 pandemic.

Existing Documents (i.e. Leases, Loan Documents, Purchase Agreements)

• Review existing documents for “Force Majeure” provisions to see what rights you have. Does a “Force Majeure” or “Act of God” provision exist that would excuse performance for a period of time? If so, review the provision to see if it specifically covers pandemics, widespread disease or similar emergency situations, or is broad enough to include such matters. Follow any required notice provisions in order to enact the protection of such clause, but realize that the protection will not be indefinite and usually does not apply to payment obligations due to lack of funds or insolvency of a party. These provisions are likely to appear in leases and construction related documents, but not as likely to appear in purchase agreements or loan documents (unless there is a construction component).
  • Learn more about key issues with commercial contracts during COVID-19 from our Litigation group.
• Review leases for many issues, including:
  • Constructive eviction, co-tenancy and go-dark provisions, and other similar issues.
  • Insurance and risk allocation provisions, including business interruption insurance and rental loss insurance obligations and requirements. The applicable insurance policies will also need to be reviewed to confirm the scope of coverage and exclusions from coverage.
  • The scope of landlord authority to temporarily close (or limit access to) properties in emergency situations, as well as the rights of tenants to temporarily cease business operations.
• Review loan documents for many issues, including:
  • With the sharp decrease of interest rates, determine if you have an interest rate floor.
  • Do you have any grace periods or notice rights with respect to late payments? Determine your payment date – it may not be the first day of the month.
  • Do you have business interruption insurance? Are business interruption proceeds included within the calculation of revenues and NOI and therefore used in the calculation of any quarterly or annual financial covenants (i.e. debt service coverage ratios or debt yield tests)?
  • Does lender have approval rights over any lease amendments, concessions, waivers, extensions, settlements or similar actions? Do you have to provide lender with notice before sending any default notices or agreeing to any of the foregoing actions? Are lender’s rights applicable to all tenants or just certain “major tenants”? Do any termination payments need to be deposited into a reserve with lender? Are you allowed to apply tenant’s security deposit without any notice to or consent from lender?
  • Review the non-recourse carveout provisions and make sure you are not violating any unpermitted transfer, bankruptcy, waste, or tax, insurance, operating expense or lienable work provisions.

Negotiation of New Documents

• Will you or your agents be able to travel to the site based on safety concerns or travel restrictions in order to perform in-person inspections or surveys? Will the Seller allow you or your agents on the premises out of safety concerns even if the property has been temporarily vacated because tenants have ceased working in their offices for a period of time?
• Consider pushing diligence periods and closing dates out as far as possible with additional extension options to account for the diligence and closing delays discussed above and below. Closing delays may also benefit a Seller if the Seller cannot get signed documents into escrow on a timely basis.
• Review closing conditions, contingencies, and termination rights. For the Buyer, would the inclusion of a ”material adverse change” closing condition, a financing contingency or a specific termination right be helpful? We can provide language specific to the COVID-19 pandemic.

Closing the Deal

• Get ahead of logistical challenges. With offices closed and people working remotely, think about what original documents are needed for closing and how those will be signed and delivered to the title company, attorneys, lender, major tenants and/or recording and filing offices. Allow extra time for printing, execution and multiple overnight deliveries if multiple signatories are required. Contact all third-parties to confirm what addresses should be used because their business continuity plans may require packages to be sent to a different location.
• Allow for extra time for funding. Office closures and reduced staff may result in delays in the processing of wire transfers. Consider funding in advance in escrow to avoid delays.
• Prepare for delays with recording and obtaining state filings/documents. Carefully monitor government offices where filings and certificates are needed for closing.
  • Provide for the possibility that offices will be closed or operate under reduced operations that may cause delays.
    • As of March 18, 2020, the Delaware Division of Corporations remains open, but in-person  access are by appointment only. See https://corp.delaware.gov/more-info/ for current updates.
    • Effective March 17, 2020, the Illinois Secretary of State’s offices are closed, but certain online services will remain available. See https://www.cyberdriveillinois.com/ for current updates.
  • Deeds, mortgages, UCCs and other documents may be able to be recorded electronically in certain jurisdictions. If not, confirm with the county recorder or secretary state whether they are open and how recordings/filings should be handled.
    • Effective March 20, 2020, the Cook County Recorder’s Office is closed in its entirety.  Any filings received electronically or by mail will be held in queue in the order they are received and will be recorded once the Recorder’s Office reopens.
  • If your transaction will involve making entity filings (i.e., new entity formations, charter amendments, mergers/conversions, etc.) consider what filings may be done in advance of closing to avoid possible office closures or staff reductions.
  • Expedited processing of certain filings may be delayed or not available, and you may or may not be able to retrieve certified charters/certificates of formation and good standings at all or as quick as before.
  • As of March 18, 2020, third party filing agents (CSC, CT, etc.) remain open. It may be helpful to submit filings with your filing agent (CSC, CT, etc.) in advance for them to hold so that they can submit those filings quickly if office closures are announced.
  • Typical UCC, litigation, judgment, lien and bankruptcy searches may be limited or slower to obtain.

For more resources and LP’s response to COVID-19, visit this webpage.