COVID-19 and completion on property transactions
With the COVID-19 pandemic sweeping the world, there is understandable concern regarding its effect on property transactions.
Prior to exchange of contracts in a transaction, the contract is not binding and in the majority of circumstances, the parties can walk away without any consequences. It is possible to negotiate contract provisions suitable to the situation to protect your position. However, it would be impossible to foresee every situation (e.g. disruption to banking systems due to COVID-19) which could occur. In terms of time and cost, it would be impractical to draft such a contract.
After exchange has occurred and a party is not able to complete on time (e.g. the seller refuses to vacate the property as they are self-isolating) the non-completing party will be in default.
In these circumstances, the party ready to complete can serve notice on the non-completing party allowing them a further 10 working days (unless varied prior to exchange) to complete. During this time, interest will accrue usually at a rate of 4% above base rate until completion occurs. However, 10 workings days may not be a sufficient amount of time. For example, the non-completing party comes out of isolation but now the removal company is understaffed due to COVID-19 or refuses to enter the house until it has been decontaminated etc. The party who is able to complete may then terminate the contract and keep the deposit paid on exchange. If that party is the seller, they will be entitled to keep the deposit paid on exchange. If that party is the buyer, they will be entitled to a full refund of the deposit.
Usually in situations such as the COVID-19 pandemic, the standard ‘force majeure’ clause in contracts is relied on. Force majeure usually allows parties to step away from a contract without any consequences in the event of unforeseeable circumstances beyond the party’s control. However, it is unlikely that COVID-19 will be covered by this clause as it is now a ‘foreseeable’ event.
The Law Society recommends that, “exchange of contract on a ‘business as usual’ basis may be preferable to using new provisions”. However, each matter should be assessed individually before proceeding to exchange. It is advisable that parties who are yet to exchange should at least consider making provisions for late completion in the contract, in light of COVID-19.
If you have any concerns or would like some advice, please contact Urvashi Suddul.