Real Estate Contracts During the Coronavirus
The Covid-19 health crisis has
changed everything for the foreseeable future. How we socialize. How we do
business. How we interact with our family. And even how we purchase real
estate. While I am confident that we
will all get through this together and come out stronger, we can still
carefully conduct business and do real estate deals while we social distance
and quarantine. However, there are critical contract provisions that must be
included in real estate contracts during this crisis to account for delays and
contract performance hindered by the crisis. This clause is called force
majeure clause (also known now as a Coronavirus clause) which accounts for what
happens to the parties’ contractual obligations in the event of unforeseen
events such as strike, war, or a pandemic such as the Coronavirus.
What is a force Majeure Clause
/ Coronavirus Clause?
A force majeure / Coronavirus
clause addresses the parties’ obligations in the event that events such as
strike, war, or a pandemic such as the Coronavirus interfere with a contract. Sometimes,
force majeure clauses do not include pandemics so it is essential to make sure
that the clause specifically calls out the Coronavirus pandemic. A comprehensive
Coronavirus clause will provide that the parties’ obligations to each other are
reasonably delayed / postponed if the Coronavirus interferes with their
obligations, and such obligations may be completely discharged if the parties
are not able to close the deal due to the outbreak.
How can the Coronavirus Interfere
with Real Estate Deals?
The Coronavirus can interfere
with a real estate deals in various ways. A common and reoccurring problem is
that the title searches and due diligence are delayed due to town hall closures
or reduced hours. Accordingly, a title search, municipal search, or zoning due
diligence could take significantly longer. It is a good idea to determine
whether the town hall of the subject property is closed, has reduced hours, or
whatever the case may be, so the parties can plan an appropriate closing date.
Moreover, if environmental
testing is required for the deal, such could also be delayed due to the virus. Many
companies have reduced staff and are working from home. Similarly, surveys
could take longer to complete if required on a particular deal.
The Coronavirus is also causing
banks to change their loan packages or even to withdraw certain loans
altogether. Accordingly, mortgages may take longer to be approved and processed
due to the virus.
These are just some of the ways
that the virus is impacting real estate deals. Of course, coordinating the
closing can be challenging as many law firms are closed and are doing their
best to close through the mail, or using very limited office hours.
Do Coronavirus Clauses Protect
Buyers, Sellers, or Both?
The Coronavirus clause protects
both buyers and sellers, but they primarily protect buyers. Of course, sellers
may have to obtain a payoff statement for existing mortgages, resolve title
issues, or do repairs, all which could be impacted by the Coronavirus. However,
the buyer is typically the party that has much more to do before closing,
including inspections, due diligence on public records, obtain a mortgage, and
so forth. Moreover, the buyer has a deposit to lose while the seller is not
putting up earnest money. Accordingly, the Coronavirus clause protects both
parties but primarily the buyer.
Are All Coronavirus Clauses
Not all Coronavirus clauses are
the same and depending whether you are the buyer or seller, you will have slightly
different objectives using a Coronavirus clause. As a buyer, you want very
broad protection, which includes delaying dates and allowing the termination of
the contract if the Coronavirus significantly interferes with the closing. A seller
should also want to include the Coronavirus clause, but only to allow the reasonable
delay of dates; not termination, so the buyer is locked into the deal. Accordingly,
buyers and sellers have slightly different objectives when including such a
clause, which is why it is important to retain a good lawyer to negotiate your
interests in transactions during the Coronavirus pandemic.
Do I need a Separate Provision
for the Inspection and Mortgage Contingency Clauses to Address Delays Caused by
A good Coronavirus provision will
account for delays of the mortgage, inspection, due diligence, and any other
contract dates, so typically you will not need a separate provision in the
mortgage or inspection contingency clauses.
Should I use a Coronavirus
Clause in Other Contracts Such as Leases, Management Agreements, etc.?
Yes. Force Majeure / Coronavirus
clauses are not unique to real estate contracts and are important in other types
of contracts. They may and should be used in any contract, including leases,
management agreements, vendor agreements, buyouts, etc. However, as with real
estate contracts, you may want a broader or narrower provision depending on
which side of the table you are on.
In summary, real estate deals can still occur
during the Coronavirus pandemic. However, it is important to include a
Coronavirus clause, be ready for possible delays, and be ready to close by
mail, or possibly in masks and gloves at your lawyer’s office.