What happens to my Alberta commercial real estate purchase and sale agreement during the pandemic?

The purchase and sale of commercial real property in Alberta and the vendor and purchaser obligations will be governed by the provisions of the signed purchase and sale agreement. It is important to review the specific provisions of each agreement carefully. This update highlights certain issues to consider as vendors and purchasers navigate a few of the challenges they might face in the context of such transactions.

Are there any provisions in the agreement of purchase and sale that address health emergencies and/or pandemics or other related emergencies?

Typically, agreements of purchase and sale of commercial real property do not contain force majeure, unavoidable delay or material adverse condition clauses that might address events beyond the control of the parties to such agreements (events such as pandemics or health emergencies). Without such clauses, the provisions of an agreement of purchase and sale remain unchanged and in full force and effect during the current pandemic unless the parties to such agreements agree to amend them.

Can the vendor or purchaser terminate an agreement of purchase and sale as a consequence of the current pandemic?

Absent any express right of termination in the agreement of purchase and sale, the agreement may be terminated only if it is conditional upon the satisfaction and/or waiver of conditions within specific timeframes. These conditions should be considered in the context of the specific transaction to determine if either party has the right to terminate the agreement as a result of non-satisfaction/non-waiver of conditions due to the current pandemic:

• Have all of the conditions already been satisfied or waived?
• What steps need to be taken by each party to attempt to satisfy each of the conditions?
• Are any of the conditions true conditions precedent that cannot be waived by either party, such as a requirement for the lands to be subdivided in some cases?
• Are any of the conditions in favour and in the sole and arbitrary discretion of either party?
• Are the conditions drafted broadly enough to permit either party to refuse the waiver of condition(s), which would then terminate the agreement?
• Is the satisfaction of conditions affected by the pandemic or any related governmental order/directive?  

If any of the conditions that go to the root of the agreement, or any other such terms of the agreement, are legally or physically impossible to perform due to the current pandemic, the agreement may be frustrated. Note that the threshold for frustration of an agreement is high and the non-performance must be without fault of either party and performance must be completely impeded.

Can each party to an agreement of purchase and sale perform its obligations within the timelines specified in such agreement?

Each of the vendor and the purchaser will need to carefully consider all its respective obligations set out in the agreement of purchase and sale to determine whether it can reasonably comply with these and if not, whether it should request an extension to a specific deadline or some other type of amendment to the agreement (i.e., price modification, increased or additional deposit, vendor take-back financing, allocation of costs for title insurance, additional representations and warranties, indemnities). For any amendments, consider:

• Does the amendment need to be in writing and signed by both parties, as is typically the case? Both parties will want to ensure these provisions are enforceable to preserve their rights and obligations under the agreement.
• Does the amendment affect other provisions in the agreement or other parties involved or ancillary to the transaction? For example, amending a deadline may also have a broader business impact, such as a lender providing financing for the purchase price or an existing lender to be paid out from closing proceeds, or in the case of leases to be assigned by the vendor to the purchaser and the scope of the vendor’s discretion to deal with these prior to closing.
• Should the vendor register a vendor’s lien caveat? Should the purchaser register a purchaser’s lien caveat?

Disclosure and due diligence

Agreements will often include a due diligence condition in favour of the purchaser. Due diligence can include a physical property inspection along with permitted testing in many instances, reviewing documents made available by the vendor either through an online database or physically at the offices of the vendor or its property manager, as well as reviewing search results obtained from governmental authorities. The vendor is often required to provide access to or copies of certain disclosure documents. Obviously, in times of social distancing and temporary closures of non-essential services, the vendor’s ability to produce disclosure documents and the purchaser’s ability to carry out its due diligence may be affected.

• Will the vendor have access to the applicable documents and the ability to copy or provide disclosure of such documents to the purchaser? Will the purchaser have access to the vendor’s offices for document review? 
• Will search results be available to the purchaser within the condition timeframe?
• What protocol will need to be implemented to permit the property inspection to proceed?
  • Who is allowed into the building?
  • Who will supervise the inspection?
  • What times will these inspections be conducted?
  • If the agreement of purchase and sale provides for interviews or discussions with tenants of the property, how will these be done and where? Can they be virtual?
• Do other terms or trigger dates in the agreement depend on the timing of delivery of disclosure documents or of property inspections?

Third-party deliverables

In some instances, the vendor or purchaser may be required to obtain or provide to the other party certain third-party deliverables, either as part of the conditions or closing. The parties should consider whether these will be available in time to permit compliance with the purchase and sale agreement. Here are some examples of third-party deliverables that may be relevant:

• Real property reports and evidence of municipal compliance related to same;
• Approvals for subdivision, development/building permits and/or financing;
• No interest letters and/or discharges of non-permitted encumbrances;
• Payout statements;
• Consent to assignment of contracts/agreements;
• Condominium and/or tenant estoppel certificates;
• Building inspection reports;
• Geotechnical and environmental assessments and reliance letters related to same; and
• Competition Act and Investment Canada Act approvals.

Closing

The closing mechanics are typically straightforward; however, the parties should consider some basic practicalities to ensure each party remains in compliance with its obligations:

• Do I need to provide notice to the other party regarding the place where closing documents should be delivered?
• Are originals of closing documents required?
• Is the land titles office open and has the process for delivering documents for registration and receiving confirmation of registration changed?

What are the risks of non-performance (i.e., failure to deliver documents when required; failure to provide access for a property inspection; failure to tender closing documents and purchase price)?

Agreements of purchase and sale will not typically define specific events of default other than a party’s failure to close. In that case, it is important to determine what remedies are specified:

• Does the agreement provide for specific performance or are damages the only remedy?
• Are there any limits on damages (i.e., limited to the amount of the deposit)?

Tips for dealing with upcoming closings during the pandemic and the social distancing measures

Original documents 

Certain documents will require wet-ink signatures (signed originals), including any documents that must be submitted to the Alberta land titles office and most bank financing documents. Confirm as early as possible in the process which documents will require wet-ink signatures and arrange for times when the signatories can sign and deliver them.

Affidavits 

Some closing documents must be executed under corporate seal or be witnessed with supporting affidavits sworn. Ministerial order No. SA:008/2020 was issued and modifies the attestation requirements to permit two-way video conferencing for affidavits. The wording of affidavits will need to be modified to allow for this. Please click here for a copy of the ministerial order, which includes a sample of the required wording. 

Title insurance 

Title insurance may be a suitable option to address certain matters, such as any registration gap, encroachment issues, the lack of a real property report or missing or unavailable government responses regarding due diligence. Note that most title insurers will require at a minimum a title search that is less than 30 days old.

Third-party deliverables 

Request third-party documents as early as possible and follow up often.