Delaware Supreme Court Rules Buyer Can Walk Away From $5.8 Billion Hotel Deal Based on Seller's COVID Response | Practical Law

Delaware Supreme Court Rules Buyer Can Walk Away From $5.8 Billion Hotel Deal Based on Seller's COVID Response | Practical Law

The Delaware Supreme Court recently held that the buyer in a planned sale of 15 luxury hotels was entitled to walk away from the transaction based on the seller's drastic changes to its business in response to the COVID-19 pandemic, including hotel closures and massive layoffs. The court held that the ordinary course covenant in the parties' purchase and sale agreement did not permit the seller to take such actions without seeking the buyer's consent, which the seller failed to do.

Delaware Supreme Court Rules Buyer Can Walk Away From $5.8 Billion Hotel Deal Based on Seller's COVID Response

by Practical Law Real Estate
Law stated as of 15 Dec 2021 • Delaware
The Delaware Supreme Court recently held that the buyer in a planned sale of 15 luxury hotels was entitled to walk away from the transaction based on the seller's drastic changes to its business in response to the COVID-19 pandemic, including hotel closures and massive layoffs. The court held that the ordinary course covenant in the parties' purchase and sale agreement did not permit the seller to take such actions without seeking the buyer's consent, which the seller failed to do.
On December 8, 2021, in AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, the Delaware Supreme Court ruled that the buyer in a planned sale of 15 luxury hotels was entitled to walk away from the transaction based on the seller's drastic changes to its business in response to the COVID-19 pandemic. The court held that the ordinary course covenant in the parties' purchase and sale agreement did not permit the seller to take actions such as hotel closures and massive layoffs without seeking the buyer's consent, which the seller failed to do. ( (Del. Dec. 8, 2021).)

Background

MAPS Hotel and Resorts One LLC (MAPS) agreed to purchase fifteen hotel properties from AB Stable VIII LLC (AB Stable) for $5.8 billion. There was a delay in the closing, and while the closing was delayed, the COVID-19 pandemic took hold in the US. MAPS eventually refused to close due to multiple alleged violations of the parties' purchase and sale agreement by AB Stable, including violation of the parties' ordinary course covenant.
The ordinary course covenant provided in relevant part that "between the date of this Agreement and the Closing Date, unless the Buyer shall otherwise provide its prior written consent (which consent shall not be unreasonably withheld, conditioned or delayed), the business of the Company and its Subsidiaries shall be conducted only in the ordinary course of business consistent with past practice in all material respects."
AB Stable sued MAPS in the Delaware Court of Chancery for specific performance of the sale transaction. Among other things, the Court of Chancery held that AB Stable violated the ordinary course covenant by implementing a variety of drastic changes to the business in response to the COVID-19 pandemic, including closing hotels and laying off or furloughing thousands of employees, without first consulting with MAPS.
AB Stable appealed, arguing that despite the ordinary course covenant, it was permitted to take the actions it did because they were reasonable, industry-standard steps to take in response to a global pandemic.

Outcome

The Delaware Supreme Court affirmed the chancery court's judgment. Specifically, the court held:
  • The ordinary course covenant required AB Stable to obtain MAPS's consent before taking actions outside the ordinary course of its business between the date of the parties' purchase and sale agreement and the closing date.
  • Because AB Stable failed to obtain MAPS's consent to its actions, MAPS was permitted to walk away from the deal.
In support of its ruling, the court noted:
  • The parties could have, but did not, include qualifiers in the ordinary course covenant, such as an exception for commercially reasonable actions or actions in accordance with industry standards.
  • The parties clearly knew how to include a commercially reasonable efforts qualifier to their contractual requirements because they included them elsewhere in the agreement, making their failure to include one in the ordinary course covenant particularly conspicuous.

Practical Implications

This case should serve as a warning to sellers and purchasers to carefully review their agreements:
  • During drafting to ensure consistency across provisions, such as the use of commercially reasonable efforts or other performance qualifiers.
  • During the pendency of a purchase and sale agreement, to understand what actions may require the buyer's consent and to ensure it is obtained before acting.
For resources on buying and selling commercial real estate, see Purchasing and Selling Commercial Real Estate Toolkit and Real Estate in Asset Acquisitions Toolkit.