Coronavirus Contract Clauses – What Every Real Estate Investor Should Know About Signing

Real Estate Contracts During the Coronavirus Pandemic

The Covid-19 health crisis has changed everything for the foreseeable future. How we socialize. How we do business. How we interact with our family. And even how we purchase real estate.  While I am confident that we will all get through this together and come out stronger, we can still carefully conduct business and do real estate deals while we social distance and quarantine. However, there are critical contract provisions that must be included in real estate contracts during this crisis to account for delays and contract performance hindered by the crisis. This clause is called force majeure clause (also known now as a Coronavirus clause) which accounts for what happens to the parties’ contractual obligations in the event of unforeseen events such as strike, war, or a pandemic such as the Coronavirus.

What is a Force Majeure Clause / Coronavirus Clause?

A force majeure / Coronavirus clause addresses the parties’ obligations in the event that events such as a strike, war, or a pandemic such as a Coronavirus interfere with a contract. Sometimes, force majeure clauses do not include pandemics so it is essential to make sure that the clause specifically calls out the Coronavirus pandemic. A comprehensive Coronavirus clause will provide that the parties’ obligations to each other are reasonably delayed/postponed if the Coronavirus interferes with their obligations, and such obligations may be completely discharged if the parties are not able to close the deal due to the outbreak.

How can the Coronavirus Interfere with Real Estate Deals? 

The Coronavirus can interfere with real estate deals in various ways. A common and reoccurring problem is that the title searches and due diligence are delayed due to town hall closures or reduced hours. Accordingly, a title search, municipal search, or zoning due diligence could take significantly longer. It is a good idea to determine whether the town hall of the subject property is closed, has reduced hours, or whatever the case may be, so the parties can plan an appropriate closing date.

Moreover, if environmental testing is required for the deal, such could also be delayed due to the virus. Many companies have reduced staff and are working from home. Similarly, surveys could take longer to complete if required on a particular deal.

The Coronavirus is also causing banks to change their loan packages or even to withdraw certain loans altogether. Accordingly, mortgages may take longer to be approved and processed due to the virus.

These are just some of the ways that the virus is impacting real estate deals. Of course, coordinating the closing can be challenging as many law firms are closed and are doing their best to close through the mail, or using very limited office hours.

Do Coronavirus Clauses Protect Buyers, Sellers, or Both? 

The Coronavirus clause protects both buyers and sellers, but they primarily protect buyers. Of course, sellers may have to obtain a payoff statement for existing mortgages, resolve title issues, or do repairs, all of which could be impacted by the Coronavirus. However, the buyer is typically the party that has much more to do before closing, including inspections, due diligence on public records, obtain a mortgage, and so forth.

Moreover, the buyer has a deposit to lose while the seller, although could face a lawsuit in the event of a breach, is not putting up earnest money. Accordingly, the Coronavirus clause protects both parties but primarily the buyer.

Are All Coronavirus Clauses the Same?

Not all Coronavirus clauses are the same and depending on whether you are the buyer or seller, you will have slightly different objectives using a Coronavirus clause. As a buyer, you want very broad protection, which includes delaying dates and allowing the termination of the contract if the Coronavirus significantly interferes with the closing.

A seller should also want to include the Coronavirus clause, but only to allow the reasonable delay of dates; not termination, so the buyer is locked in the deal and is not provided a way out of the deal.

Accordingly, buyers and sellers have slightly different objectives when including such a clause, which is why it is important to retain a good lawyer to negotiate your interests in transactions during the Coronavirus pandemic.

Do I need a Separate Provision for the Inspection and Mortgage Contingency Clauses to Address Delays Caused by Coronavirus? 

A good Coronavirus provision will account for delays of the mortgage, inspection, due diligence, and any other contract dates, so typically you will not need a separate provision in the mortgage or inspection contingency clauses, but it cannot hurt to include it anyways.

Should I use a Coronavirus Clause in Other Contracts Such as Leases, Management Agreements, etc.?

Yes. Force Majeure / Coronavirus clauses are not unique to real estate contracts and are important in other types of contracts. They may and should be used in any contract, including leases, management agreements, vendor agreements, buyouts, etc. However, as with real estate contracts, you may want a broader or narrower provision depending on which side of the table you are on.

In summary, real estate deals can still occur during the Coronavirus. However, it is important to include a Coronavirus clause, be ready for possible delays, and be ready to close by mail, or possibly in masks and gloves at your lawyer’s office.

New Transfer Act Changes Reflect A Friendlier Business Environment

Is there light at the end of the tunnel?

Last month Governor Lamont signed Public Act No. 19-75, a new law that amended several provisions in the Transfer Act. These amendments are favorable to the regulated community and are designed to narrow the scope of real properties and businesses that are subject to the Transfer Act, as well as to lessen the burden for those already in the program.

The amendments include the addition of several new important exceptions to the definition of an “establishment,” and the shortening of the time period that DEEP has to audit an LEP Verification.

In particular, the amendments exclude from the definition of an “establishment” any real property or business operation from which more than 100 kilograms of hazardous waste was generated in any one month from the following activities:

  • The one-time generation of hazardous waste in any one month, as a result of either the first time such waste was generated or such a one-time generation since the last time a Form I, Form II, Form III or Form IV was required to be submitted.
  • The removal of unused chemicals or materials as a result of the emptying or clearing out of a building.
  • The complete cessation of a business operation provided the waste is removed not later than ninety days after such cessation.

Another important change is the shortening of the time period DEEP has to audit an LEP Verification from three years to one year. Further, DEEP must complete the audit within three years from the date of submittal.

These amendments will provide some relief to the regulated community for transactions involving real property or businesses that are not major generators of hazardous wastes. Although some of the language is not ideal and will be subject to some interpretation, overall the amendments are a step in the right direction.

The amendments will become effective on October 1, 2019. Application of the new provisions will not be retroactive and will not apply to transactions that occur prior to the October 1, 2019 effective date. Of note, the legislation mandates the convening of a new working group to develop recommendations for additional legislative changes to the Transfer Act.

This is an important opportunity for the regulated community and signals a willingness on the part of the legislature to facilitate commercial transactions in which environmental issues may exist. Lenders, developers, and commercial realtors are well-advised to participate in this process and make their concerns known.

Practicing Law In The Age Of E-Commerce: Navigating A Dispute With eBay

Even though I am technically considered a millennial, I distinctly remember a time when technology was not an integral part of my life. Today, it would be foolish to fail to recognize its significance in my daily life and prevalence in the practice of law on many different levels. One of the bigger players in the e-commerce world today is eBay, Inc., a company that provides an online auction and shopping platform to its users. I recently represented an eBay user in a dispute with the company, which resulted in a successful and cost-efficient disposition for my client. Drawing on my experience, I hope to shed some light on the unique process of navigating a dispute with eBay, Amazon, Etsy and similar e-commerce giants.

Although it may not be so obvious to a non-lawyer, the obvious starting point with navigating such a dispute is eBay’s “User Agreement”, which of course, is a legally binding contract between the user and eBay. I have no doubt that the vast majority of eBay users have never read this document and just accept its terms with one click of the mouse. Perhaps the most important sentence within the introductory provision of the User Agreement is the following statement: “Please be advised that this User Agreement contains provisions that govern how claims you and we have against each other are resolved.” It should also come as no surprise that the User Agreement is littered with various disclaimers, limitations of liability and exclusions of damages. Applicable law regarding the enforceability of those provisions can vary from jurisdiction to jurisdiction.

One of the more significant tactical decisions a commercial litigator will have to make is whether to attempt to resolve a dispute via alternative dispute resolution or litigation. Courts strongly favor the use of alternative dispute resolution mechanisms such as arbitration and seek to enforce arbitration clauses whenever possible. Different types of commercial or consumer disputes present unique considerations in this regard, and dealing with eBay was certainly different from other types of such disputes I have handled. In many contexts, litigation may seem like the only answer, but arbitration is often preferred over litigation for several reasons (speed, cost, efficiency, simplicity, etc.). In my case, arbitration was even more appealing. The procedure outlined in the “Agreement to Arbitrate” within eBay’s User Agreement highlights several of those distinct advantages. The Agreement to Arbitrate also mandates that all claims against eBay are to be resolved through arbitration, and gives the eBay user the alternate option of asserting a qualifying claim in small claims court. Additionally, any claim that is pursued outside of arbitration in the courts of a state other than Utah faces the possibility that it will be removed or transferred to a court in Utah.

The prospect of pursuing a claim against eBay may seem like a daunting one. We here at Jacobi & Case, P.C. relish the challenge, and have the skills, experience and mindset needed to tackle unique challenges like this, to do so aggressively and to advocate on your behalf no matter who your adversary might be.

Selling or Buying

Buying or selling your business? We have the expertise and over 40 years of experience to assist you with your next transaction.

No transaction is too big or too small for us to assist you with. Whatever the scope, we will give your transaction our full attention. In the calendar year 2018, our firm assisted clients in transactions ranging from $200,000 to over $10,000,000. These transactions covered small businesses to large businesses with assets in Connecticut and other states. Assets included the inventory of an optician’s business, to a large multi-state business transferring almost 100 vehicles, accounts and state and federal permits. There were leases, covenants not to compete and employment contracts to consider and prepare.

Need assistance with accounting and tax advice for a transaction. We can work with your accountants and specialists or we can refer you to professionals that we have worked within the past.

Our representation also can include transferring of permits, licenses and corporate documents, consideration and evaluation of environmental concerns. We can assist you with a speedy and efficient resolution of any and all of these issues.

For more information, please contact Attorney Max Case at (203) 874-7110.

Change the Transfer Act to Save It

I have always loved Yogi Berra. He was a Hall of Fame player and a Hall of Fame creator of peculiar expressions. My favorite Yogiism is “When you come to a fork in the road, take it.” Although not a Yogiism, I am also fond of the expression, “Don’t throw the baby out with the bathwater.” Although the image is awfully strange, the concept makes sense, especially when dealing with environmental regulation in Connecticut. The Transfer Act has received its fair share of criticism over the years. However, getting rid of the Transfer Act is not the answer. Instead, making it work to protect health and the environment while promoting business growth must be the objective.

Having had the privilege of participating in the Transfer Act’s statutory development as early as 1995, I do have a strong interest in its successful development. It doesn’t work well in its present configuration, as it is out of sync with the trend toward risk assessment as the basis for regulation. It is also too slow of a process, with the average cleanup taking 7 years to complete. Frankly, it also has a bad reputation with out-of-state developers who have little interest in being stuck in regulatory quicksand for an indefinite period of time when their projects and sites are not the sources of significant risk. The Transfer Act’s bad reputation is well deserved.

The problems are fixable, but risk assessment must become the primary factor in defining the level of cleanup required at a site. Of course, I don’t want “foxes in the hen house.” Yogi could have said that, but didn’t. It means that the state must spend money to hire a number of experts in environmental risk assessment to assure that the assessments are performed properly and reviewed quickly.

By the way, we also need more DEEP staff conducting Transfer Act reviews. This process must become much faster if we are going to encourage business investment and redevelopment in this State. Going back to the beginning of the LEP program in the mid-1990s, it was designed to trust LEPs, particularly for sites that, based on groundwater classification and analytical data, did not reflect significant risk.

The original Environmental Condition Assessment Form was quite simple. If the site was in a GB groundwater area and the analytical data was acceptable, the vision was that the LEP would be empowered to implement the Remediation Standard Regulations with little interference. Whether anyone wants to agree with me or not, the fact is that from time to time, this concept was not followed by personnel at DEEP who did not fully commit to the LEP process. It will never be perfect, but the process can work efficiently if sufficient resources are allocated and the regulatory attitude changes.

Practical Environmental Due Diligence Tips for Transfer Act Site Sellers

Over 30 years ago, when my oldest son Eric was about 7 years old, he wrote a story entitled, “What I Want to Be.” It started with a singular line. “When I grow up I want to be an environmental layer.” Yup. He wanted to be a “layer” just like his dad. Maybe that is why his drawing, which accompanied the story, pictured a man with a briefcase in one hand and a baseball glove on the other. I had this picture in my mind earlier today when I was focusing on the most important and fundamental functions an environmental lawyer performs, particularly in a transactional setting.

Not surprisingly, often the most important job is to assemble the right team. Assuming that the client is the team manager, I would consider myself the catcher, controlling the game on the field. My key player would be the technical consultant, a Licensed Environmental Professional (“LEP”). I want that player to really understand the job. I need the LEP to know how critical this role is to the success of the team.

When representing a seller, it is essential that the technical consultant understands that the Phase 1 Environmental Site Assessment must provide a sufficient factual basis for the lawyer to determine Transfer Act applicability. There is a substantial liability on a seller who conveys a Transfer Act site without making an appropriate Transfer Act filing. The consultant performing Phase 1 must also perform a sufficient review of historical documentation and conduct a site visit so that a subsurface investigation if one is necessary, can be focused on the likely release areas and constituents of concern.

On behalf of the seller, the consultant’s Phase 2 scope of subsurface work may not necessarily include investigating the site to the extent (and cost) required to achieve site verification. The seller may simply want sufficient information developed to give prospective purchasers a reasonable idea of the environmental condition of the property. An experienced seller may appreciate the fact that a serious buyer will generally desire to conduct an independent Phase 2 investigation following a review of the seller’s reports. Further, under the Transfer Act, the buyer will have 2 years following receipt of a DEEP notice that its Transfer Act filing is complete to finish the investigation. A cost-conscious seller, therefore, may conclude that a more limited investigation is appropriate so long as it reasonably informs the buyer of the site’s condition.

Finally, the team needs to determine if a remedial cost estimate is appropriate and whether that cost estimate should be incorporated into the investigation report. In this regard, consideration should be given to whether the LEP’s cost estimate should be widely disseminated or whether it should be limited to a subset of serious buyers who have sufficiently demonstrated their desire to pursue the transaction and who have signed a confidentiality agreement.

In summary, the selection of the correct LEP is critical to the fate of many transactions. How do you choose the “right” consultant? First, technical competence, experience, and credibility with the governmental agencies are givens. Second, the consultant must understand that the team’s objective is primary. Depending on the client’s goals, a comprehensive investigation is not necessarily the best approach from a money or timing perspective.

Similarly, an unrealistic remedial cost estimate, in the long run, is not in the best interests of any party. Third, the team members must be able to communicate well together. Objectives change. Development plans change. Draft reports must be quickly modified. The consultant’s pace cannot lag behind. In a nutshell, my advice to developers is to put a good team together and keep it together as long as it works. It sounds much easier than it actually is.

Can Your Environmental Lawyer Be a Profit Center?

I still remember a site inspection that I performed more than 30 years ago. I had already represented Company X for some time and was not surprised when its President approached me. However, I was a bit taken aback when he said, “What are you doing here?’’ I got the message loud and clear that my presence was not appreciated and likely forecasted expenditures for environmental work and legal fees, neither of which the company president had any interest in.

Given this historic perspective, let’s fast forward to the present where changes in Environmental Law and the common perception of the role of lawyers have expanded the functional areas where legal expertise is needed. We are still very important in providing our clients with the risk analysis and compliance information that business people require in making business decisions. But now, much more is, or should be, expected of us.

This is particularly true in the area of site development where legal input can be extremely valuable in the identification of target sites and in the selection of remedial strategies, including the use of ELURs. With regard to site development, the potential for using the state Brownfield programs may eliminate the need to comply with the Transfer Act and the need to address groundwater plumes that have left the property. Further, the use of these programs may facilitate the issuance of a Covenant Not To Sue by DEEP.
When compared to the liabilities associated with a traditional conveyance subject to the Transfer Act, entrance into a Brownfield program may sufficiently reduce liability and cleanup costs to make a previously unattractive site a prime target for future development.

Of course, the factors discussed above impact lenders as much as buyers and sellers. Collateral value and the desirability of a loan are impacted by the cost of cleanup and the assessment of liability. We are no longer in a world ( and haven’t been for some time) where the presence of contamination is a deal killer. It is simply a factor to be considered, and a measure of creativity in structuring a transaction can make a big difference in a property’s marketability.

A Connecticut Environmental Lawyer’s Take on Why Deals Die

As a relatively small firm, we have been involved in a surprising number of major development projects. We have represented buyers, sellers, and lenders on very substantial acquisitions and represented large corporate clients in court and arbitrations as plaintiff’s counsel or defendant’s counsel. We have had many successes (which feel great!). We have also seen deals fail.

Deals die for many reasons. From an environmental perspective, most transactions do not fail because the property contains contamination. They fail for the following reasons:

The parties do not understand the liabilities associated with the site or if the site is suitable for the prospective purchasers’ use. Sellers who do not allow the prospective purchaser reasonable due diligence or try to control the extent of due diligence will have difficulty transferring their site. Depending on their level of risk aversion, sophisticated buyers will not accept sellers’ limited site characterization reports which do not reasonably quantify site liabilities and do not provide a basis for a reduction in purchase price based on anticipated future costs of investigation and remediation.

The parties cannot agree on the Transfer Act applicability. It is not simply a question of whether the statute applies but often deals with the question of which Transfer Act Form is appropriate. Those questions are often matters of judgment. If the parties cannot agree on Transfer Act applicability issues, they will not likely reach an understanding of the underlying site liabilities and costs of investigation/remediation. If potentially high-cost issues (such as tank releases, PCBs, or contaminated drinking water) are not addressed, most prudent buyers will not gamble that the seller’s Transfer Act interpretation is correct.

Quantifying likely environmental costs and resolving Transfer Act applicability issues requires the use of environmental consultants and attorneys who are competent in their fields and want to make deals happen. It requires professionals who understand their clients’ objectives and put those objectives in front of their own.

The parties to the transaction ultimately have to determine the importance of the deal and their tolerance for risk given their strategic plans. They need to exercise a level of control over consultants who may be recommending additional investigation that is unneeded. They need to control their attorneys who may be micro-managing the other party’s due diligence or imposing unreasonable conditions for site access and indemnification. They sometimes need to be directly involved in the negotiations to assure that the key issues remain the focus of attention.

In summary, if the environmental issues are understood and not overwhelmed by unknown and undetermined costs and liabilities, contamination concerns will not often kill deals. Sophisticated deals do not generally work when one side underestimates the other. They do work when the parties and their professionals understand their roles and want the transaction to come to fruition.

Protecting Your Property From Tenant Activities That May Trigger The Transfer Act

One of the most common issues we face when representing landlords is the unexpected triggering of the applicability of the Transfer Act, Conn. General Statutes §22a-134, et seq., by a tenant. This typically occurs when the tenant becomes an “Establishment” under the Transfer Act by generating greater than 100 kilograms of hazardous waste in a month. Unfortunately, a landlord and its counsel may not have recognized the potential that a pharmacy or big box tenant may exceed the 100 kilogram generation threshold during its routine practices of managing old, damaged or returned inventory or performing routine maintenance. That tenant may submit a notification of hazardous waste activity to the appropriate environmental agency as required under applicable environmental law indicating that it is either a small or large quantity generator of hazardous waste, both of which identify that tenant as generating more than 100 kilograms of hazardous waste in a month. Worse, a conveyance of that business may result in a Transfer Act filing requiring the investigation of the entire parcel.

Generating this level of hazardous waste is not a statutory violation. For many businesses, generating hazardous waste is simply part of facility operations necessary to produce goods. Note that in addition to becoming an “establishment” by generating greater than 100 kg of hazardous waste in any one month on or after November 19, 1980, a business may become an “establishment” by conducting the process of dry cleaning, furniture stripping or vehicle body repair on or after May 1, 1967. A business may also become an “establishment” by recycling, reclaiming, reusing, storing, handling, treating transporting or disposing of hazardous waste generated at a different location.

Being an “Establishment” is not unlawful. However, the unintended consequences of being so classified could have significant negative consequences for the landlord. First, it may inhibit the ability to sell the property as the conveyance of the property (or the sale of the business) may trigger the Transfer Act. Second, lenders may be less inclined to accept the property as collateral. Third, the investigation/remediation obligations under the Transfer Act may be quite substantial.

As operating as an “Establishment” is not illegal under environmental law, there may not be any recourse against the tenant based on such action….unless a provision is expressly inserted in the lease prohibiting the tenant from triggering Transfer Act applicability. If you are negotiating a commercial lease, stick this prohibition in the lease unless you knowingly are willing to accept the repercussions of Transfer Act applicability in exchange for obtaining a potentially excellent tenant. This is not a matter of good versus bad. It is merely a matter of understanding the business liability risk that may be encountered if this provision is not included in the lease.

To end on an upbeat note, all hope is not lost if the lease does not address this situation, and the parties to a transaction are concerned that tenant activities may have triggered Transfer Act applicability. Go back to the fundamentals of Transfer Act 101. The statute is often triggered by the GENERATION of greater than 100 kilograms of hazardous waste in any month since November 19, 1980. This is a matter of proof. Was the hazardous waste generated in small amounts over time, although disposed of in a quantity that appears to have triggered the Transfer Act? Was the self-declaration of a facility as a small or large quantity generator based on disposal records rather than actual rates of hazardous waste generation? Was it simply a conservative filing made years ago without an appreciation of the significance of the declaration?

The point is that the battle is not lost. Avoid Transfer Act applicability concerns by taking precautions in the lease and having your environmental attorney draft specific Transfer Act provisions. Address existing concerns by digging deep into whether the tenant’s business practices really did turn the site into an “Establishment”.

Due Diligence Reporting Requirements to Environmental Regulatory Agencies

Environmental due diligence is fundamental to transactions involving properties that may have been subject to a hazardous substance release. Although such due diligence remains an important aspect of a successful property acquisition, the risks of due diligence have increased as more environmental conditions must be reported to the Department of Energy and Environmental Protection (DEEP).

As of July 1, 2015, more stringent reporting requirements under the Significant Environmental Hazard (SEH) statute, Conn. General Statutes §22a-6u, became effective. These changes originally passed in 2013 by Public Act 13-308 significantly lower certain reporting thresholds and will result in increased reporting to the DEEP.

The SEH statute requires reporting to the DEEP of the discovery of certain environmental conditions. Specifically, a “technical environmental professional” that discovers certain environmental conditions during the conduct of a site investigation is required to notify his/ her client and the property owner of such condition. The statute then requires the property owner (and in some cases the technical environmental professional’s client) to notify the DEEP of the hazard within a certain time period. The DEEP may then require the property owner to further investigate, mitigate and/or abate the condition.

Notably, the changes have significantly lowered certain reporting thresholds. For example, some important changes include the following:

  • The reporting threshold has been lowered from 30 times to 15 times the Residential Direct Exposure Criteria for metals, PCBs and volatile organic compounds (some substances exempted) in soils within 2 feet of the ground surface if the property is in residential use.
  • The reporting threshold has been lowered from 30 times to 10 times the volatilization criteria for volatile organic compounds in groundwater within 15 feet “of” a building instead of “below.”
  • Notification is required for groundwater contamination located within 200 feet in any direction of a drinking water supply well.

It is also important to note that for certain hazards, the changes to the statute require the property owner to conduct specific actions to evaluate and confirm the hazard within short time periods of time.

The impact of the changes to the SEH statute will result in increased reporting to the DEEP. Therefore, buyers, sellers, lenders and property owners conducting environmental investigations should plan for the possibility of a SEH reporting obligation. Prior to the conduct of site investigations, the parties should address how they will manage a SEH reporting obligation and who will be responsible for the notification, responses actions and costs. Parties to a transaction should also address who will be responsible for any long term response actions (and associated costs) that may extend past the closing date of the transaction.