Are Real Estate Contracts Binding in the Era of Coronavirus?

It’s been a few months since a worldwide pandemic took hold of this country, leaving a multitude of questions and complicated legal situations in its wake. Whether you are a real estate investor, a home seller, a Realtor, a landlord, a property manager, or a tenant, you likely have questions about the real estate contracts you’re part of right now, in the age of COVID-19.

 

 “I’ve never seen anything like this,” says Jim Goldman, a partner with the firm Miller Barondess in Los Angeles. Goldman, whose practice is focused on litigating complex commercial real estate, financing and professional liability, was referring to the new world of complicated legal issues that have arisen following the worldwide COVID-19 pandemic. He participated in this Q&A to help provide some clarity.

Q: What are the most common issues you’re seeing right now?

 

A: Right now, we’re mainly seeing a lot of landlord/tenant issues, because with rent due, often at the first of the month, that is something pressing that is happening right now. Our commercial tenants started contacting me in large numbers in mid-March, asking what kind of contractual provisions and governmental requirements might relate to mandatory business shutdowns and how they might relate to paying rent or a mortgage.

 [See also: How COVID-19 Affects Foreclosures]

Q: With so many questions from homebuyers and investors in residential real estate regarding deals in progress, are you seeing flexibility in contract deadlines to handle the delays?

 

A: True, there are a lot of delays. For instance, shelter-in-place orders have prevented property inspectors and appraisers from doing their jobs. So, buyers can’t complete their due diligence in the time allotted and lenders may not have what they need to approve financing. It puts closings at a standstill. Not to mention getting documents recorded. We are in uncharted waters right now and kind of at a standstill with extensions of contracts.

 

Q: Buyers who started the process before the outbreak and widespread stay-at-home orders have likely seen their financial situation change, or may feel like they’re now overpaying for their house. Are buyers able to get out of contracts?

 

A: Even though we are in unprecedented times, in general you cannot just walk away from a contract because your situation has changed – even if it was because of an event beyond your control. Unless some sort of provision was written in the contract allowing a cancellation for this type of unforeseen event, you may still be legally obligated – for now. It’s hard to say what will be allowed when this is over, because no one knows how long this pandemic will last, or how any new laws and ordinances will affect everyone’s rights. And since we’ve never had what is close to a nationwide shutdown of the economy, there is no legal precedent for this situation.

 

Q: Does a global or national pandemic not fall under a “Force Majeure” provision for forces beyond your control?

 

A: It depends. Many “Force Majeure” provisions are merely designed to protect one or both parties from being liable for damages as a result of not being able to perform. But there are other legal theories that one party or the other might be able to rely on in not performing or delaying performance.

 

For instance, say the Coronavirus has prevented a builder from receiving shipping materials on time from China, so he or she won’t be able to finish the project on time. The builder might not be entitled to scrap the project, but they might be entitled to extend the time it takes to complete it. 

 

Q: How did the H1N1 Swine Flu epidemic from 10 years ago change contracts and provisions and does that affect this situation?

 

A: Some leasing contracts and insurance policies were re-written with provisions that prevent liability due to pandemics. But the economic fallout from that crisis wasn’t nearly as severe as what we have now, so such provisions don’t necessarily cover the current situation.

 

Q: So what can current homebuyers and investors do to protect themselves? Is now a good time to buy while prices and interest rates are low?

 

A: Honestly, right now I wouldn’t advise buying!  If you absolutely want to put yourself out there, I would say you have to write in good loan contingencies if you need financing, and as long of a due diligence and closing period as you can get.

 

Q: Do you think this pandemic will affect the way future contracts are written?

 

A: Yes. Anyone preparing a contract is going to have to consider the circumstances we have now and who bears the risk. I suspect insurance policies will also be revised to make it clear what is covered or not covered related to a similar outbreak. There’s probably a way for a Rider to cover it, but it’s got to be addressed. Leases and purchase agreements may also include provisions to address pandemic-related issues.

 

Q: Are you seeing a lot of lawsuits filed over these contractual issues?

 

A: Not yet. They will no doubt come, but there’s now there’s too much uncertainty. Also, the courthouses are generally closed except for true emergencies. The only filings we’re doing are for existing cases. For right now we have to see how this all plays out. It’s pretty much wait and see.

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