The Impact of coronavirus on the property market
The impact of COVID-19 (coronavirus) on the real estate (property) market is difficult to predict as the government’s responses to the pandemic is changing daily. Therefore, during this time of uncertainty, it is important for sellers and buyers to consider potential disruptions which may affect their obligations when selling and purchasing property.
Delays in satisfying contract conditions
The coronavirus pandemic situation means that time periods and obligations under contracts could be impacted by further closures or unavailability of parties (including financiers) which may be outside the control of parties and not be currently foreseeable.
Delays due to undertaking property searches, finance approval or a building and pest inspection report caused by COVID-19 restrictions or consequences will not usually entitle a property buyer to unilaterally extend the timeframe for satisfaction of the condition or settlement. However, the buyer may still seek the seller’s agreement to an extension of time for the condition or settlement.
For new property contracts, the potential for these types of delays as well as the following, should be taken into account to allow for insertion of any special conditions that might need to be included:
• either party not being able to do things to prepare for settlement (e.g. witnessing or face-to-face verification of identity) and extensions for that purpose;
• inability to perform any other contractual obligations or obtain necessary approvals (e.g. from 29 March 2020, all foreign buyers will require Foreign Investment Review Board approval and the threshold for all property classes have been reduced to $0, which might result in significant delays in the application process;
• the risk of delay in either party being able to settle and mechanisms to extend or suspend the settlement date, e.g. self-isolation (unable to give vacant possession);
• termination rights that might be needed if settlement suspended for a particular period;
• if a financier in the transaction is unable to attend a settlement;
• suspension or removal of time of the essence;
• a right for either party to extend critical dates on a specified number of occasions.
Tenancy risks for Investment Property during coronavirus pandemic
Buyers purchasing an investment property with an intention to lease to a tenant will need to be aware that the government has announced plans to change the residential tenancy arrangements in response to the current COVID-19 (coronavirus) pandemic. These changes may include a freeze on evictions due to rent arrears for tenants experiencing financial distress due to the impacts of coronavirus pandemic and even possibly capping tenant break lease costs during the pandemic. If these (or similar) changes are passed, it will impact the buyer’s investment objectives. The government has already released a mandatory code of conduct for certain commercial tenancies, for more information about this please see our article on this topic: National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During The Coronavirus Pandemic.
Settlement of property contracts during coronavirus pandemic
Whether a party can utilise the coronavirus pandemic to delay fulfilment of their settlement obligations will depend on the terms and conditions in the contract. Time is usually of the essence under the REIQ contract but the Suspension of Time provision applies if a party is unable to perform a settlement obligation solely as a consequence of a Delay Event. However, this provision is likely to be construed quite narrowly and it:
• only relates to the inability of a party to perform settlement obligations, not to other obligations or to dates for satisfaction of conditions;
• the definition of Delay Event does not specifically refer to a pandemic event;
• requires the inability to perform to be “solely as a consequence of” a Delay Event and will not apply if the property is destroyed or finance is withdrawn.
The only relevant Delay Event refers to compliance with any lawful direction or order by a government agency. This may extend to the current government direction that a person must self-isolate and if a person is unable to leave their home due to compliance with such a direction and therefore unable to give vacant possession, a right to delay settlement may arise.
When a party is affected by a Delay Event, they must take reasonable steps to minimise the effect of the Delay Event and their ability to perform the settlement obligations and notify the other party when they are no longer prevented from performing their settlement obligations due to the Delay Event. Either party may then give the other a Notice to Settle nominating a new settlement date (between 5 to 10 business days after the Notice to Settle is given).
As such, to provide clarity and comfort to sellers and buyers in new contracts, special conditions should be included which:
• amends the definition of Delay Event to include the inability of a party to perform a settlement obligation due to the COVID-19 pandemic (e.g. compulsory lockdown, self-isolation);
• extends the settlement timeframe for a longer period after the Notice to Settle is given to ensure that all parties in the transaction (e.g. solicitors and banks) are ready to settle.
For existing contracts, it may be safer to request a mutual agreement to extend settlement if either the seller or the buyer are unable to settle as incorrectly utilising the Suspension of Time provision may amount to repudiation and result in a claim for damages. Other common law rights, such as force majeure or frustration, may apply depending on the terms and circumstances of the contract.
Another way of minimising the impact of COVID-19 (coronavirus) is for settlements to occur electronically via the PEXA platform without the need for a physical settlement.
If you have any questions about your contractual obligations or would like us to assist you with preparing special conditions relating to the COVID-19 pandemic and government responses, please contact our Property Teams and we will be happy to assist.