Not surprisingly, over the last couple of weeks we have received a number of telephone calls and emails from clients and realtors concerned with the impact of COVID-19 on their real estate transactions. For some, the issue has been the inability to come into the office to sign documents because of quarantine or self–isolation requirements. For others, they do not wish to leave their home for fear of contracting the virus. Currently in BC, the option for clients to sign remotely is very restricted in all but very limited circumstances. We are not permitted to virtually commission documents. This may change in the coming weeks if further government restrictions are imposed, but at present an “in person meeting” with the lawyer or notary is still required in the majority of cases to complete the purchase or sale of property. We are also hearing of an increasing number of people who have been laid off from their job and face the prospect of not being able to complete their purchase as they can no longer obtain financing.
So what is the legal position if a client is unable to complete their purchase or sale because of COVID-19 or because of loss of employment and financing? The standard BC Real Estate Board contract does not contain a term covering pandemics or an economic downturn so the usual contractual provisions will generally apply. This may result in a fundamental breach of the contract if either a buyer or seller do not complete their deal. A detailed review of the remedies for breach of contract is beyond the scope of this article, but usually if a buyer fails to purchase the property he/she will lose his/her deposit and may also face a claim from the seller for any reduction in price the seller may subsequently experience as a result of a drop in the market. Where a seller is not able to complete he/she will likely have to return the deposit to the Buyer and may also have to pay damages to the Buyer for wasted moving costs, financing costs or the cost of alternative accommodation.
For those people already locked into a firm and binding contract they should contact their lawyer, mortgage broker and realtor as early as possible to discuss their options if they are concerned they may not be able to complete their sale and/or purchase. One would hope in these challenging times that parties will be flexible and an agreement can be reached to extend the closing or possession date, or in some cases, perhaps even rescind the contract.
The contract should also be reviewed to see if it contains any terms that might allow a party to get out of the deal. Some contracts contain what is know as a “force majeure” clause, otherwise known as an “Act of God” clause, which may allow the parties to be released from their contractual obligations and responsibilities in the event of serious unforeseen circumstances. Depending on the language used, such a clause could potentially apply to COVID-19. The vast majority of property transactions in BC use the standard BC Real Estate Board contract which does not contain a “force majeure” clause. Some Developer pre-sale contracts do contain a “force majeure” clause, however, this clause is generally in favour of the Developer only.
As a last resort, a party may argue that the contract has been frustrated, which, if successful, would mean that both parties are discharged from further performance of their obligations under the agreement. In simple terms, frustration occurs when an event, through no fault of either party, creates a new circumstance that has the effect of making the contract impossible to fulfill. However, the threshold required for frustration is a very high one and you will need to demonstrate that the original reason for entering into the transaction has been completely destroyed by the subsequent event. Existing case law suggests that claiming a contract had been frustrated because of something like COVID-19 is unlikely to be successful although some commentators think that in certain circumstances it might apply.
For those people considering entering into a real estate contract during these uncertain times the best advice may simply be to delay entering into a deal until the “curve has been flattened” and we are back to some sort of normality. Undoubtedly, some individuals will not have the luxury of riding out the storm and will need to sell. For those people, they should check that their moving company is willing and able to attend the property which will allow them to move. Sellers with tenants living in the property should also carefully review the new provincial mandate regarding issuing eviction notices if that is a term of the agreement with the buyer.
Other people will no doubt see these times as an opportunity to pick up a bargain. For those undaunted buyers it is prudent to negotiate a term in the contract which will allow an extension of the closing date and/or the option to rescind the contract in the event of a COVID-19 related issue arising. Negotiating a longer closing date may be another potential safeguard. From a sellers perspective, you should be wary of any clause allowing a buyer to extend the closing date indefinitely or rescind the contract for a COVID-19 issue. Unless the clause has been well drafted problems in enforcing it may arise allowing some parties to use it as a way to get out of their contractual obligations if they simply no longer wish to proceed.
If you have concerns in relation to an upcoming real estate transaction or are perhaps considering entering into a contract we encourage you to contact us for advice and to discuss your options.