Q: “I am under contract to purchase commercial real estate that has tenants whose businesses have been impacted by the COVID crisis and the resulting economic conditions and restrictions. The economics of the transaction have so drastically changed (or will) that I want to terminate the agreement. I have significant escrow monies on deposit with the title company, and there is nothing in the agreement that specifically addresses this issue. Do I have any basis for terminating?”
May 11, 2020
Answered by Gary Blackman
A: Assuming the agreement does not allow you to terminate under non-Covid grounds, we are in unchartered territory in terms of reliable case law on when a party can terminate a contract under these circumstances. There are several “common law” or equitable theories that might apply that argue that a change in circumstances has essentially destroyed the underlying purpose of the transaction. These include the defense of commercial impracticability, legal impossibility, the impossibility of performance, frustration of purpose, and/or commercial frustration. For example, a major tenant in the property you will be purchasing is closed until further notice, or there is a high likelihood of previously unanticipated tenant defaults. These are not easy cases to win but, as we’ve said, this is legally unchartered territory.
You can assume a seller will not agree to terminate your agreement and/or release your earnest money. In most cases, your joint escrow instructions will provide that the earnest money will remain on deposit with the title company until such time that both parties agree to its release or the title company is directed to act pursuant to a court order. As such, the buyer and seller will need to either settle the matter or litigate. The prospect of long drawn out litigation will often be the impetus to a settlement because, until such time that there is a resolution, the monies will sit in an account that neither party can access.
No one knows exactly how the courts will come down on issues like these but what we do know is that it will be a very fact-specific analysis. Judges will be wary of buyers taking advantage of the COVID crisis to terminate a deal in bad faith.
Absent some clear contractual grounds in your agreement, it will most likely be a business decision as to whether the potential exposure in going through with a closing is greater than losing the escrow money you have at risk.