The real estate market is rapidly changing as a result of the current COVID-19 pandemic. Consideration of potential disruptions that may be caused by the pandemic should be made for any new property contracts Councils may be considering entering into.
For Councils that have entered into contracts for the sale and purchase of land, the uncertainty caused by the COVID-19 pandemic and government responses has raised questions regarding the ability of the parties to comply with their contractual obligations and to complete contracts.
It is important the terms of each individual contract are reviewed, especially if the settlement date on your contract is within the next six months, or if you have any concerns about your or another party’s ability to complete. Below are a number of matters that all vendors and purchasers should consider.
Measures to mitigate risk
There are a number of risk management measures a Council can implement to mitigate the impact of COVID-19 as either the vendor or purchaser:
- Work together with the other party during any due diligence processes, including the sharing of any relevant searches, rates certificates and expert reports in relation to the property.
- Obtain any clearance certificates or rates certificates required for settlement as soon as possible.
- Review any termination or delay provisions in your contract now and adapt as appropriate.
Purchasers should also consider: - Engaging in discussions with vendors if any extensions to the settlement date may be required as soon as possible.
- If new contracts are being negotiated, requesting a tailored force majeure clause be inserted which includes public health pandemics.
New Contracts
Before entering into any new contracts, please consider inserting special conditions governing delay or termination of contract as a consequence of the COVID-19 pandemic. Consideration should be given to circumstances where mortgagees shut down or suspend services, or any relevant authority, including a separate part of any local government shuts down or suspends service.
Methods to exchange contracts and other processes in the contract completion process should also be reconsidered, especially with new amendments to the Electronic Transactions Act 2000 being brought about by the State government’s emergency COVID legislation. Procedures for the signing and witnessing of documents under the Oaths Act 1900, Guardianship Act 1987, Succession Act 2006, Powers of Attorney Act 2003 and Conveyancing Act 1919 may also change. The new regulations may override any current legislative provisions in the aforementioned Acts which regulate the signing or witnessing of documents, including requirements around the verification of identity.
Foreign purchasers
If you are looking to enter into a contract with a foreign entity, please be aware that all foreign purchasers will now require Foreign Investment Review Board (FIRB) approval. Thresholds for all property classes have been reduced to $0. All current and future contracts to be entered into with foreign purchasers will need to include an appropriate FIRB approval condition. Approval times have been increased from 30 days to up to 6 months. This means provisions regarding settlement periods and conditional contracts must be revisited.
Settlement
As most settlements in Australia can now occur electronically via the PEXA platform, property settlements, for the most part, are not currently affected by government responses to the COVID-19 pandemic. However, going forward it would be prudent to ensure that you can settle on PEXA if required.
As further restrictions are put in place, settlements may be affected by the shut down or suspension of service of bodies such as the NSW Land Registry Services. If the land title office was to completely close or its electronic systems were to fail, it may be prudent to ensure that settlement can still be undertaken in the traditional manner (where possible), rather than electronically.
Termination and rescission
Generally, property contracts do not allow for termination or rescission except for material and detrimental changes to the property between entry into the contract and settlement.
Most contracts only contain clauses allowing one or either party to terminate for the other party’s death, insolvency or lack of capacity.
Where contracts contain force majeure provisions, the ability of a party to rely on such a clause depends on how the force majeure event is defined and the specific circumstances it is expressed to cover. The burden of proving its application rests with the party wishing to rely on the clause, and any ambiguity in this respect will be read against that party.
Doctrine of Frustration
Absent any specific provisions in contracts, it is possible in the current COVID-19 environment that parties may attempt to rely on the doctrine of frustration to terminate a contract and renegotiate more favourable terms. Under the common law, frustration may be relied upon to discharge the obligations of the parties where unforeseen circumstances arise, through no fault of the parties, which make performance of the contract impossible.
However, this remedy has a very narrow scope, and importantly, will not apply where the change is only temporary, the circumstances were foreseen, or the event is expressly addressed in a force majeure clause. At this stage, it is unlikely most property contacts will be able to rely on this remedy.
Delay
Whether a party can refer to the COVID-19 pandemic to delay the fulfilment of its obligations will depend on the contract.
Under the New South Wales Law Society contract standard conditions, there are no delay events allowing any postponement of settlement. Small delays to settlement can be accommodated under the notice to complete period (generally 14 days from the date the notice is issued), which is required before a party that is ready, willing and able to complete can terminate the contract.
Purchasers should note that default interest for late settlement may be payable depending on how the default provisions are drafted in the contract (generally payable for any delays other than delays caused by the vendor). When entering into new contracts, purchasers should carefully consider default provisions and aim to update them to exclude delays caused by COVID-19 related matters.
Off the plan contracts
If you are currently a party to an off-the-plan contract, you should consider whether any potential interruptions to the normal operation of government agencies and other authorities, as well as the construction industry, will result in any delays to your settlement period, or allow the extension of any sunset dates under the contract.
Need help?
If you require assistance with understanding your rights and obligations during these precarious times, whether you are preparing for settlement, or considering entering into a new contract, please contact us.