What Does a “Force Majeure” Clause Mean for Home Buyers and Sellers?
Closing on a home, whether you’re selling or buying, is usually a smooth and timely process. However, there are unexpected events that may delay the transaction. On rare occasions, extreme weather, accidents, acts of terrorism or war, and most recently, a pandemic, can create a scenario that prevents your deal from being finalized.
In these situations, a contractual clause known as a force majeure (“strong force” in French) can be invoked to protect the home buyer or seller.
A force majeure clause is a contractual provision that relieves one or both of the parties of their performance obligations if circumstances beyond their control arise. Most often in residential real estate transactions, this clause is invoked to delay – not cancel – the closing process. However, COVID-19’s far-reaching economic impact has raised questions about the extent to which this clause can be used to protect homebuyers and sellers.
Extreme weather and other natural disasters are among the most commonly enforced force majeure events. A hurricane, earthquake, tornado, or similar catastrophe can delay your financing and closing process in a variety of ways.
- Financing: If you miss your closing date, sometimes even by a day, your lock on your mortgage rate may expire. If this happens, you may find yourself dealing with a higher rate and, consequently, a higher and potentially unaffordable monthly mortgage payment.
- Insurance: It’s not uncommon for insurance companies to put a hold on releasing new policies during a major storm or natural disaster. “With a hurricane approaching, for example, insurance companies may stop taking new applications or issuing and binding new policies,” says Alison Hecht-Catanese, a REALTOR® with Coldwell Banker in Greenwich. Most lenders require homeowner’s insurance. So, if you can’t get a policy, you may not be able to close on your home.
- Appraisal: A lengthy closing delay may prompt your lender to request a new appraisal.
- Documentation: A fire or storm may result in the loss of physical documents like your deed. Your closing may be delayed while replacement documents are obtained or prepared.
- Move-In: If the home involved in the transaction is damaged considerably due to a natural disaster, storm, or fire the buyer’s move-in date may need to be altered so that the repairs can be completed.
Invoking the force majeure clause due to COVID-19 is less straightforward than invoking it because of a natural disaster, storm, fire, or act of terrorism or war. REALTOR® Magazine reports “The doctrine may be invoked by tenants (primarily commercial) who are having difficulty coming up with rent, landlords who could not perform a service during the force majeure event, or contractors or vendors to justify project delays.”
It is conceivable that force majeure can be invoked by a home buyer who has lost their job due to COVID-19, accrued extensive medical bills because of the pandemic, or experienced delays in their closing process due to government shutdown orders.
Due to backups in the court system, there’s still no definitive answer as to how courts are ruling on these cases. Additionally, the rulings for these cases vary by state. The JD Supra article Tour de Force: Evolving Force Majeure Considerations One Year into the Pandemic notes, “Regardless of whether a party is seeking to invoke, or defend against invocation of, a force majeure clause, the answers to those questions will vary across jurisdictions and will require a careful analysis of the governing contract language, causation, and adherence to notice requirements.”
Historically, courts have interpreted force majeure provisions very narrowly. This means they have supported force majeure claims which are tied to events specifically named within the contract. Proving COVID-19 as an enforceable force majeure event may be more challenging and the outcome will vary by individual case and by state.
A force majeure clause, which is included in most real estate contracts, can protect home sellers and buyers if the closing needs to be delayed or canceled due to a covered event.
For homebuyers, force majeure releases you of your obligation to purchase a home if the current homeowner cannot afford to make repairs on the property that’s sustained extensive damage from a recent storm.
On the flip side, force majeure protects home sellers as well. If the home being sold is damaged beyond repair and requires a rebuild, but the municipality determines it’s unsafe to build on that location, typically it would be determined that the seller can’t complete the contract and they would be excused from having to rebuild and sell.
In the unlikely event that an “act of God” delays or cancels your home purchase or sale, your real estate contract should contain the necessary protections to keep the process moving along or, when necessary, release you of your obligations. Your REALTOR® can help you find and understand the force majeure clause in your contract so you can buy or sell your home confidently.