Thinking of Adding a “COVID Clause” to Your Real Estate Deal? Don’t
While the uncertainty COVID-19 has carried with it has put many people on edge, there are still buyers and sellers participating in the market.
Despite a recent cautionary report by the Canada Mortgage and Housing Corporation (CMHC) and weak figures put out by the Building Industry and Land Development Association (BILD), many real estate agents report a pickup in transactions since the COVID-related lockdown brought things to a near-halt, with multiple-offer scenarios even continuing to take place.
Signing a real estate contract may seem more fraught than ever these days, leading some people to want to add clauses to protect themselves against unforeseen circumstances.
But this can be dangerous, experts say.
Emergency clauses worry lawyers
The unusual circumstances of the pandemic caused the Ontario Real Estate Association (OREA) recently to put out suggested “state of emergency” clauses that agents could use in contracts. These include conditions necessary for protecting people from contact, such as “Electronic Signature Consent” and “Key Drop Devices.” However, some of the clauses worried legal experts.
“Our concerns are with respect to a few clauses that were prepared for use by real estate brokers and agents in agreements of purchase and sale in order to attempt to address the issues that could arise over the course of a real estate transaction due to COVID-19. The proposed clauses are potentially problematic from both a legal and practical perspective,” said lawyer Aaron English, chair of the Commercial Real Estate Group at Torkin Manes LLP.
English, along with his colleague Sidney Troister, recently put out a warning, saying, “Lawyers and their clients should 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.”
Lawyer Bob Aaron of Aaron and Aaron says this type of clause may allow people to get out of what would be a firm contract because “somebody decides ‘I changed my mind and I… want to get out of the deal.’”
“A lot of people at the beginning [of the pandemic] started making up their own clauses,” says Shawn Zigelstein, broker at Royal LePage and team leader of Team Zold.
Real estate brokerages are not required to use the OREA clauses. Royal LePage, for instance, has made its own rulings.
The dangers of ‘backout’ clauses
While it may seem helpful to add in backout clauses, “there’s an increased likelihood of everyone getting sued,” Aaron says.
OREA’s state of emergency clause suggests adding conditions such as if the lenders or land registry office temporarily closes down then the date of completion be extended or terminated without penalty.
This “is vague and ambiguous, as it allows for different interpretations as well as allows buyers or sellers to walk away from the deal without any consequences,” says Azin Ghorbankhani, a lawyer with Seif real-estate law firm. This could result in “litigation causing more expenses for either party.”
She adds, “If an agreement gets cancelled, agents will also not get their commission and if a buyer has an agreement with a realtor, they may be liable for that as well.” She stresses she is speaking in generalities and people should get their own legal advice in this situation.
Another situation buyers could see is losing their deposit, regardless of a “COVID-clause,” lawyers say.
“Unfortunately, there is the possibility that a buyer could lose its deposit if the buyer cannot close for reasons that are not accounted for in the agreement of purchase and sale and are not the fault of the seller,” Torkin Manes LLP’s English says.
For those buyers who are worried prices will drop between when they sign a contract and when they close, they should know that legal rulings from market drops before the pandemic resulted in buyers having to reimburse sellers for damages, such as having to keep the house on the market or paying the mortgage for longer, Ghorbankhani says.
So how can buyers and sellers protect themselves?
Current language already accounts for specific circumstances, lawyers say. Major concerns at any time are things like inspections, buyers’ job security and financing, and they get dealt with either in the standard language of contracts, or before getting to the point of drawing up a contract, Aaron says.
Ghorbankhani notes, “With any investments, there is uncertainty. It’s best for buyers and sellers to place conditional offers and instead of having the normal 3-5 day condition on finance, inspection, etc., add an extra 2-3 days to allow for delays to be covered.”
She also suggests that if anyone is purchasing a property, they should mention in the agreement that they require vacant possession and to have sellers get their tenants to sign a mutual landlord tenant board document confirming they will move out. “This way, everyone is covered.”
As for wanting to protect yourself in case you become sick with COVID-19, “It’s the same as usual sickness,” Aaron says. You could develop any type of illness before closing, pandemic or not.
Financing was one of the biggest concerns earlier on, Zigelstein says. But he says he has seen mortgage professionals be quite lenient in terms of honouring original agreements, even if a client has been laid off or is making less money.
As for sellers being concerned they may not find their dream home, he suggests they have a backup plan for where they could stay temporarily, or look at a longer closing period.
Get the contract checked
Buyers and sellers may have concerns specific to their situation that may be addressed in a contract. The bottom line, say experts, is to have your agreement reviewed by a real estate lawyer.
“I always strongly recommend that anyone looking to buy or sell have their agreements reviewed by their lawyer, as lawyers will always modify the wording in order to assure it is proper and can be enforced in court without any ambiguous terms,” says Ghorbankhani.
And flexibility is the word of the day, as physical distancing and other factors can cause hiccups and delays.
“There seems to be more consideration for others,” says Zigelstein. Who has not been seeing many problematic transactions at this point.
“Product is still selling,” he says, adding, “I think anyone who is worried (about their situation) is on the sidelines.”