The COVID-19 pandemic has injected a new level of uncertainty into the timing of performance under real estate contracts. Inspections or appraisals required during the due diligence period can be hindered by the unavailability of necessary parties or the inability to access buildings. Land use requirements such as rezoning, conditional use permits, plans of development and other land use or other governmental approvals can be delayed by the closing of local or state governmental authorities. Lenders may be delayed in issuing loan commitments or may be reevaluating previously issued commitments in light of the crisis. Although the title companies are doing the best they can under these circumstances, title examinations can be hindered by limited access to the clerk’s offices. Necessary title records and recent filings may not be available for review resulting in the inability of the title examiner to complete the requisite search. While many closings can take place in a timely manner where online filing is available, some closings may by delayed by inaccessibility to clerk’s offices (for example, some do not allow access to the public or access is by appointment only), as well as by the timing of the execution, notarization and delivery of necessary documents. In general, almost any aspect of the real estate purchase and sale process, like so many other things, can be slowed by people working remotely from home.
Therefore, the parties to a real estate contract should pay close attention to the timelines in the contract and the related notice and performance provisions. Most real estate contracts contain a “time is of the essence” provision, which means the action required under the contract must be performed by the date provide for in the contract, or the party failing to timely perform will be in default. This could result in loss of the right to purchase the property, the forfeiture of a deposit, or other default damages. If the failure to perform was expressly caused by the COVID-19 pandemic, then arguments based on impracticality, impossibility frustration of purpose or force majeure may be available, but reliance on those theories is never as good as the parties reaching agreement on what should take place and when during the pandemic.
To manage these risks, we recommend the contract include a specific provision which allows for extensions of time in event of delays caused by the COVID-19 crisis. The nature and length of any such extension will depend on the circumstances of each transaction, but it is far better to build this into the contract upfront.
Also, many contracts do not allow for notice by email, and some allow for it so long as notice is sent by other means the next business day, which can be challenging and costly in the COVID-19 world. The parties should consider notice by email. If your contract does not provide for it now, you should consider amending it to allow for it before you bump up against a deadline. If the parties believe a secondary notice is necessary, they can consider relaxing the time for the sending of those.
We also recommend diligent management of the deadlines. Waiting until the last minute could be fatal in the COVID-19 period. For example, be sure the title examination can be completed, and the title objections provided within the time period provided for in the contract and be certain you allow sufficient time for notices to be sent and delivered.
Even with widespread discussion regarding “reopening,” no one knows exactly what that will mean or whether there will be renewed shutdowns in the future. Real estate contracts are often performed over an extended period, so the parties should consider COVID-19 issues at the time they enter into the contract, or if already in effect, amend them now, to include the appropriate provisions to manage the contractual deadlines with the pandemic in mind.
Members of Sands Anderson’s Commercial Real Estate Team stand ready to help with any of your real estate needs in these disrupted times.