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Things to Consider Before Terminating Your Real Estate Transaction

In the last several years, many economists suggested that a recession was looming, and yet, the stock market continued to boom, unemployment rates continued to drop, and banks consistently made capital available for development, redevelopment, and investment opportunities. Consumers were lured into thinking that maybe the economists were incorrectly predicting doom. How could something go wrong when everything seemed to be going so well?

Enter COVID-19 and the unprecedented "shock" to our systems. As the world scrambles to contain this horrific disease, stock markets have plummeted, the unemployment rate is rapidly climbing, banks and investors are not freely releasing their capital, and despite incredibly low interest rates, most businesses want to hold onto their cash.

Given these uncertainties, the natural inclination may be to terminate pending real estate transactions. Get the deposit back. Take your losses and run. Stay out of the market until things rebound. However, in many instances canceling transactions may not be the best course of action for buyers, sellers, and the economy.

Winston Churchill once said, “If you are going through hell, keep going.” Buyers and sellers alike should not necessarily look at the COVID-19 tragedy as a stopping point for their real estate transactions, but in the right circumstances might simply slow down the pace and re-evaluate transactions for new opportunities. Before terminating any existing transactions, sellers and buyers should consider the following:

SELLERS:

  • Does the pricing reflect the current state of the market?

  • Is the credit of the tenants at the property the same as when the transaction started?

  • Is the occupancy level at the property the same?

  • Are there other potential buyers who could close any faster or at a higher price?

  • Are there concerns relating to loan documents?

  • Do individuals have personal guarantees to lenders?

The answers to the questions might make a seller empathetic to the concerns that buyers may have about the timing of their acquisitions.

BUYERS:

  • Is there capital that the buyer needs to deploy?

  • Are there exchanges that buyers need to consummate to avoid tax gains?

  • Will there be opportunities to get low interest loans in the future?

  • Will increased vacancies allow buyers to expedite future redevelopment or re-purposing plans?

  • Does this property serve a strategic purpose in the portfolio?

  • Can the acquisition be underwritten in a new way to make the economics work?

Buyers should take these things into consideration before canceling a transaction.

ALTERNATIVE TO CANCELLATION: HIT THE PAUSE BUTTON, DEVELOP A PLAN

Since no one knows what the future holds due to the COVID-19 virus, many of the aforementioned questions cannot immediately be answered with certainty. So buyers and sellers may not know whether an opportunity is being lost. Buyers and sellers alike may need time to develop a plan to move forward, no matter what is happening in the economy.

Therefore, instead of making a knee-jerk decision to terminate a purchase and sale transaction, consider hitting the pause button:

  • Extend due diligence periods.

  • Allow additional underwriting to take place.

  • Extend closing dates.

  • Recognize that delays are happening due to things beyond anyone's control.

  • Be empathetic to the other side of the deal and work together.

Although not all of the paused transactions will be consummated, the pause button will at least allow the opportunity for more real estate transactions to be in a position to close when the effects of this pandemic ebb. What we have learned from the past is that economic activity helps to stimulate and revive the economy. Nevertheless, please remember that all transactions must be analyzed under the specific contractual language and the facts involved, so please consult your attorney before making any decision on whether or not to terminate your transaction.

© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 85

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About this Author

Sandra Jacobson Real Estate Lawyer Allen Matkins Law Firm
Partner

Sandra Jacobson is a partner in the firm's Orange County office. Her practice involves all aspects of real estate transactions, including acquisitions and dispositions, real estate development and leasing of office, industrial, multifamily and retail properties across the United States. Sandy has extensive experience in representing sellers and buyers in complex and portfolio projects involving industrial and office properties.

Sandy has helped her clients to develop more than one million square feet of office, industrial and retail assets, including the negotiation of construction...

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