The impact of COVID-19 if you are buying or selling
The impact of COVID-19 on the property market remains to be seen. What is however becoming clear is that COVID-19 as a pandemic is expected to have far reaching implications on existing and future contractual obligations of Buyers and Sellers.
Many clients have asked, what if we are all forced into the unlikely event of a compulsory lockdown and are unable to settle? Under a standard REIQ residential contract, time is of the essence, which means that if you do not comply with a deadline in the contract, then you may be in breach. The REIQ residential contract does have a Suspension of Time mechanism where, if a party is unable to perform a Settlement Obligation solely as a consequence of a Delay Event, then time is suspended and cases to be of the essence of the contract and the parties will not be in breach of their Settlement Obligations. A ‘Delay Event’ is defined to include:
- A tsunami, flood, cyclone, earthquake, bushfire or other act of nature
- Riot, civil commotion, war, invasion of a terrorist act;
- An imminent threat of an event in paragraphs (a) and (b); or
- Compliance with any lawful direction or order by a Government Agency.
Notably, a Delay Event, does not include a pandemic. Accordingly, in the absence of a lawful direction or order being issued by a government agency, the clauses are unlikely to trigger the suspension of time provisions in the wake of COVID-19.
To provide clarity and a safety net for Buyers and Sellers, we recommend the inclusion of the following Special Condition in a REIQ residential contract:
COVID-19 Special Condition
- ‘Delay Event’ in clause 6.2 of the Standard Terms is extended to include the inability of a party, to perform a Settlement Obligation for reasons outside of their control associated with the COVID-19 pandemic (examples include but not limited to periods of compulsory lockdowns, periods of self-isolation, temporary suspension of paper/manual settlements)
- Clause 6.2(6)(b) is amended to read ‘a date, being not less than 5 nor more than 20 Business Days after the date the Notice to Settle is given, which shall become the Settlement Date’; and
- The suspension of time provisions in the contract are for the benefit of the Seller and Buyer.
How the Suspension of Time provisions operate
If, for instance, parties are unable to settle due to lock-downs or isolation, an affected party must take reasonable steps to minimise the effect of the Delay Event on its ability to perform its Settlement Obligations. When a party is no longer prevented from performing their obligations, that party must give the other party notice of that fact, promptly. When the suspension period ends, either party may give the other party a Notice to Settle, containing the new settlement date (being not less than 5, nor more than 20 business days after the date the Notice to Settle is given) and that time is of the essence.
We have suggested that the Settlement Date contained in the Notice to Settle be amended to not more than 20 Business Days after the date the Notice to Settle is given. While this may seem quite a long period of time, all parties, including banks, solicitors, agents, mortgage brokers will need to ensure there is capacity to settle transactions within those time frames and simply put, 5-10 business days, which is the current standard in the REIQ contract, may not be long enough to deal with a backlog of applications over an extended closure period.
A move to the unknown
It is difficult to prepare for the unknown, but what we do know is that all parties will have to act in good faith to achieve a mutually agreeable outcome and there may need to be some give and take at this time.
We also need to treat the of settlement of properties akin to the treatment of the pandemic in that we need to ‘flatten the curve’ so that settlements are spread evenly over a reasonable period.