Law360 (March 10, 2021, 6:08 PM EST) -- Major real estate cases brought on by COVID-19 have shown courts are amenable to considering "material adverse change" clauses as means to call off M&A deals, while a pair of tenant-friendly rent dispute rulings also have landlords on high alert.
Lawyers say that a year into the pandemic, buyers and sellers are carefully looking at the language in their mergers and acquisitions contracts after a Delaware court decision allowed a buyer to back out of a megadeal.
Meanwhile, it still remains difficult for tenants to win rent payment disputes, although tenant-friendly decisions in Illinois and Massachusetts have created some concern among landlords.
Here, Law360 looks at four key disputes and what's been learned from each.
Simon Property Group Inc. announced a deal to buy fellow mall operator Taubman Centers Inc. for $3.6 billion in February 2020, but as the mall sector tanked amid the COVID-19 pandemic, Simon sought an out.
The buyer sued in Michigan state court, saying it had a right to exit the deal due to a material adverse effect clause — another name for a material adverse change clause — in the agreement. Such provisions allow parties to terminate deals if some adverse change in circumstances, as defined by the specific nature of the clause, occurs after the agreement is signed.
With the case headed toward trial, the companies reached a settlement in November that involved Simon paying a revised price of roughly $3 billion.
While the settlement meant the M&A deal went forward, it left unanswered the question of how a court might rule on MAE clauses during the pandemic. The case had largely centered on how widely the retail sector was interpreted and whether Taubman had been disproportionately harmed by the health crisis.
"The dispute between Simon and Taubman, particularly over the proper interpretation of the MAE ... provision, is an example of how even well-drafted provisions can be subject to differing interpretations, and of how it's often in the interest of all parties to settle rather than to embark upon what can be lengthy, expensive and uncertain litigation," said John Sullivan, chair of U.S. real estate at DLA Piper, who was not involved in the case.
Simon was represented by Thomas Cranmer, A. Michael Palizzi and Larry Saylor of Miller Canfield Paddock & Stone PLC and by Paul Weiss Rifkind Wharton & Garrison LLP.
Taubman was represented by Honigman LLP and Wachtell Lipton Rosen & Katz.
The Taubman special committee of the board of directors was represented by Keefe Brooks and Steven Ribiat of Brooks Wilkins Sharkey & Turco PLLC and by Kirkland & Ellis LLP.
The case is Simon Property Group Inc. vs. Taubman Centers Inc., case number 2020-181675-CB, in the Circuit Court for the Sixth Judicial Circuit of Oakland County, Michigan.
While all eyes in the retail M&A world in 2020 were on the Simon-Taubman dispute, hotel M&A lawyers closely watched a fight between Mirae Asset Global Investments Co. Ltd. and Dajia Insurance Group. Lawyers say a court's decision to let Mirae off the hook for its $5.8 billion hotel portfolio purchase from Dajia provides important information about the interpretation of MAC clauses.
Korea-based Mirae had inked a deal in September 2019 to buy 15 hotels from Dajia, which was formerly Anbang Insurance, but the transaction subsequently stalled when a third party filed fake deeds for some of the properties. Meanwhile, in April, with the hotel sector under extreme pressure from COVID-19, Mirae said Dajia had defaulted on the deal.
Dajia sued Mirae in response, seeking to bar the company from backing out of the deal. The portfolio included properties in California and New York.
Delaware's Chancery Court sided with Mirae in November, saying Dajia made "extensive changes" on the business side as hotel occupancy plummeted in March and April. Those changes violated the purchase and sale agreement, which required the company to continue a normal course of business up until the deal's closing, the court said.
"This case was the first case in Delaware to make a determination about whether COVID was considered a MAC that permitted a termination of the [sale and purchase agreement] ... or whether COVID caused sufficient disruption to the business of the seller to be considered a material change in the ongoing operation of [the] seller's business," said Robert Ivanhoe, vice chair of Greenberg Traurig LLP, who led the M&A deal for Mirae and was a witness in the court case. "The latter determination gave Mirae the right to terminate the SPA and receive a return of its deposit."
In addition to the pressure on the hotel sector, Mirae had been concerned about not being able to get clean title to the properties, and the Delaware court said Dajia had not been forthcoming regarding the fake deed matter.
Dajia Insurance Group was represented by Raymond DiCamillo, Sarah Clark, Kevin Gallagher and John O'Toole of Richards Layton & Finger PA, and Adam Offenhartz, Marshall King, Nathan Strauss, Shireen Barday and Tyler Amass of Gibson Dunn & Crutcher LLP.
Mirae Asset Global Investments Co. Ltd. was represented by A. Thompson Bayliss, Stephen Childs and Michael Barlow of Abrams & Bayliss LLP, Michael Carlinsky, Andrew Rossman, Rollo Baker IV and Christopher Kercher of Quinn Emanuel Urquhart & Sullivan LLP, and Kap-You Kim of Peter & Kim Attorneys at Law.
The case is AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC et al., case number 2020-0310, in the Court of Chancery of the State of Delaware.
An Illinois bankruptcy court found in June that a force majeure provision excused a Chicago restaurant from some payment of rent.
The court said a force majeure provision in Hitz Restaurant Group LLC's lease agreement partially exempted the company from paying in light of a shutdown order from Illinois' governor in March. Such provisions allow parties to get out of certain obligations in the wake of extreme events, but experts say the decision was notable because force majeure rarely excuses tenants from rent payments.
"The Hitz decision is significant because it showed a willingness by the court to attempt to fashion a remedy that it felt would be fair to both sides by giving some relief to both parties," said Eric Rapkin, chair of real estate at Akerman LLP, who was not involved in the case.
"I wouldn't have gleaned that that type of remedy would result based on the force majeure clause at issue. But the court gave the landlord at least a portion of the rent, and it gave the tenant a lifeline by finding that most of the rent should be abated, even though the clause in that lease specifically said that lack of money would not constitute a force majeure [event]," Rapkin added.
At issue in the case was payment of rent for Giglio's State Street Tavern. Hitz had inked a 10-year lease in early 2019 but had allegedly already fallen behind on rent by that summer. Kass Management had sought to evict Hitz in early 2020.
Hitz then filed for Chapter 11 in late February, shortly before the pandemic started to sweep across the U.S. Then, in March, Gov. J.B. Pritzker issued an order requiring bars and restaurants to suspend in-person service, which hurt Hitz's ability to bring in money to pay rent.
Kass Management Services Inc. was represented by Mario Sullivan of Johnson & Sullivan Ltd.
Hitz Restaurant Group LLC was represented by Jonathan Golding of The Golding Law Offices PC.
The case is In re: Hitz Restaurant Group, case number 1:20-bk-05012, in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division.
A Massachusetts court said last month that a restaurant could use frustration of purpose, a part of common law, to excuse payment of rent, and that decision has landlords concerned that similar decisions could follow.
Caffè Nero inked a 15-year lease with landlord UMNV 205–207 Newbury LLC for space on Newbury Street in Boston in June 2017, and the café opened there a year later. When the pandemic hit, the restaurant closed and fell behind on rent payments, and the landlord sued.
The Massachusetts court found that frustration of purpose excused the company's rent payment obligation, based in part on an order by Massachusetts' governor in March 2020 ordering restaurants to suspend in-person dining.
Experts say the decision is important because, like force majeure, frustration of purpose largely has not been a viable way for tenants to avoid paying rent.
The differences between force majeure and frustration of purpose are subtle. The latter is often used as a defense when the value of a particular contract or obligation has been diminished by an extreme event, and it's rarely been used in lease disputes.
While lawyers say such disputes are contract-specific and rely heavily on wording of the agreements and clauses, there's some concern among owners that other courts could follow suit with tenant-friendly rulings.
"Although owners/landlords will argue that this case should be limited to its facts, it is a tenant-friendly result that has created some angst in the owner/landlord community," Sullivan said.
The landlord is represented by Wayne Dennison and Joshua Dunn of Brown Rudnick LLP.
Caffè Nero is represented by Andrea Martin of Burns & Levinson LLP.
The case is UMNV 205-207 Newbury LLC v. Caffè Nero Americas Inc., case number 2084CV01493-BLS2, in the Commonwealth of Massachusetts Superior Court, Suffolk County.
--Additional reporting by Elise Hansen, Lauraann Wood and Dave Simpson. Editing by Aaron Pelc and Emily Kokoll.
Correction: An earlier version of this article incorrectly omitted Robert Ivanhoe's connection to the Mirae case. The error has been corrected.
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