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December 31, 2021

Hotel Group Seller's COVID-19 Response Breaches 'Ordinary Course' Covenant, Excusing Buyer's Performance

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Delaware's Supreme Court held this month that a buyer's obligation to close a hotel group purchase was excused where the seller adopted what it described as "proportional changes in response to extraordinary circumstances-like the responses of other hotel owners in response to the pandemic." The case is AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, No. 71, 2021 (Del. Dec. 8, 2021).

In affirming the Delaware Chancery Court's holding that the seller violated a covenant to conduct its business "only in the ordinary course of business consistent with past practice," the Delaware Supreme Court held the covenant meant that the seller's "compliance is measured by its operational history, and not that of the industry in which it operates."

The parties entered into the sale agreement in early September 2019, with closing deferred to provide time to quiet title and arrange financing. In response to the Covid-19 pandemic, which hit in February 2020, the seller temporarily closed two properties and substantially reduced operations and headcount for others. On the April 17, 2020 closing date, the buyer notified the seller it was in default and refused to close. Although the sellers "actions might have been reasonable in response to a world-wide pandemic," the Court held, "they were inconsistent with past practice and far from ordinary," and required the buyer's approval "which could not be unreasonably withheld."

The case underscores the risk that "ordinary course" covenants may be triggered by unforeseeable circumstances and teaches the need for sellers and buyers to specifically consider the allocation of such risks.

Ballard Spahr Securities Enforcement and Corporate Governance Litigation attorneys can assist businesses in negotiating contracts to address risks and challenges stemming from such unexpected events, and, where necessary, in resolving disputes under such contracts through litigation and/or ADR.

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