• Andrew Domer

Due diligence issues during the pandemic

Updated: Jun 18

It's been over 4 months since the shelter-in-place (SIP) order was first issued by the State of California Public Health Officer on March 18. In the early days of the pandemic, we saw wide disparities among jurisdictions throughout California as to the strictness of SIP orders. Below is a summary of some of the specific challenges attributable to the SIP orders in the area of due diligence.

Over the past four months, the ongoing crisis and shifting state and local SIP orders have complicated meeting benchmarks in purchase and sale agreements (PSAs) related to due diligence, deadlines for obtaining entitlements, and closing. As a result, parties to existing PSAs should consider renegotiating those agreements to ensure that they realistically account for the current and future delays and uncertainty. Parties negotiating new PSAs should also account for these uncertainties.

Typically, PSAs allow for a period of time after execution where buyers have the opportunity to conduct due diligence before their deposit becomes non-refundable. At the outset of the crisis when more restrictive state and local SIP orders were in effect, performing due diligence was difficult or altogether impossible with many third party surveyors, inspectors, and environmental consultants that perform crucial due diligence functions unable to work. Even as statewide and local SIP orders have eased, allowing consultants to operate under social distancing guidelines, uncertainties continue to complicate the due diligence process. For example, consultants may still be slowed by backlogs and social distancing guidelines and there is likely to be continued uncertainty surrounding the availability of capital resources. Uncertainty also surrounds impacts of domestic and international travel restrictions, delays confirming the feasibility of land use entitlements, and the issuance of title policies and recording of documents.

Considering these uncertainties are likely to linger for several months, buyers and sellers should renegotiate or negotiate PSA due diligence timelines so that they are realistic under the circumstances and ensure each party has enough time to complete due diligence.

One reasonable solution to this problem is to incorporate language allowing buyers the automatic right to extend the Due Diligence Period only for those items the buyer is not reasonably able to complete based on existing conditions. Regarding closings, PSAs often incorporate conditions precedent that must be satisfied by a certain deadline before transactions are finalized. Often, if such conditions are not met, the other party may terminate the PSA and retain a deposit. The most common condition precedent impacted by the current crisis is the obligation by the buyer to secure a title insurance policy subject to the payment of premiums and recordation of conveyance documents. Most title companies will not issue policies until key transactional documents are recorded, and for a time, many physical county recording offices were shut down. Although most if not all counties have resumed recording electronically, parties to existing PSAs may consider renegotiating closing language to allow for the waiver of a claim for default due to reasonable timing issues related to recordings. Parties negotiating new PSAs should consider such flexible language as well.

Finally, PSAs often include deadlines for closing based on the expiration of statute of limitations periods following approval of project entitlements. Statutory periods have been tolled for civil cases, including administrative writ of mandate cases challenging land use approvals and environmental review. Parties to an existing PSA should review these deadlines related to expiration of statutory periods to determine if an amendment is needed or whether the closing will be delayed.