The spread of the Coronavirus COVID-19 has created uncertainty in our everyday lives. One area of uncertainty that may not immediately come to mind is the purchase and sale of real property in California. People who are presently under contract to purchase or sell real property consider how the virus may impact their pending transactions. People who are contemplating a purchase or sale of real property must decide whether to pursue such a transaction now or wait until the uncertainty subsides.
A party to a pending contract who wants to cancel the transaction over COVID-19 concerns must identify either a contractual provision or law that excuses performance. The RPA-CA does not contain a term that expressly relates to illnesses or fear of illnesses of the buyer or seller. The RPA-CA does not contain a Force Majeure clause either.
A buyer or seller under contract using the RPA-CA must exercise some existing contingency contained therein to cancel without breaching the agreement. If a buyer’s loan commitment is affected by the influence of COVID-19 on the financial markets, then a buyer could exercise the loan contingency to cancel a transaction. This could occur either through the buyer’s financial health being impacted by a downturn in the stock market, or the availability of money in the mortgage market. Therefore, buyers will want to keep the loan contingency in place up to close of escrow. Agents representing buyers should review all pending contracts and alert the buyer if the loan contingency expires prior to close of escrow so that the buyer can either seek an addendum extending that contingency or make a decision to cancel if the seller submits a notice to perform.
The legal principle of “Force Majeure” (where an “act of God” excuses performance due under a contract) may apply to the COVID-19 outbreak. While the RPA-CA also does not contain a Force Majeure clause the concept may be available under California Civil Code Section 1511. That Section provides:
- The want of performance of an obligation, or of an offer of performance, in whole or in part, or any delay therein, is excused by the following causes, to the extent to which they operate:
- When it is prevented or delayed by an irresistible, superhuman cause, or by the act of public enemies of this state or of the United States, unless the parties have expressly agreed to the contrary;
The first consideration is whether COVID-19 is an irresistible or superhuman cause. In natural disasters like hurricanes or earthquakes, that question is more easily answered. Because there is no cure or vaccine currently available, it seems that the better argument is that COVID-19 is an irresistible or superhuman cause at this time.
The second consideration is whether COVID-19 makes the performance of a contractual obligation truly impossible. Nonperformance of a contract is not excused under Force Majeure if a contract may still be performed even though not in the manner contemplated at the time the contract was entered into. A party to a contract is not released from the obligations in that contract by the mere fact that performance is made more difficult or burdensome by the Force Majeure event.
For buyers and sellers contemplating a real property transaction, the practical realities of that process must be considered. The seller’s home will be opened to broker caravans and prospective purchasers with no effective way of screening for COVID-19. Potential buyers will have to enter a home not knowing if the seller or the seller’s recent guests are infected. These considerations most often will apply equally to buyers and sellers as a buyer typically sells his or her existing home in order to purchase a new one and a seller will purchase a new home upon the close of escrow on his or her existing home.
If a buyer and seller make it over these hurdles, it may be prudent to include a term addressing COVID-19 as a Force Majeure event. Parties to a contract are free to excuse, or partially excuse, one another from performing contractual obligations in certain specified circumstances. The specified circumstances can be anything the parties agree to.
The parties will need to decide if they want to agree to a cancellation of a purchase agreement or just a continuance of the anticipated close of escrow date until such time as performance is feasible. The term to be added to the contract will be very different depending on what the parties agree to.
As an example, if the parties want to be able to completely cancel a purchase agreement over COVID-19 concerns, they might want to consider language similar to this:
Neither party shall be liable in damages and shall have the right to terminate this Agreement for any delay or default in performing hereunder if such delay or default is caused by conditions beyond its control including, but not limited to Acts of God, Government restrictions, infection by COVID-19 or the impact of COVID-19 in any way upon the performance of this Agreement and/or any other cause beyond the reasonable control of the party whose performance is affected. This provision shall remain in place until close of escrow and survives the removal of contingencies by either party.
As a further example, if the parties want to extend a transaction that is affected by COVID-19, for a reasonable time but not allow for immediate cancellation, they may want to consider language similar to this:
The parties agree and acknowledge that, in the event either of them become infected by COVID-19, subject to Government restrictions relating to COVID-19 or cannot reasonably perform an obligation contained within this Agreement because of COVID-19, the close of escrow or another date for performance contained within this Agreement shall be automatically extended at the request of either party for a period of ten (10) business days. If, after the first extension of ten (10) business days, the condition or event that necessitated the initial extension has not ended or otherwise resolved or a subsequent similar condition or event has occurred, the parties agree that close of escrow or another date for performance contained within this Agreement shall be extended in successive ten (10) business day periods until such condition that necessitated the initial extension has resolved for a maximum of six (6) total extensions totaling sixty (60) days. If, at the end of the sixth ten (10) business day extension, escrow has not closed either party may terminate the Agreement, and Buyer’s deposit shall be returned to the Buyer within five (5) days of termination notice with each party bearing its own costs incurred to date and sharing equally in the payment of any costs not yet paid.
These suggested provisions are meant only to be illustrative of what a buyer and seller may want to consider and are not intended to be used in a purchase agreement without the buyer and seller having each consulted with an attorney to evaluate whether these examples are appropriate for the particular buyer and seller in the specific transaction contemplated. Real estate brokers and agents should limit their advice to buyer(s) and seller(s) to alerting them to these issues and encouraging buyers and sellers to seek legal advice from an attorney.
Additionally, California Association of Realtors recently published a Corona Virus Addendum/Amendment Form CVA. That form contains both continuation and cancellation language.
If you have any questions as to which provision and/or form fits your transaction best or have a pending escrow impacted by COVID-19, call Mark Carlson at 818-996-7800.
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