The COVID-19 pandemic is wreaking havoc in real estate markets throughout the nation and promises to create additional disruption until the economic shockwaves of the pandemic have settled. As we advise clients who have transactions in various stages of development, we are sharing key lessons learned both on how to close those transactions that can close in this environment, and on how to develop alternative strategies for those transactions that must be held in abeyance, postponed or restructured to accommodate the new and exigent reality. Here are some of the complications we are experiencing today.
With more than 25 states in some form of a shutdown, performing due diligence can be difficult to impossible. Surveyors, inspectors and environmental consultants may or may not be working, and those who are working can be short staffed and slowed by social distancing requirements. Local zoning and buildings departments may be closed or short-staffed, which can delay zoning and entitlement analysis. Communicating early and often is key to keeping on top of the due diligence process in this environment. Buyers should consider addressing extension of due diligence periods before they expire. To the extent our clients are negotiating purchase and sale agreements, we advise a realistic view regarding the length of the due diligence period.
We have found that lenders are focusing primarily upon their existing portfolios (borrowers that will be having difficulties due to the pressure of tenants that cannot or will not pay rent) and upon those committed transactions that are already in the pipeline and near to closing. Transactions that are not ready to close are being delayed or abandoned altogether. We are not seeing many new lending commitments in the real estate world in this environment. Disclosure requirements and bringdown certificates can be a problem for sellers and borrowers. Sellers and borrowers ready to close may now have notices in their files from tenants claiming rent abatement or requesting a rent holiday because of the pandemic. Sellers and borrowers will need to address their obligations to notify their buyers and lending institutions of this and other pandemic-related activity prior to closing.
Acknowledgement of Documents
Many real estate documents require an acknowledgment by a notary for recording or other purposes. Notarization ordinarily requires the party signing the document to be present before the notary. The physical presence requirement can be a problem during a period of shelter-in-place and social distancing. Some governors have issued executive orders sanctioning virtual notarization of documents by video or audio means. For transactions seeking to close during this period, this logistic should be addressed and addressed early.
For transactions closing right now, the status of the recording office is critical. In many states hardest hit by the pandemic, recording offices are closed to the public and operating with limited staff and capabilities. Luckily, some of these areas have adopted e-recording. With e-recording, the logistics of the real estate closing can be handled much like a real estate closing prior to the pandemic. In a location that does not have e-recording, we have seen myriad workarounds, with some more effective than others. The inability to utilize the recording office in the normal course of events has led to other problems related to searching title.
The title insurance industry is impacted greatly by the new reality. Title insurers are inhibited in two ways by their more limited access to recording information due to the closure of and limitations faced by local recording offices.
First, title insurers are having some difficulty running searches and securing up-to-date title information. Again, this impact will vary by office, depending upon the disruption in effect at the time. Second, because of recording limitations, title insurers are having significant problems insuring closing and insuring the gap between the date of the most recent commitment and the date of the recording of the insured deed or mortgage. Some title companies are inserting specific COVID-19-related exceptions to title, exempting from their insurance problems that may exist with the recording or priority of the recording due to the fact that the recorder’s office was closed at the time of the closing. Most buyers, and certainly most lenders, will not easily accept such a provision in their title insurance. Recognizing this, title insurers will remove the exception if the seller or the borrower will take on this risk in an enhanced gap indemnity and provide some credit or security for the indemnity. Some title insurers have demanded that the seller’s proceeds be escrowed until recording and the priority of the recording has been unequivocally confirmed. At this writing, the battle is still raging between the insured and insurers.
Early negotiation of these potential trapdoors will be key to getting deals closed and closed on time.
Faegre Drinker’s Coronavirus Resource Center is available to help you understand and assess the legal, regulatory and commercial implications of COVID-19.