Effect on Real Estate
March 23, 2020
COVID-19 presents a constantly evolving situation with many factors at play, this article provides a general guide to its impact, while not addressing specific situations.
SHUT DOWN ORDER
On Thursday, March 19, 2020, Governor Wolf announced that all non-life sustaining businesses would be required to close their physical locations. The physical offices of real estate agents and brokers were not deemed life-sustaining and, therefore, close their physical offices; although work being completed via telecommuting may continue. Failure to comply with the Governor’s order will come at a steep cost, including the potential forfeiture of any disaster relief funds which would otherwise be available to the company. Failure to comply with the order may also lead to other negative outcomes, including termination of loans, grants, suspension or revocation of licenses, and termination of Redevelopment Assistance Capital Project (RACP) grant funding. Violators may also be subject to fines or imprisonment.
COMMERCIAL REAL ESTATE SALES AND ACQUISITIONS
At this time, it appears that all closings must be suspended. There are several issues that make most, if not all closings, subject to a temporary suspension. The largest obstacle to transacting real estate closings during the shut down order is the inability to notarize documents. In any real estate closing, there are certain documents that must be notarized, the most important of which is the deed. The deed is the document that actually serves to transfer the ownership of the property and it must be recorded with the Recorder of Deeds in the county where the property is located in order to protect and secure buyer’s interest in the property. All deeds must be notarized at the time of closing in order to be recorded. At this time, Pennsylvania does not allow for remote notarization. There has been an effort to have title services declared “life-sustaining businesses” by the state and a determination is expected imminently. That decision will determine whether or not closings can be made.
Beyond closings, there are other important deadlines in the purchase and sale agreement that may be impossible to meet given the
If you are the buyer or seller of under a contract for commercial real estate, be sure to check all deadlines under the contract, including deadlines for any due diligence, securing financing and closing.
Most purchase and sale agreements do not have a force majeure provision, which provision (as discussed below) can serve to suspend certain contractual obligations in the face of a major event outside of the control of either party to the contract. At this time, certain deadlines may be impossible to fulfill due to the
The shut down order also raises important issues in the commercial lease context. The closure of businesses is likely to result in some commercial tenants defaulting on their rental obligations. Both landlords and tenants will want to know how to address this.
While commercial leases typically contain language allocating the risk resulting from damage to the leased premises, that language does not clearly address a situation where tenant cannot occupy the leased premises for reasons other than damage to the leased premises. In this case, any language dealing with condemnation, constructive eviction or rent abatement in the event of physical damage to the leased premises will be deemed not to apply.
However, the lease may include language which limits or suspends certain contractual obligations in a force majeure event. “Force majeure” is a major event which is not caused by the actions of either party to a contract. Often referred to as “acts of God,” event such as riots, trade embargoes, strikes, natural disasters, and fire are considered force majeure. If your contract has a force majeure clause, it may not specifically reference a pandemic; however, pandemics, like COVID-19, are likely to qualify as force majeure events. Any force majeure clauses should be read carefully as sometimes landlords will explicitly exempt rental payments from the contractual obligations that may be suspended due to force majeure.
Whether or not force majeure applies to rental payments will depend on a detailed analysis of the language of each specific lease.
It is likely that commercial tenants may seek to have their rental obligations suspended due to the common law doctrines
Whether or not rent will abate under any commercial contract is a highly specific question that requires analysis of the language of the lease and the effect of the shut down on the business of the tenant. The businesses considered life-sustaining, which remain open during the shutdown are less likely to be able to avail themselves to any theory of law that would result in reduced or abated rent. Further complicating this analysis from a commercial landlord’s perspective is the tenant’s ability to recover costs under any business interruption insurance it may have. Landlords must weigh several legal and business considerations in determining how to proceed in the case of a defaulting tenant, including the likelihood of being able to recover any money from the defaulting tenant and the ability to re-let the leased premises to a third party
We are likely to see new developments in the law as it relates to the commercial lease obligations.
Find the full list of closed businesses here: https://www.scribd.com/document/452416791/Life-Sustaining-Business#fullscreen&from_embed
If you have a specific question about involving Pennsylvania Law, please contact CGA Law Firm at (717) 848-4900.