18 March, 2020
This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice.
Over the last few weeks our Residential Property Team have been involved in detailed discussions and negotiations with solicitors acting for buyers and sellers of residential property in an attempt to keep property transactions moving despite the disruption caused by the Coronavirus (COVID-19) pandemic.
The existence of the pandemic results in many potential issues which may arise including an inability to vacate on completion as the seller is in self-isolation, banking system interruptions, removal companies not wishing to enter properties or being short-staffed and requests for properties to be decontaminated where the occupants are known to have been infected or been exposed to the virus.
In commercial transactions, particularly those of an international nature, it is common to see what is known as a ‘force majeure’ clause in a contract. A force majeure clause provides that a party which is subject to the direct effects of, for example, a natural catastrophe, war or pandemic and who cannot therefore perform its part of the contract, will be relieved from doing so.
For new build residential transactions, some purchase agreements will include a ‘force majeure’ clause which will limit the liability of the developer for any loss by reason of any delay in construction caused by a force majeure incident. Many are predicting that the construction industry will be hard-hit, both in terms of supply and labour. The construction of new build properties may, therefore, be the subject of delays. Under the Consumer Code for House Builders a contract will usually incorporate a ‘longstop’ date, after which the buyer may seek to terminate the contract.
Faced with a significant delay, a buyer can either wait patiently and see what happens or seek to terminate the contract and take a refund of the deposit(s) paid. In any event, you should instruct your solicitor to talk you through your options. In particular, consideration will need to be given to the possibility of a developer going into liquidation as a result of the Coronavirus outbreak and what remedies you would have in that event.
By contrast, the vast majority of residential property transactions incorporate the Standard Conditions of Sale (Fifth) Edition, which do not include a force majeure provision. The sudden spread of the Covid-19 virus around the World is unprecedented. Understandably therefore, when the Standard Conditions of Sale (Fifth) Edition were drafted, the Law Society did not include provisions providing for the effects of a pandemic.
The contractual position is clear. The non-defaulting party can serve a notice to complete on the defaulting party. The notice will give the defaulting party 10 working days to complete. After that time has expired, the deposit can be forfeited and/or damages and other remedies sought. As the Law Society has said: ‘the contract provisions will apply unless the non-defaulting party takes a ‘good faith view’ but where there is a chain of transactions, this will not always be possible.
In the absence of a force majeure clause in a property contract, the doctrine of ‘frustration’ can apply. In essence, this provides that a contract can be discharged when an unforeseen event occurs which makes the performance of the contract impossible. Certainly Covid-19 could be seen as such an unforeseen event but the bar is high and it must be shown that the effects of Covid-19 made the performance of the contract impossible, not just more difficult.
A contract which is deemed to have been ‘frustrated’ is automatically terminated, so this course of action isn’t always suitable.
We would recommend taking a proactive but measured approach. To help guard against the risks of a residential property transaction being affected by Covid-19, we would recommend the following:
1. Speak up! – Keep your solicitor and agent in the loop as to your own situation. If you have to self-isolate and you anticipate that the period of isolation may run over the completion date, or if you become unwell, you should endeavour to let all parties know in advance. It may be that an agreement can be reached between parties to provide for this event and all parties will appreciate being forewarned.
2. Mortgage Finance – If you are obtaining mortgage finance, liaise with your bank at the earliest opportunity to see if it anticipates that there will be any delays in obtaining access to the mortgage finance and, if necessary, whether it will be prepared to increase the period of a mortgage offer.
3. Communication – Keep in close contact with any third parties that you may be relying on for your move, such as removals companies, bearing in mind that staff shortages may cause delays.
4. Consider your sale / purchase contract – Consult an expert solicitor who can consider carefully the appropriateness of incorporating a specific tightly-framed force majeure clause to ensure that you will not be held liable where you cannot complete your transaction on account of the direct effects of the pandemic. In many situations it may not be appropriate to incorporate such a clause.
5. Deep cleaning – Contact specialist cleaning companies who can arrange a deep clean and decontamination service for you. Access arrangements can be made via your agents or your solicitor can negotiate the insertion of specific provisions in your contract.
Conveyancing can often be (incorrectly) seen as straightforward and routine. Now more than ever we consider that it is essential that buyers and sellers use expert property solicitors able to protect their client’s position as best as possible.
Alternatively, please get in touch with your usual Steele Raymond Residential Property Team contact should you have any queries.