COVID-19 and Real Estate Contracts

Question: When the COVID-19 virus hit, I was preparing to close on a multi -family investment property. Now the value of the property has plummeted and I am not so sure that I want to close on the property. Does this "black swan" event give me an excuse from closing on the purchase agreement? Am I legally liable to close? 

David's Answer:   The COVID-19 Pandemic has severely impacted the real estate business, making it difficult for both buyers and sellers to complete the respective terms of their Purchase Agreements. In residential and commercial real estate transactions, some buyers, approved for mortgage financing before the crisis, have unfortunately lost their jobs or business. They no longer qualify for their loan. Many sellers are dependent on their buyer to close so that they can purchase their next home or refinance their existing commercial property.

In contracts, a Force Majeure ("Superior Force") provision is a clause that removes a party's liability on a contract when there is a natural and unavoidable catastrophe that interrupts the expected course of events. These unforeseen events restrict a participant from fulfilling their contractual obligations.  

Courts will excuse performance on a contract under the theory of Force Majeure when:

(1) the risk of nonperformance was unforeseeable;

(2) performance is truly impossible; and

(3) there is a Force Majeure clause contained in the contract.  

It is not yet legally settled if the COVID-19 crisis is an event that was was either unforeseeable or if the crisis makes it impossible to perform on an obligation. Even in a crisis, having a Force Majeure provision in your contract does not automatically excuse one's contractual obligation. If parties to a contract dispute whether Force Majeure applies,courts will question whether or not there are other ways for the parties to fulfill their obligations in light of the unexpected disaster. Courts will want to determine whether or not the event is temporary and whether or not the event is truly unforeseeable. They'll also look to see if significant damages have been incurred by the party invoking the clause.  

When it comes to financing the purchase of a property, courts will look to see if the commitment to lend is dependent upon collateral value alone or if the loan commitment is conditioned on income.  In the current crisis, millions of people are no longer working and therefore, they can no longer qualify for the loan. But is a change in income a temporary situation or permanent.

There are other ways to move forward on a closing even in the current business climate. you could try to renegotiate a new purchase price instead of cancelling the contract. Moreover,  consider forfeiting the earnest money deposit instead of closing on the purchase agreement. 

As you can see, even in the most difficult times, it is not entirely clear as to whether or not you can back out of your contract because of the COVID-19 virus. Each case has to be looked at on it's own merits. It is best to consult with your legal adviser before taking any action or inaction.

I hope this helps you better understand Force Majeure during these challenging times. 

Dedicated to your success.

David Soble

About the Author: Since 1990, attorney David Soble has represented banks, lenders, loan servicers, consumers and business owners in all types of real estate, finance and contract matters. For 30 years, David has been involved in thousands of real estate and financial transactions and has successfully negotiated and saved millions for his business and individual clients.

Disclaimer: You should not rely or act upon the contents of this article without seeking advice from your own, qualified attorney.