Many of our clients entered into current real estate purchase and sale agreements (PSAs) prior to the COVID-19 outbreak, but the deals have not yet closed. Generally, these PSAs do not contain force majeure clauses, and the courts have consistently looked within the four corners of PSAs to determine the rights and remedies of the parties. In the absence of a force majeure clause or similar provision in a PSA, the parties should not expect any of the fallout from COVID-19 to result in additional time to satisfy any pre-closing or closing obligations that have definitive "time of the essence" deadlines. Of course, the parties should consider interacting and seek to negotiate an appropriate extension of time to close. We would expect that in certain transactions, a purchaser might also request a reduction to the purchase price. In other transactions where a purchaser is no longer willing to proceed with the transaction (such as a hotel which now has a very low occupancy rate or has decided to close temporarily), the negotiation may be centered on the termination of the PSA and a return of some portion of the down payment. Pryor Cashman's Real Estate Department possesses the experience needed to help you to navigate your transaction with practical and workable solutions.

For transactions where the parties have not successfully negotiated a mutually acceptable amendment to their PSA, or are simply unable to come to terms, it is important to understand how to arrive at and also to maintain a firm closing date. The closing date is typically the seminal moment to determine the outcome of a PSA if the closing fails to occur by reason of a party's default.

In PSAs that contain a time of the essence closing date or if a time of the essence closing date has been established by one of the parties, the question is raised as to whether a party may have the right to delay the closing in the event of an inability to close on the time of the essence closing date (also known as the "law date"). A careful understanding of what "time of the essence" means in practice may move to the forefront. In this regard, consider the following scenarios:

  • Some PSAs are "time of the essence" to close as against only one party (usually the purchaser), such that if the seller were not ready, willing or able to close on the law date, that would not give rise to a default by the seller (i.e., the purchaser would not have the ability to terminate the PSA and receive a return of its down payment). Instead, this would have the effect of rendering the PSA no longer being "time of the essence," such that a new law date would need to be established by one of the parties as a predicate for either a closing to occur or invoking a party's remedies.
  • In those PSAs which are "time of the essence" as against both seller and purchaser, each party is required to close on the law date. However, in order to hold a party in default for failing to close, the other party must itself establish it was, in fact, ready, willing, and able to close. In the case of a seller seeking to terminate a PSA and receive the down payment, the seller would have to show that it could convey good title in accordance with the requirements of the PSA (i.e., typically needs the title company to confirm the status of title on the law date), plus satisfy its other closing obligations (signed consents or resolutions, as well as executed assignments and other transfer documents, etc.).

ACTION ITEM: Be careful to review the entire agreement to make sure all obligations are or will be satisfied by closing. Do not overlook the need for making sure the seller has cleared and/or paid for any violations, circulated its apportionments with back-up, provided all estoppels, and otherwise satisfied all pre-closing and closing obligations. This will undoubtedly require close and coordinated efforts with client and counsel (as well as third parties in certain instances, such as arranging for assignment of mortgages if the PSA so requires). In this presently challenging environment, it is foreseeable that courts will be more sympathetic to alleviating a purchaser from a default even if one or more of the seller's unsatisfied obligations were not overly material.

A seller seeking to set a law date by sending a "time of the essence" closing notice should be wary of failing to give a purchaser sufficient time close. The seller must also be able to fully satisfy all of its obligations on the selected date: a seller that fails to be fully ready, willing and able to close on its own established law date will be subject to the risk, at a minimum, of relieving the purchaser from performance until a new date is set. If, however, the purchaser can establish it was, in fact, ready, willing, and able to close and the seller was not, this can give rise to a seller default.

Moreover, the amount of time given to the other party to close must be reasonable under the circumstances. We have heard many attorneys over the years advise to their clients that 30 days is the appropriate time period that should suffice. However, New York law does not proscribe an actual period of time -- the minimum time period given by a party must be reasonable in light of the totality of relevant circumstances, including the sophistication of the parties. For example, if a purchaser adjourned a closing three times for two weeks each and a seller accommodated these adjournments, if this seller were to set a law date thereafter, it may consider a shorter period of time.

ACTION ITEM: Add additional time to allow a party to close if the goal is to establish a law date that is expected to result in a judgment in favor of the party setting the date.

Attention should also be given to matters which are outside of a party's control and/or which are conditions precedent to a party's obligation to close, such as: (i) if any recording office or municipal is closed or short-staffed, will the title company be able to record documents or obtain title continuation searches so as to determine the status of title as of the closing date, (ii) is the existing lender and/or its attorney available to provide any contractually required closing documents (such as a payoff letter and/or assignments, terminations, etc.), (iii) in those situations where a "New York" style (i.e., in-person) closing is to be held, is the specified location accessible or subject to some public or private (i.e., imposed building rule by the landlord) limitation or restriction. These are just some considerations, and the analysis requires careful attention to the precise terms of the PSAs and the facts as they have the potential to relieve an otherwise defaulting party from failing to close.

The Real Estate Department at Pryor Cashman stands ready to guide you through these legal issues during these uncertain times. We are available to review your PSAs and other agreements to discuss COVID-19's impact on your real estate transactions and formulate a path to achieve optimal results during this highly tumultuous time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.