Material Adverse Change – coming to a property contract near you soon?

Material Adverse Change (MAC) provisions are sometimes included in sale/purchase contracts to protect the buyer against something unexpected happening which so badly affects the viability of a deal that the parties agree that it can be terminated. Corona virus, anyone?

In this deal, a buyer of sites near three airports managed to include such a MAC clause in their contract – not because they were necessarily concerned about Covid-19 specifically, but really because Thomas Cook going bust last year showed that the properties’ viability as a business was materially dependent on aircraft continuing to fly in and out of the nearby airports (and the airlines staying in business). With the skies being so quiet at the moment, is it any wonder that the buyer invoked their MAC protection, succeeding in avoiding spending £510M on assets which right now might not seem to be worth the sum agreed in early March 2020?

Whilst they are sometimes used in share purchase agreements, MAC clauses are not usually found in property asset purchase agreements, or other property documents, such as leases – but will our unusual times trigger an increase in their popularity?

It is worth noting that MAC provisions are complicated and involve even more ‘what if’ thinking than normal on a legal agreement, and are bespoke for every deal. As such, more time needs to be spent on drafting and negotiating the terms (and more lawyers’ time usually means increased legal fees). If you exchange a contract which has MAC wording, it may then be that the seller disagrees with the buyer as to whether circumstances justify termination, so you could easily get into litigation, so there is potential for more expense.

There are economic reasons why we would all like deals to get going again, but with all the uncertainty of our Covid-19 world, will deal-makers still prefer to wait for things to resume some form of normality before exchanging contracts (who knows how long that will be?), rather than spending more cash on a contract with MAC wording, which provides so much uncertainty and scope for argument?

If you would like to discuss what might be involved in including MAC clauses in your sale documentation, please get in touch.