The Coronavirus (COVID-19) pandemic is causing unprecedented economic impact and disruption on a global scale. How does it affect your business or home sale? It is critical that businesses, homebuyers, and sellers review and understand the exact contractual terms by which they are bound. Coronavirus has changed market conditions. I am not simply talking about the short-term alteration of our society, the price of businesses and homes that are for sale is changing. Many purchasers want to get out of deals for which they have signed contracts, many sellers wish to enforce deals. The key is to determine who bears the risk of loss for the change in market conditions. The way we determine this is to look at the language of the contract and to apply its terms to what has occurred. We also look at state law for a variety of doctrines to apply even if the contract language is not helpful.
Real Estate Transactions in a Time of Uncertainty
If a homebuyer backs out of an offer based on a contingency (appraisal price, home inspection, securing financing, etc.), they may have a legal basis for doing so and may also demand the return of their earnest money deposit. Likewise, if the homebuyer’s own home sale is a condition, and the pandemic continues to depress the housing market, genuinely preventing said sale, this too could allow a homebuyer to walk away. However, if a homebuyer backs out of a purchase agreement without a contingency, they could risk losing their earnest money since they put that money down based on the promise of following through with the contract. Even more significantly, the seller can sue the purchaser for the difference in price between the contract price and the actual eventual re-sale price. The seller would have an obligation to mitigate damages by re-selling the property.
The exact remedies available to the buyer and to the seller are determined by the terms of their agreement. In practice, courts are far more likely to order a seller to close a sale than to order a buyer to close on a house they can no longer afford.
Similar issues for business purchases apply as with real estate transactions. Again, the key issue is who bears the risk of the change in market conditions that Coronavirus has caused.
Given that the potential liability for a buyer or seller in breach of a purchase agreement is great, what options or defenses are available if a party can no longer fulfill their contractual obligations because of the pandemic?
There are a variety of legal doctrines that might apply in such a Breach of Contract Dispute (Frustration of Purpose, Impossibility/Impractability of Performance, Force Majeure). The first step is to get legal advice. Show the contract to a lawyer. Work up a strategy. The lawyer can negotiate or guide you as you negotiate. If necessary, the lawyer can represent you in litigation. At Nachtlaw, we’ve been handling contract negotiations and litigation for a quarter of a century.
For questions or comments related to this article, please call our office at 888-312-7173 or contact authors David Nacht or Sam Estenson.