Allen Matkins Partners Scott Leipzig and Tim Hsu Prevail in Arbitration Concerning a Buyer’s Right to Terminate a Purchase Agreement and Recover its Deposit Following COVID-19 Disruptions

Allen Matkins
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Allen Matkins

Last week, an arbitrator ruled that the purchaser of a commercial real estate property could terminate its purchase agreement and recover its non-refundable deposit, even though it had previously waived all contingencies, based on the specific impacts on the property from the COVID-19 pandemic given the specific language of the governing agreement.

Allen Matkins partners Scott Leipzig and Tim Hsu represented a buyer of commercial property (Buyer), which entered into a purchase and sale agreement (PSA) to purchase a retail commercial shopping center in Orange County (the Property). Seller was represented in the arbitration by Gibson, Dunn & Crutcher. The Property was in escrow when COVID-19 hit in March 2020, causing severe disruption to the retail center and its tenant operations. At that time, Buyer had already waived all contingencies but sought a full refund of its deposit based on provisions of the PSA requiring Seller to provide notice to Buyer of any “issue materially affecting… the Property” and allowing Buyer to terminate the PSA and recover the deposit if there were such an issue (i.e., a MAC provision). The Allen Matkins trial team successfully presented witness testimony (including testimony from real estate experts) establishing that the impacts of COVID-19 (including disruptions to tenant operations and resulting rent delinquencies) constituted a sufficient material adverse effect on the Property to trigger Seller’s notice obligation and Buyer's right to terminate the PSA and recover its deposit.

Seller filed a counterclaim for interference with Seller's tenant relationships and raised a number of defenses, each of which was rejected by the Arbitrator. Among other things, Seller argued that the MAC provision covered only changes to the physical land and improvements and that COVID-19 did not have any such physical impact to the land and structures. In response, Allen Matkins pointed to the nuanced definitions in the PSA (defining the Property as including contract rights and intangibles) and argued that mandatory changes to tenant operations and financial disruptions to the shopping center due to COVID-19 constituted material changes to the Property as defined. Seller further argued that it had no duty to inform Buyer of COVID-19 (or the effects thereof), as it was widely known and readily apparent to all. This argument was also rejected as there is no exception in the PSA relieving the Seller of its notice obligations for items known by the Buyer.

Following the three-day arbitration, our client prevailed on all issues, was deemed to be the prevailing party, and is now authorized to recover its reasonable attorneys’ fees and costs.

This victory comes on the heels of Scott’s $200 million defense of watchmaker Citizen last year, named one of the Daily Journal’s Top Defense Verdicts of the Year. He was also named one of Los Angeles Business Journal’s Top Litigators & Trial Lawyers of 2020.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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