Can a Buyer Back Out of a Deal If the Value of the Purchased Property Plummets Because of Covid19?
The Laws Affecting Real Estate Deals Are Without Precedent For Addressing Legal Issues Arising From a Pandemic. Without a Line of Prior Cases, Legal Advisors Will Be Able to Provide Only 'Best Guess' Opinions. The Covid19 Crisis Is Sure to Provide Much Fodder For Litigation.
Similar Questions About Covid19 Affected Realty Deals Include:
- Is It a Breach of Contract If a Seller Denies An Inspection Because of Corona?
- What Happens If Financing Falls Because Corona Causes a Market Crash?
- Can a Buyer Now Demand Sanitizing When the Deal Required Broom Swept Only?
- What Happens If Moving Services Are Unavailable and a Seller Is Unable to Vacate?
- Does Coronavirus Trigger Frustration of Contract For Realty Deals?
Understanding the Realty Deal Issues Arising From Covid19
This time of year is usually the busiest period for real estate dealings; particularly the sale of residential dwellings; however, whereas isolation and social-distancing concerns are currently at the forefront, such may interfere or disrupt showings, inspections, and may even impair the capacity for move-out on or before closing day. Additionally, the Covid19 crisis may result in a dramatically affect market conditions including housing values resulting in the failure to close within abandoned deals. Challenging concerns expected to give rise to legal issues include:
- Whether a real estate deal is frustrated by outside forces that disrupt the closing date;
- Whether a realtor should perform showings despite social-distancing concerns;
- Whether a seller can disallow an inspection due to social-distancing concerns;
- Whether a buyer can now require sterilization rather than just broom swept cleanliness; and
- Whether a buyer can abandon a deal if a seller is unable to close due to market changes.
These are just some of the legal issues that sellers, buyers, and realtors, may need to address.
Denial of Inspection by Seller
Most often an Agreement of Purchase and Sale starts off as a conditional offer, with various terms and conditions to protect the various parties to the transaction. These conditions will have a deadline by which they must be completed, after which the deal is said to be ‘firm’ and all parties are expected to fulfil their obligations to each other. One of the most common conditions involves a home inspection which will typically state, “This Agreement of Purchase and Sale is conditional upon the Buyer obtaining a report, satisfactory to the Buyer in the Buyer’s sole discretion. “ Included in the condition is usually a provision that will state that the seller agrees to provide reasonable access to the property for the purpose of allowing the Buyer, or the Buyer’s home inspector, to conduct such an inspection. Finally, the clause will end with a provision stating that the condition is included for the benefit of the Buyer and may be waived at the Buyer’s sole option.
So, if a Seller agrees to such a condition, then subsequently refuses to allow the Buyer, or the Buyer’s home inspector, to conduct such an inspection, within the window of time provided in the condition, the Buyer would be in a position to choose whether or not waive the condition.
If the Buyer chooses to waive then the sale may proceed, but of the Buyer refuses to waive the condition, then the Buyer has a reason to walk away from the sale without penalty and any deposits paid by the Buyer will be returned.
Amending Cleanliness Condition
When a property is sold, such as a residential dwelling, the Agreement of Purchase and Sale typically requires that the seller will leave the home in 'broom swept condition' when vacating on, or before, the closing date. While this is a typical term, and although many previously signed realty deals likely contain this condition, in the face of the Covid19 pandemic, some buyers may now be concerned for coronavirus contamination and may now seek to impose, after the deal was done, additional conditions requiring sterilization, among other things.
Generally, as basic principles of contract law, a party to a contract is unable to unilaterally impose changed terms of the contract upon the another party. This principle applies to contracts for the purchase of realty and appears as settled law per the case of Rexhill Holdings Ltd. v. Maybird Investments Ltd. et al., 1972 CanLII 465 (ON SC) as confirming the earlier case of Stubbs v. Downey and Downey, 1957 CanLII 392 (ON CA),  O.W.N. 330, 8 D.L.R. (2d) 720.
In Stubbs the buyer agreed to purchase a house where the seller was, “to arrange a mortgage of $6,800 repayable $57.11 monthly at 6% per annum”. Rather than making the arrangements as per the Agreement of Purchase and Sale contract, the seller instead arranged a mortgage that would have the buyer obliged to, “pay $75 quarterly with interest at the rate of 6% per annum on the unpaid principal under a mortgage”. Although there was a negligible difference between what was stated in the Agreement of Purchase and Sale when compared to what the seller actually arranged, the Court of Appeal determined that a party is unable to make or impose a unilateral change to a contract even if the change is negligible. The Court of Appeal stated the reasoning that “[I]n essence, the purchaser, had he completed the transaction, would not have received what he had bargained for”.
Accordingly, in the event that a buyer would want to change an previously executed Agreement of Purchase and Sale, being a contract already entered into, so to alter the usual stipulation that upon closing the seller will vacate the premises in a broom swept condition, the buyer would need the consent of the seller to make that change. Furthermore, as an exchange for an altered condition, some form of compensation such as additional funds paid would be required as the law, generally, expects that a bargain is a bargain and to legally amend a bargain requires that there be a two-way benefit known as 'bilateral consideration'.
With all of the above said, whereas it is suggested that a buyer is unable to impose a change within a 'done deal', it may still be helpful for a seller to accommodate a request a higher level of cleaning upon closing a realty deal. This is especially so if the buyer makes such a request because the seller has undergone self-isolation within the premises due to a coronavirus infection. In such a circumstance, the seller may be wise to provide cleaning to the point of 'sterilization' or otherwise act in such a way as to eliminate, or at least minimize, the possibility that the property could be contaminated on the closing date. While it may be very difficult for a buyer to prove, if proof is possible at all, should a buyer subsequently sue after closing with the allegation that the property was contaminated by some form of lingering coronavirus, in what is known as a latent defect claim, even if the seller were successful in defending such a lawsuit, the time, energy, and cost, may be much more troublesome than the cost of a very thorough cleaning.
Available Services Difficulty
As a result of mandated social distancing measures and various services being deemed non-essential, a seller may become unable to vacate a property promptly. For example, previously hired movers may be unable or unwilling, due to coronavirus fears, to provide moving services on a closing date. While such a circumstance may appear as, and may potentially be a breach of the Agreement of Purchase and Sale, both a seller and a buyer are obligated to mitigate any potential damages from such a breach as well as required to act reasonably in an effort to complete the contract. The duty to act reasonably and in good faith is indicated within the summary headnote of Garrett v. Ayr Ventures Inc., 1995 CanLII 7140 which reads:
There is an overriding duty to act reasonably to attempt to complete the contract, and because of its lack of good faith, the plaintiff could not rely strictly on the provisions of the agreement ...
Futhermore, most agreements for the purchase of residential property in Ontario include a term that speaks to ‘time being of the essence’ and that such time “may be extended or abridged by an agreement in writing”. This term simply means that should there be a time limit to do something, such as vacate a property by a certain date and time, it should be done by the stated time; but, if such becomes impossible, then the buyer and seller may be able to change the time.
Although such was other than a realty deal case, the Supreme Court decision in Bhasin v. Hrynew,  3 SCR 494 confirms the duty of parties to act in good faith in performing the obligations within a contract; and accordingly, unless some genuinely serious difficulty would arise from agreeing to extend or abridge a closing date should the coronavirus impair a seller from vacating and thereby closing as scheduled, such as if movers became unavailable, it would seem that the buyer would be unable to use such failure to vacate as a reason to walk away from the transaction. Accordingly, a buyer, who may become concerned with sudden plummeting market values, among other things, may be unable to use a 'failure to vacate' as an opportunity to avoid completion of a realty deal.
If the Covid19 pandemic is deemed as a force majeure, meaning an unforeseeable circumstance outside the control of the parties to a contract, such as an Agreement of Purchase and Sale between a seller and a buyer, the enforcement of signed realty deals awaiting closure, among other deals, may become troubled and litigated. Without precedent law, whereas the Covid19 Crisis is an unprecedent situation, it is very dfficult to strongly predict how the courts will decide the litigation expected to arise from the many, and varied, legal issues stemming from the Covid19 Crisis.