Pandemic has changed the way real estate contracts are drafted and negotiated

While California continues to ease restrictions and life gets back to normal, the past year has changed the way real estate transactions will move forward. As a result of lessons learned from the pandemic, leases and purchase and sale contracts include new provisions that are not likely to go away, according to Los Angeles-based law firm Greenberg Glusker.

One change to leases and purchase and sale agreements born out of the pandemic that will continue is how force majeure clauses are drafted.

“Prior to 2020, I can’t recall a single definition of force majeure which included pandemics,” says partner Brian Kang who chairs the firm’s real estate group. “Now, nearly every force majeure clause includes it. Furthermore, due to the heightened sense of the unexpected, I see a growing trend to broaden the definition of force majeure as much as possible. Especially by attorneys who represent tenants and borrowers.”

Retail tenants have become emboldened in negotiations requiring rental abatement in leases should governmental orders result in their inability to operate full capacity or at all. 

“I have seen this trend start with large, multi-location restaurants and quick service tenants and now become a frequent ask even with small retail tenants as well, such as independent yoga studios and gyms,” says real estate partner Kevin Sher. “Going forward, tenant abatement rights which were written specifically with Covid-19 in mind will apply to use and occupancy limitations from any governmental order in order to hedge against future shut-downs.”

Another new provision to come out of the pandemic, that will be standard in most purchase and sale agreements, are events that may delay a transaction’s closing, according to partner Steve Lurie.

“Missing a closing date can have significant financial ramifications,” says Lurie. “Unforeseen developments that cause a delay in delivering packages to the escrow holder, buyer, seller, lender or legal counsel, or result in the closure of the escrow holder’s or title company’s offices, that impact a closing date or other key performance date are now sometimes addressed in purchase and sale agreements. This so-called ‘blocking event’ provision is also sometimes applied to conditions that prevent a lender from wiring funds.”

The new provision provides that the closing date or other key performance date is extended until two business days following the cure of the blocking event. 

“As the term ‘social distancing’ will continue to be part of our vernacular, these and other contractual provisions will be part of the way real estate contracts are drafted and negotiated,” says Kang.