Can a Buyer Terminate an Agreement of Purchase and Sale Because of COVID-19?By sedoo
Due to the COVID-19 pandemic, the financial situation of many Buyers has changed significantly. As a result, some Buyers may not be able to pay the purchase price to the Sellers upon closing. Other Buyers may be able to close but do not want to. For instance, a Buyer may have been buying commercial premises to open a restaurant, but because of the social distancing rules, the Buyer no longer desires to invest in that business.
Typically, the reasons above do not enable a Buyer to terminate an Agreement of Purchase and Sale (APS) unilaterally. However, the transaction may be terminated if it contains a condition precedent or an early termination right, which can be used for such purposes and is in force. Otherwise, the Buyer is likely in breach of the APS if the Buyer fails to complete the transaction on the closing date, and the APS does not contain a condition precedent or early termination right. In case of such a breach of the APS, the parties have the following options:
- To agree to a mutual release, whereby the parties agree that all, part or none of the deposit is to be released to the Seller. In doing so the parties agree to release each other from any legal claims, actions or damages relating to the transaction; or
- The Seller can refuse to provide a mutual release to the Buyer, following which the Seller can take legal action to recover any damages incurred, including but not limited to the deposit held in trust.
If unable to close, the Buyer should try to negotiate in good faith acting reasonably with the Seller for a closing date extension, an amendment of the APS, or the termination of the APS. Although the Seller does not have an obligation to agree to accommodate such requests of the Buyer, the Seller should consider doing so in good faith acting reasonably as well, keeping in mind that Seller will expect to at least be remunerated for reasonable costs and expenses incurred.
Can a Buyer claim frustration of the APS?
Adapted to the real estate transactions and simplified, the Doctrine of Frustration provides that, in case of an unforeseen event (without the fault of either Buyer or Seller) which so significantly changes the nature of the parties' rights or obligations from what they could reasonably have contemplated when executing the APS, the APS can be cancelled. The Buyer would get back the deposit and not be responsible for any damages to the Seller.
Although COVID-19 would likely be considered as an unforeseen event, there must be a drastic change in the character of the contractual obligations. The Buyer cannot claim frustration because the performance under the APS has simply become more onerous, or expensive, or less remunerative or beneficial for the Buyer. This is a high bar to meet and may not be a promising argument for a Buyer to attempt to terminate an APS due to COVID-19.
The lawyers at Kormans LLP are available to advise you and represent you in your real estate transactions.
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Vlad Bogoslavets is an Associate Lawyer with Kormans LLP. You can reach Vlad at email@example.com. All blog entries are for your reading pleasure only and are not posted to provide legal advice. For your matter, we encourage you to consult with a lawyer to review and discuss your specific facts and circumstances.
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