protections So-called COVID clauses a new standard in real estate deals
Aim is to protect buyers, sellers and agents
Like everyone else on March 17 — the day a state of emergency was declared in Ontario — Christian Torok had no idea when the COVID-19 crisis would end. One thing the Toronto realtor did know, however, was that one of his residential sales had to close despite the turmoil.
Having purchased a new home two weeks earlier, one of Torok’s clients was eager to sell their current property. But that suddenly became much more difficult than usual, the Real Estate Homeward Brokerage salesperson recalls. Suspecting the pandemic would drag down prices, some bidders made unacceptably low offers, while other prospective buyers expressed concern about financing issues triggered by job losses. The inability to host open houses and showings didn’t help.
After a buyer was eventually found, real estate lawyers from all parties stepped in to clear the final hurdle: “COVID- proofing” the purchase- and- sale documents. “It wasn’t easy because we have never had a situation like that before,” Torok says. “The key was that we approach it carefully in order to protect everyone’s interests.”
While uncertainty still hangs over most civic interactions, these so- called COVID clauses are fast becoming the new standard in real estate deals across the city. The idea is to protect buyers, sellers and real estate agents from financial losses and liabilities arising from the virus.
These clauses can take several forms. Should the pandemic cause buyers to lose their jobs or become incapacitated, for instance, force majeure clauses are being amended to free stricken parties from liability or obligation. Others protect deals from delays if banks or the registry office temporarily close.
“We are not in a businessas- usual environment,” says Matthew Wilson, a real- estate lawyer with Siskinds LLP in London, Ont., and a member of the Ontario Bar Association’s Real Property Law section. “Sellers are scared to let people into their homes before closing. Buyers are scared that houses will be somehow contaminated. Buyers also worry that, if they can’t complete a final inspection, the house might not be in the condition it was supposed to be in on closing. Both buyers and sellers worry that someone will have COVID-19 and closing will be delayed, or the deal will fall apart.”
Because the terrain is so unfamiliar, Wilson cautions buyers and sellers to proceed with extra caution. Some “decent” examples of COVID-19 clauses have come across his desk, he says, but many are vague, imprecise and “may cause issues for buyers and sellers.”
Other lawyers back him up. In a recent bulletin, Sidney Troister and Aaron English of Toronto’s Torkin Manes LLP warned peers and clients to be “well aware that these suggested clauses may lack precision and may not in fact be what the parties to the agreements of purchase and sale actually want, or what may be in the best interests of one or more of the parties.”
One clause cited by the pair addresses the temporary closure of banks, lenders or land registry offices due to COVID-19. Should those sorts of closures get in the way of a deal being completed on time, the clause extends closing dates to two business days after services resume. If the delay exceeds a specified date following the original closing date, either party can terminate the deal. Another clause automatically extends closing for a period of 14 days should either party become incapacitated by COVID-19 or by a quarantine.
These are creaky clauses, Troister and English say. For one thing, they leave open the possibility of abuse. “A disingenuous buyer might, for example, be experiencing a delay in obtaining required funding for its purchase, and could use the proposed clause that calls for an automatic extension of the closing date as an excuse for delaying the closing,” English explains.
As of early May, neither Wilson nor English had encountered any problems or complaints arising from COVID-19 clauses. However, they both agree that fallout might not yet be apparent, given the protracted timelines of real- estate closings. In other words, time will tell.
No matter, Wilson says, “buyers and sellers shouldn’t just copy and paste clauses they’ve come across” into their agreements. “COVID-19 clauses need to have certainty for both buyer and seller, and also need to be reasonable.” And if there’s one thing the pandemic hasn’t changed, he says, it is that “closing a real- estate transaction is a legal process.” So his best — if most obvious — piece of advice is, “Have a lawyer review before signing.”