Real Estate Transactions and COVID: Challenges to Closing

We’ve now passed the first month end since the world was turned upside down by the novel coronavirus (COVID-19) and for many involved in the real estate market it was a bad April Fool’s joke.

April 1^st came too quickly for many people who are still trying to determine what the impact of the market upset, brought on by the global pandemic, will mean to their businesses, livelihood and future plans.  However, those looking at ongoing real estate closings are well advised to be pro-active in considering what implications the current situation may have, as some parties may be struggling (or unwilling) to complete for a variety of reasons.

Below, we consider some of the novel issues confronting vendors and purchasers in this brave new world.

Vacant Possession Conditions:

• Many, if not the vast majority, of residential properties are conveyed on the condition that the vendor will provide vacant possession of the property as of the possession date, for the purchaser’s own occupation.  S. 49(5) of the Residential Tenancy Act  allows for landlords to give notice to tenants to terminate a tenancy in these situations.  This right has now been suspended by Ministerial Order M089, pronounced on March 30, 2020.  Therefore, landlords are no longer permitted to terminate tenancies to provide vacant possession to the new owners.
• Parties entering into purchase and sale agreements after March 30, 2020, must make accommodation for the possibility that a vendor may not be able to provide vacant possession as they will not be able to apply for and obtain an Order of Possession prior to the date of possession without tenant consent.  If a contract provides for vacant possession that can longer be provided the purchaser should seek legal advice immediately.  There may be remedies available in the law that could assist.
• Vendors who have previously entered into a purchase and sale agreement that requires vacant possession should carefully review the conditions of their agreement and begin communicating with the purchaser that vacant possession may not be a possibility in the current circumstances.  The possibility that this may constitute grounds for the purchaser to seize the chance not to complete should be considered and legal advice obtained.

Contract Frustration and “Force Majeure;”

• Many purchasers’ economic conditions may have drastically changed and they may be looking at closings from a different perspective come the end of the month.  Few, if any,  deals made prior to mid-March will have contemplated in their contract the current change in circumstances.
• Each situation has to be evaluated separately looking into the wording in each contract and the various facts of that situation.  Having said that, generally, contracts of purchase and sale are still fully enforceable and purchasers who do not close are risking both their deposit and normal contractual damages including being liable to the vendor for any damages they may incur such as the potential carrying costs and loss in resale value the purchaser suffers in a falling market.  Also, purchasers should also be alive to the “chain” of deals which may be prevented from closing by their withdrawal from their specific deal and should seek legal advice on the remoteness of their potential exposure.
• Mere changes in economic conditions are unlikely to be enough in themselves to base a finding that the contract is “frustrated”.  The doctrine of frustration, when it applies, relieves one or both parties from performance under a contract.  Additionally, unless a contract has a “force majeure” clause that specifically refers to a pandemic or similar situation a force majeure clause is unlikely to justify refusal to complete.

Statements of Adjustments:

• At closing, the parties to a real estate transaction will prepare one or more statements of adjustments to confirm balances owing on adjustable expenses related to the property, including taxes, utilities, rent, deposits paid and commissions payable.  In the normal course, these statements are a simple calculation for the allocation of annual and monthly expenses between purchaser and vendor, prepared in accordance with normally accepted practise standards.
• The new policies being announced by the provincial and local governments with regard to tax deferrals, utility credits, and the very real potential that tenants’ ability to pay rent may be in question, whether presently or in the future, may impact statements of adjustments.  It is important to review these statements carefully in light of the facts known to both parties at the time of closing and the deferrals, credits, and income anticipated, many of which may be very different from the pre-COVID norms.

Going forward:

The above are just a few of the new issues confronting practitioners and participants in the real estate industry. They are far from the only ones. Even on the most basic level, new rules around social distancing and mandatory quarantines will need to be navigated to comply with verification requirements for execution of contracts.  Guidelines and temporary solutions have been approved by regulatory bodies to ensure that transactions can continue to be completed and registered.  Forethought, a steady hand and a willingness to seek out and apply novel solutions, bringing purchasers and vendors together will be necessary to navigate these new circumstances.

For assistance with property and lending transactions, contact Mark S. Thompson and Dalene Visser. For assistance with a dispute over a closing, contact Claire Immega and Matthew Milne.

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