• Scott Alevras

Closing in a Time of COVID - Can I Cancel My Real Estate Contract?

The COVID-19 pandemic (“COVID”) has had a profound effect on the real estate market. Buyers and sellers are trying to cancel transactions due to reasons such as loss of employment, inability to obtain a relocation property and simply not wanting to deal with people in their homes or having contact with their personal items. The question is, whether you are able to cancel a real estate transaction due to COVID related issue? Although the reason may be COVID related, you should first see if the transaction can be cancelled another way.


Attorney Review - Most real estate contracts provide for a three day attorney review period during which either side can send a letter disapproving the contract and suggesting revisions. The three day period is stopped once either side sends an attorney review letter to the other. The respective attorneys then send letters back and forth negotiating the attorney review changes each has made. Once there is an agreement on the terms of the contract, the parties agree that attorney review is concluded thus creating a binding contract. During this time, however, the contract can usually be cancelled by either side without reason or penalty prior to the conclusion of attorney review.


Mortgage Contingency - If there is mortgage contingency and a loss of employment, a denial letter from the lender should suffice for a buyer to cancel a transaction. Some attorneys may want to argue that, if a mortgage commitment is issued, and the loss of employment/mortgage denial occurred thereafter, that the contingency has been satisfied and the buyer is obligated to close. The reality is, however, that the buyer would be unable to proceed without financing and attempting to hold the buyer to the contract would be an effort in futility. The seller in that case would be better off cutting losses and relisting the property for sale.


Home Inspection - Home inspection may also be a basis to cancel the contract. Generally, if the parties are unable to come to a resolution as to the home inspection contingency, either may cancel with a refund of deposit monies to the buyer. If you fear that COVID may prevent you from closing and you have not yet concluded negotiating home inspection, do so carefully and with a plan as to where you want to end up. Has the seller taken a position that a structural defect will not be addressed? This is the buyer’s opportunity to cancel. Has a buyer insisted on a credit in lieu of home inspection repairs? This is the seller’s opportunity to cancel. A party should be cautious about whether to accept, reject or counter an offer because a right to cancel may be affected when such a communication is made.


It bears noting that the above scenarios and the parties' rights would be dictated by the specific terms of the contract and any agreed upon attorney review provisions. It is, therefore, important that attorney review be handled meticulously so that rights, responsibilities and remedies under the contract are fully understood. Most transactions utilize the NEW JERSEY REALTORS® STANDARD FORM OF REAL ESTATE SALES CONTRACT. This form contract does not make reference to any COVID related remedies that would enable a party to cancel the transaction such as force majeure (act of god), impossibility or impracticability. Recently, however, brokers have been utilizing a COVID addendum which addresses some of the concerns caused by the current state of affairs. It reads:


NEW JERSEY REALTORS® ADDENDUM REGARDING CORONAVIRUS

©2020 NEW JERSEY REALTORS®


This Addendum is attached to and made a part of the New Jersey REALTORS® Standard Form of Real Estate Sales Contract, Form 118 (the “Contract”). If this Addendum conflicts with the Contract, then this Addendum shall control. The current world-wide Coronavirus (“COVID-19”) pandemic has had unprecedented impacts on real estate transactions, including but not limited to travel restrictions, self-imposed and governmentally required isolations, and closures of both governmental and private offices required to fund, close and record real estate transactions. Accordingly, if the Closing is not possible or practical as a result of unforeseen circumstances related to the COVID-19, such as Buyer’s or Seller’s inability to travel to sign documents, closings of or delays in related government and business services, including for example delays by or closing of lenders, title/escrow, county recording offices, municipal inspections, or otherwise (“Unforeseen Circumstances”), Buyer and Seller agree as follows:

1. Buyer or Seller may postpone the Closing by up to ____ days (if left blank, then 30 days) to accommodate Unforeseen Circumstances, after which either Buyer or Seller may cancel the Contract and Buyer’s deposit shall be returned to Buyer .

2. If checked: If Buyer is unable to close on a loan and proceed to Closing because of Buyer’s loss of income from COVID-19 related issues, notwithstanding that Buyer may have removed Buyer’s loan contingency, then either Buyer or Seller may cancel the Contract and Buyer’s deposit shall be returned to Buyer.

3. Other:


In my opinion, Paragraph 1 of this addendum gives either party the ability to cancel the transaction without penalty, therefore eviscerating any contractual obligation to close title. Who gauges what “unforeseen circumstances” are? Do we rely on a party’s claim without debate or any proof? This, like the contract itself, can and should be addressed in attorney review. Recently I have seen clauses such as “Paragraph 1 of the COVID-19 Addendum shall only be a basis to cancel the contract of sale if the party asserting same can actually show that unforeseen circumstances prevent that party from closing title.”


Similarly, Paragraph 2 leaves much to be desired and should be likewise changed. The first part is acceptable. Of course the buyer should not be required to close if financing has been withdrawn due to a loss of employment (unless that loss is purposeful or voluntary). But what does “notwithstanding that Buyer may have removed Buyer’s loan contingency” even mean? Has the buyer said that he or she does not need financing to proceed? In that case, I would say that the buyer should be required to close because the buyer has waived the financing contingency and the seller has relied on this representation. If, however, this clause means that if a mortgage commitment has been issued, essentially satisfying and “removing” mortgage contingency, then the buyer should be able to cancel. This ambiguity, should, therefore, be addressed in attorney review.


If you are going to buy or sell, it is important to have an attorney who is experienced and well versed in real estate transactions. Your attorney should take you through the contract and answer all your questions. Attorney review letters should be reviewed and explained thoroughly. Concerns about COVID and whether same may prevent you from closing should be discussed before they become a problem.


PLEASE NOTE THAT this is general information and that each transaction is dictated by its specific facts and contractual terms. This information, is, therefore for informative purposes only and SHOULD NOT BE CONSTRUED AS LEGAL ADVICE OR CREATING AN ATTORNEY CLIENT RELATIONSHIP. Contact me or another experienced real estate attorney to discuss your particular transaction.







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