With the upheaval created by the COVID-19 pandemic, the topic de jour in real estate, as well as in many other contracts, is the force majeure clause. Most real estate contract forms have some type of force majeure clause, but a global pandemic is rarely, if ever, listed as one of the illustrative events giving rise to a force majeure. Both the Commercial Brokers Association (CBA), on the commercial/industrial side, and many state and local multiple listing services, on the residential side, have developed new forms to address COVID-19 as a force majeure event.
The CBA addendum has three principle provisions:
- Defines “force majeure” to include “epidemics;”
- Extends all of the time periods for contingencies and conditions for up to 10 days; and
- Automatically extends closing for up to 10 days.
The possession date under the addendum would be either the extended closing date or some other date agreed upon by the parties.
The definition of “force majeure” and the extensions each provide that neither party can be at fault and that their timely performance is prevented by a force majeure event.
Note the CBA’s use of the word “epidemic” in the illustrative events giving rise to a force majeure. Unlike many of the residential force majeure addenda, the CBA’s is not limited to COVID-19, but to any epidemic. And, as we’re all learning, an epidemic is a localized outbreak of a disease, while a pandemic is an epidemic on a widespread, universal basis. Thus, under the CBA addendum, a declared pandemic would trigger the force majeure clause. In the absence of a declared pandemic, an epidemic in a location other than where the contract is to be performed would not give rise to a force majeure event. If, however, the outbreak is in the locale where the contract is to be performed, the addendum would apply.
Whether the 10-day extensions of contingencies, conditions and closing are enough to sustain a transaction in the context of a pandemic such as COVID-19 remains to be seen.
The automatic extension of closing also contains a provision that the purchase and sale agreement terminates, and earnest money is refunded to the buyer, if the sale of the property cannot be completed by the extended closing date.
Several state and regional multiple listing services also have developed addenda to residential purchase and sale agreements. Most of the addenda forms refer specifically to the outbreak of COVID-19 rather than a generic epidemic or pandemic. Some reference voluntary or mandatory closures, whether government-ordered or necessitated by a third-party service provider, such as a bank, title company, escrow agent, home inspector, appraiser or attorney.
The residential form addenda either set a 30-day period for extending deadlines, or leave the decision up to the parties. All provide for a right to cancel the transaction by either party should the COVID-19 issue continue, and for refund of earnest money to the buyer. One form, developed by the New York State Association of Realtors, has an optional provision that allows the purchaser who has removed the financing contingency to terminate the contract if the purchaser is unable to fund their loan and close due to the purchaser’s loss of income from a COVID-19 issue.
Both the commercial and residential addenda forms are voluntary. Parties are free to develop their own addenda to meet their needs. Whether a form is used or your attorney drafts one, there is no requirement to amend a purchase and sale agreement with the addenda or an equivalent to address this unique situation. For any new transactions, variations on these addenda are likely to become a standard part of the deal.