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REA
April 08, 2020  

Broken Trades Seen Leading to Court Battles

As property deals unravel amid the current market turmoil, expect disputes over deposits to land in court.

Several buyers have already walked away from purchases after putting down nonrefundable cash, and more busted deals are expected. Market pros anticipate some will try to get their money back, hoping courts will take into account the extraordinary circumstances.

Real estate attorneys say courts are likely to enforce contracts and deny refunds. “You’re probably going to lose that deposit,” said Stuart Saft, who chairs the New York real estate practice group at law firm Holland & Knight.

Nevertheless, some brokers have begun hearing from would-be buyers saying that unless they can re-price a trade, they will back out — and potentially file lawsuits to get their money back.

“You are staring to see bad behavior from buyers,” said one broker. “They are demanding the seller take a haircut, and if they don’t get it, they are threatening to walk and sue for their deposit.”

One New York real estate pro said government efforts to prop up the economy may encourage firms to think they can get relief. “One would think they’re going to get litigious,” he said. “With what the government has done to compensate people, you’d have to think people will try.”

One battle is already shaping up, with the seller seeking a ruling against a buyer that’s trying to reclaim a deposit. Blackstone last week sued KS Development of Arcadia, Calif., for backing out of a deal to buy nine California hotels for $265 million, according to The Real Deal. The lawsuit reportedly said that Blackstone had offered to extend the closing date to June in exchange for an additional $1 million deposit — but KS declined and instead instructed the escrow agent to hold back the deposit.

Other deals are being viewed as potential lawsuits. In Midtown Manhattan, investor Jacob Chetrit canceled an agreement to pay SL Green Realty $815 million for what was once known as The Daily News Building, at 220 East 42nd Street. Market pros are watching whether Chetrit will try to recoup some or all of its $35 million deposit.

Meanwhile, Mirae Asset Global Investments has a $580 million deposit on the line as it tries to complete its $5.8 billion purchase of 17 luxury hotels across the U.S. from China’s Anbang Insurance. South Korea-based Mirae has had the deal under contract since September but is still working to arrange financing. Should that fall through, some believe the firm might try to recoup the deposit given the drastic drop in performance of the underlying assets.

However, real estate attorneys say the law is pretty clear that unless a purchase-and-sale agreement specifically spells out why a buyer could get a deposit back, it’s unlikely to happen.

“There are a number of cases from the Great Recession where all of a sudden the credit markets were completely frozen and there was absolutely no liquidity,” said Janice Mac Avoy, co-head of the real estate litigation practice at Fried Frank in New York. “Courts said that unless you have a financing contingency, your inability to finance . . . doesn’t matter. The risk of loss is on you.”

Still, some market pros think judges may be more lenient given the extraordinary nature of the coronavirus’ impact on financial markets. Many may try to argue the pandemic is a “force majeure” event. That designation relieves parties from performing contractual duties when circumstances beyond their control make it inadvisable or impossible.

“I’m a believer that empathy is the rule of the day,” said one New York broker. “It’s so unprecedented . . . it’s not so cut and dry.”

Mac Avoy disagreed — and noted that she’s never seen a real estate purchase-and-sale agreement that included pandemic as a force majeure event.

“I think courts have said in times of crisis that it’s even more important to enforce contracts as they were written,” she said.

Saft said most deals are likely to be extended rather than canceled, as both buyers and sellers give the market more time to settle. But he said there will be lawyers who counsel clients to pursue lawsuits on the chance the buyers can salvage some of their deposit. He expects those lawyers will work on contingency — meaning they’ll only get paid if they win.

Added Mac Avoy: “You always find litigious people who are willing to take a chance. It’s always going to depend on what the contract says, but most buyers are going to lose that lawsuit.”