If you’re in the process of buying a home but have lost income due to COVID-19, don’t assume that you’ll be able to get out of your signed purchase contract, a leading real estate lawyer has warned.
Home buyers who have paid their deposit and signed a purchase contract, who may now want to get out of the purchase since the pandemic hit, do not have a standard “Force majeure” or “Act of God” clause that will let them walk away, said Richard Bell of Bell Alliance in Vancouver. Such a clause would need to have been specifically written into the purchase contract to be applicable, which is unlikely, he said.
What’s more, if the buyer walks away from a purchase contract, even if they have lost their job and can no longer afford the home, they could be liable for much more than simply losing their deposit.
“If a buyer loses their job – well, that could happen any time,” Bell told Glacier Media Real Estate March 30. “If they can’t complete the deal, they become liable for at least the deposit. But there could be a further, knock-on liability, if the seller then resells for less than the original amount. The buyer who caused the original deal to collapse could also be liable for the difference.”
Bell added, “Then the question becomes, if the collapse of the original deal causes a series of deals in a chain to collapse, how remote is the original buyer’s liability? How many links in that chain is the buyer liable for? That’s when you get into a legal battle.”
A purchase contract can, however, be rendered void under the doctrine of “frustration” whereby the deal can’t go ahead and collapses under extraordinary circumstances, through no fault of either party. However, this requires the explicit agreement of both parties to the contract, explained Bell.
For example, a buyer may not want to go ahead with a home purchase due to lost income, and the vendor may equally not want to sell anymore because they can no longer afford to upsize, also due to lost income. Under such circumstances, the buyer and seller can come to an agreement whereby the contract is cancelled and the buyer’s deposit returned.
Cold feet a symptom of COVID-19
Vancouver realtor Kevin Skipworth of Dexter Realty is seeing a lot of nervousness among buyers who have signed purchase contracts. He told Glacier Media Real Estate March 31 that he had one buyer with cold feet because of the COVID-19 pandemic and associated concerns about the economy, but after discussion with their conveyancing lawyers, the deal finally went ahead.
“There’s really nothing in the contract that allows for a buyer to walk away from a transaction because of the virus pandemic, but that doesn’t stop anybody from trying. For us as realtors, it’s not our place to try to negotiate out of a contract, that’s where legal advice is the first place to go.
He agrees with Bell that there can be much pricier ramifications than merely a lost deposit. “Everybody seems to think you can walk away and just lose your deposit and that will be fine, but that’s not the case. Sellers can go after you for damages, and more.”
Bell said he is seeing some collapsed home purchases at his law firm, but this is not currently his key concern in terms of real estate conveyancing. He pointed to rules of social distancing and quarantining making it virtually impossible to comply with legal requirements that home buyers and mortgage consumers be present in person to sign contracts, along with their government ID.
“It’s a major roadblock to closing home purchases right now,” said Bell. “Different lenders require different things. But some are literally requiring that we go round to quarantined clients’ homes and have them show their ID to us through the window. It’s ridiculous. Hopefully it will change before long, so we can do it by video. We’re trying to get this up the chain of command.”
‘Force majeure’ in construction
One sector that may have some luck in claiming “force majeure” when failing to complete a contract due to COVID-19 is the construction industry, where sites have had to close due to the outbreak – depending on such a clause being in the contract.
Whether or not a judge under Canadian common law would grant “force majeure” varies greatly from case to case, said Sahil Shoor, a Waterloo, Ontario-based civil litigator for Gowling WLG, in a legal bulletin to the construction sector on March 20.
That is because while some contracts include “force majeure” clauses that clearly states diseases, plagues, epidemics or quarantine restrictions as applicable conditions (beyond the typical “acts of God” events such as natural disasters, fires, floods and wars), other make no such distinctions. Some other contracts yet, Shoor said, may not have a “force majeure” clause at all, further complicating the issue in court.
“In order to successfully rely on a force majeure clause, the relying party [contractor] has the burden of establishing Force Majeure Event and proving that the Force Majeure Event has effectively prevented the party from fulfilling its obligations under the construction contract,” Shoor said in the bulletin, adding the court will assess the merits of the case based on whether the COVIC-19 outbreak qualifies as a force majeure, whether the risk of not being able to complete the contract was “foreseeable and able to be mitigated,” as well was whether it was really impossible to complete the contract.
In cases where there is no clear description of an epidemic or disease as force majeure, a judge will often hinge decisions on the availability of an “alternative method of performance” – even if the alternative is significantly more expensive for the contractor applying for relief.
“As an example, are the party’s employees ill due to the virus and unable to work, or simply afraid to work and choosing not to attend?” Shoor said, adding that cases without a force majeure clause will follow similar lines of legal logic under the doctrine of frustration.
– With files from Business in Vancouver
Glacier Media Real Estate