COVID-19 and “Force majeure” and Real Estate Contracts
- Jim Hanson, lawyer, founder, Hanson & Co
- Ruth Hanson, Managing Broker, Sotheby’s International Realty Canada and Member, Real Estate Council of BC (RECBC).
The COVID-19 pandemic is creating many stresses and strains in our economic, social and legal worlds. Among these strains are real estate contracts. Is a party who has entered into a real estate contract prior to or during COVID-19, and who now has new circumstances, such as a buyer who is no longer employed, required to complete on the contract?
A legal principle that will bear on this issue and which will no doubt be litigated in this context in our Province in years to come is “force majeure”, also known as “Act of God”.
This principle of common law allows parties to escape their obligations under a contract when external conditions (such as war, natural calamities, and other acts beyond the control of any party) make fulfilment of the contract impossible. A shipper is relieved of his obligation to deliver a product if the port of call is overtaken by a declaration of war, just to use an example.
What about COVID and real estate contracts? On the one hand, COVID is clearly an event outside of anyone’s control and is the kind of catastrophic occurrence that could reasonably be viewed as making the fulfillment of a contract impossible. On the other hand, a party could argue that COVID merely makes the fulfilment of a contract more difficult but not impossible and that “force majeure” is inapplicable because COVID does not rise the level of a event such as civil war or natural catastrophe which is sufficiently disruptive to excuse contractual performance.
In British Columbia, the standard pre-printed form of Contact of Purchase and Sale is silent on “force majeure”. The BC Real Estate Association has advised realtors to avoid placing “force majeure” clauses in real estate contracts without specific legal advice.
To date, no cases have been decided in British Columbia directly addressing COVID-19, “force majeure”, and real estate contracts.
In our view, “force majeure” may be applicable to some real estate contracts frustrated by COVID. There may be fact patterns where the consequences of COVID rise to the standard of catastrophic event incorporated by the “force majeure” principle of common law. However, in our view, this determination will need to be made on a case by case basis. In some cases, a party’s unwillingness to complete a real estate contract will not be excused by “force majeure”. The determination will we believe turn on an assessment of all of the circumstances surrounding the contract including not only COVID but the other terms of the contract, the nature of the real estate involved, price, timing of the contract, the personal circumstances of the parties, their knowledge of COVID at the time of entering into the contract, and all other relevant details. At the heart of the determination will be the role COVID plays in frustrating the contract. We can state that in general “force majeure” is regarded by lawyers as being difficult to prove and the test is viewed as being onerous on the party seeking relief as a result of the principle.
We will watch with interest as the law develops on this interesting and important topic. No doubt there will be cases in British Columbia involving COVID-19, real estate contracts and “force majeure”. In the meantime, we would urge all parties to a binding real estate contract of purchase and sale to govern themselves very carefully and assume that the contract is binding and enforceable unless one obtains very clear advice regarding the applicability of “force majeure” with clear instructions from a lawyer as to the process to follow to escape a binding real estate deal for this reason.