Author
Lisa Bevan

Lisa Bevan

Senior counsel

Read More
Author
Lisa Bevan

Lisa Bevan

Senior counsel

Read More

9 June 2020

Residential property - June 2020 – 2 of 5 Insights

Don't forget the COVID clause

  • QUICK READ

Shortly after the UK lockdown began at the end of March 2020, so-called COVID clauses in residential sale contracts began to be used routinely across the sector. Such clauses provide a mechanism for parties to exchange contracts while retaining a degree of financial protection, by ensuring that they are not in default if completion is unavoidably delayed due to a defined "COVID event." A party's right to serve a notice to complete in these circumstances is also suspended.

The housing market reopened for business on 13 May 2020, and sales and completions can now resume provided they take place in accordance with government guidance. That guidance encourages ongoing flexibility around house moves and suggests that property lawyers should continue to factor COVID-19 into all sale and purchase contracts.

We can therefore expect COVID-19 clauses in one form or another to be with us for some time to come. Lawyers will want to protect their clients' contractually against a possible second wave of infections and a further lockdown in the UK.

Frustration?

At the beginning of the lockdown, those who had already exchanged contracts to buy or sell residential property wondered if their contracts could somehow be frustrated by the crisis. However, it is widely accepted that a property sale and purchase contract will not be frustrated by an outbreak such as coronavirus.

The doctrine of frustration requires that the circumstances in which performance of the contract is called for would render the outcome radically different from that which the parties contemplated under the contract. This is not the case with a property contract during COVID-19, despite the range of practical hurdles that may be present.

If performed, the contract would deliver exactly what the parties had bargained for. So frustration has not provided the answer for buyers, or for those sellers who were unable to organise removal of their furniture or were ill and self-isolating as their completion date drew closer.

Force majeure?

Under English law, the occurrence of a force majeure event – traditionally, an earthquake, war or storm – does not generally bring a property sale contract to an end, unless the contract specifically provides for this. Force majeure clauses are not usually seen in residential sale contracts, except on sales of new build properties where they typically benefit a developer in the event of delay in the construction process (due to specified occurrences).

A force majeure event needs to be defined in the contract and it is unlikely that standard force majeure clauses could be invoked by the outbreak of COVID-19, unless the wording specifically covers a public health crisis which is highly unlikely.

How does a COVID clause work?

Broadly speaking, an industry standard clause will provide that:

  • the parties' right to serve a notice to complete will be suspended while an event related to COVID-19 prevents the other party from completing, and
  • a party will not be in breach of its obligations because of a delay caused by COVID-19, and
  • either party may terminate the contract if completion does not take place by a specified long-stop date, fixed at an agreed date beyond the contractual completion date.

To date these clauses have tended to be quite widely drafted, reflecting the widespread disruption across the property market in the early days of lockdown, and have typically included the following as examples of a "COVID event" due to which a party is unable to complete on the contractual completion date:

  • either the buyer or seller (or anyone living with them) being ill, shielding or self-quarantining
  • the government introducing recommended or mandatory measures to reduce transmission
  • disruption to post or sending money electronically
  • either buyer or seller is unable to execute documents effectively (ie if no witnesses are available)
  • the buyer cannot carry out standard pre-completion searches
  • a lender withdraws its offer to finance the purchase
  • there are delays elsewhere in a chain of transactions.

The disadvantage of such clauses is that neither buyer nor seller has the usual certainty that completion will in fact occur on a specified date.

It is open to lawyers to produce narrower clauses, particularly a more restricted list of COVID events than is set out above and we can expect to see this increasingly. Moving forward, sellers will not want to find themselves facing a potential delay to completion, and the contract potentially being terminated, if a buyer's mortgage offer is withdrawn. COVID clauses are likely to evolve to be restricted to more limited events such as a further lockdown or one of the parties to the contract becoming infected.

Other points to consider

  • The clause can be used in a new contract or as variation to an existing contract, if both parties are willing to be flexible and to preserve their deal.
  • If the contract is leasehold and licence to assign is required, consider whether any period within which the licence is to be obtained needs to be extended in line with the long stop date of the COVID clause.
  • If there is a chain of transactions, the arrangements will need to be consistent across the chain.

COVID clauses will not cover every eventuality in what is a fast moving and complex crisis, but they do provide a basic layer of protection for both parties who may otherwise be wary about transacting in the current circumstances.

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