COVID-19 clauses being added to real estate contracts
Real estate contracts between buyers and sellers are changing because of the Covid-19 (coronavirus) pandemic and the change may become permanent.
Since the pandemic hit in March, more agents are adding what is being dubbed a “COVID rider” to the contracts because typical force majeure clauses that are included to protect both buyers and sellers cover natural disasters, but have never included pandemics.
That is changing in the here and now.
According to the Miami Herald, REALTORS® have been contacting attorneys since the coronavirus hit to help re-write sales contracts with the inclusion of language that would allow for the cancellation of the contract due to a pandemic or a coronavirus outbreak.
That’s because many deals are in a state of flux during this crisis.
What if an appraisal or inspection can’t get done in a timely fashion? What if either the buyer or the seller gets sick with the virus?
These clauses will allow for parties to postpone a closing, or even back out of a deal without penalty, if COVID-19, or any future pandemic, were to be the cause of such actions.
Force Majeure laws in many states allow for contractual provisions for “acts of God” or other circumstances that would be deemed as completely unforeseen or not preventable.
California first enacted such a law in the 1870s. The language excused someone from holding up their end of the bargain on a contract if they were prevented or delayed by “an irresistible, superhuman cause.”
Would the California courts deem a pandemic to fall in that category? That’s uncertain. This is why REALTORS® are adding the provision to contracts now, to protect their clients – mostly the buyer.
“There might be delays – bank delays, title company delays – with everything that’s going on,” Gov Hutchinson, assistant general counsel at the California Association of REALTORS® (CAR) told Mansion Global. Hutchinson helped draft a coronavirus amendment that is now available to all of CAR’s 200,000 members.
This amendment, assuming a pandemic or coronavirus delay, automatically extends the closing date by 30 days and allows a buyer to back out of the contract without losing their deposit.
These new COVID riders protect the buyer by affording them the time necessary to finalize their lending, as well as myriad other boxes that need to be checked before buying a house, like completing an inspection.
During a pandemic, agents are learning that inspections are taking a lot longer because of the social distancing practices that need to be followed and the potential does exist that some banks, in a rapidly damaged economy, could choose to stop lending practices until the pandemic passes and/or the economy stabilizes.
While sellers might not be too keen on these clauses, it could potentially benefit them as well. If government mandates require the shut down of the county recorder’s office, the new COVID rider would simply push of the closing from their end of the transaction.
While the greater benefit is certainly to the buyer, it does add an extra layer of protection for everyone involved.
Consider in places like New York City, where many multifamily residences have put in rules that prevent anyone from either moving in or moving out during the state-imposed quarantine as an effort to limit the spread of the virus.
While that’s smart from a public health perspective, it does offer a real dilemma for someone who is buying a home they can’t access at all.
“You don’t want to be in a position where you have to pay the carrying costs on a new home, but you can’t move in until this is all sorted,” Ilyse Dolgenas, special counsel to the real estate team at Withers Worldwide told Mansion Global.
This is especially so in a city like New York, where monthly building fees can amount to tens of thousands of dollars in the affluent section of the city.
However, because there is no timetable on a pandemic, deadlines are likely going to be added as part of all contracts as well so that the COVID rider can not remain open-ended and stall a transaction from being completed.
The language in Dolgenas’ clause pushes the closing on a transaction to within a certain agreed upon number of days after the pandemic is no longer deemed a public emergency.
Nonetheless, according to Miltiadis Kastanis, the director of luxury sales for Douglas Elliman in the Miami area, this type of language in real estate contracts might be new, but it’s not just a passing fad in the age of COVID-19.
“The addition of the word ‘pandemic’ as a force majeure is here to stay,” Kastanis told the Miami Herald. “It has shown to impact our market strong enough.”
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