COVID-19 Real Estate and Corporate Q&A

May I stop paying rent for space occupied by my business?

The answer depends on the terms of your lease but generally the failure to pay rent could trigger a default that may be difficult to remedy.

I signed a contract to buy a business/real property before the virus hit. Can I get out of the deal?

It depends on the terms of your contact. For example, many merger or purchase agreements either may be terminated as a result of, or the closing of the transaction contemplated thereby is often conditioned on there not having occurred, a material adverse effect (“MAE”) on the target’s business, financial condition, results of operations, etc. Delaware courts have found only one case where a target suffered a MAE allowing a buyer to abandon their agreement, as there is a high burden of proof to show that a MAE has occurred (i.e., the impact on the target’s business must be durationally significant, a period that is measured in terms of years rather than months). There are a number of fairly standard exceptions that are customarily negotiated to the MAE definition, as a result of which factors such as general economic and market conditions, natural disasters and terrorist attacks are not considered in determining whether a MAE has arisen, except to the extent there is a disproportionate effect on the target’s business compared to others in the same industry. Recently, we have seen targets seeking to negotiate a pandemic exclusion to the MAE definition – to the extent targets are successful in doing so, a buyer would not be able to take into account the effects of COVID-19 on the target’s business in determining whether a MAE has occurred.

One other potential avenue for buyers to potentially terminate a transaction would be the “continuing operational covenants” contained in the parties’ agreement. These covenants typically obligate a target to conduct its business in the ordinary course between the signing and the closing of the transaction. In the event that a target must significantly reduce or shutter its operations due to COVID-19, it may not be able to comply with this covenant, as a result of which a condition to closing may not be satisfied or a termination event may arise. However, if this covenant is qualified, such that a target must only use its commercially reasonable efforts to continue its business in the ordinary course, or an exception is made for actions required by governmental orders, a breach giving rise to termination may not occur. Each transaction is different and we urge you to consult with one of us. MAE clauses are not typical for real estate transactions so in those cases the purchaser would not have an option to terminate the deal.

Does New York permit documents to be notarized electronically?

By Executive order dated March 19, 2020 electronic notarizations are now permitted. See the order here for the requirements which include a direct video interaction and an electronic transmission of the signed document the day it was signed.

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