Since the Covid-19 world pandemic was declared, I have seen a number of Agreements of Purchase and Sale contain what I will call “the Covid Clauses”. These clauses are an attempt to address the possibility of deals being delayed, extended or terminated due to a number of factors beyond the control of the Buyer and Seller. Unfortunately, in my opinion, these clauses are vague, confusing, inconsistent and may create more problems which may lead to transactions not closing at all and possible litigation. This column will examine some of these clauses and explain that they should not be used or used with extreme caution. I will also give some examples of clauses that realtors should consider using during the pandemic.
The main Covid clause provides as follows:
“The parties agree that if the buyer’s bank or lender or the applicable land registry office “temporarily ceases operations, such that either party is frustrated from completing this transaction for reasons wholly outside the control of that party, then closing is extended to the date that is two business days after the resumption of bank or land registry services. It also provides that if the delay exceeds an outside date to be filled in following the original closing date, either party can terminate the deal”.
The clause has many problems. First of all, it refers to the possibility that the Buyer’s bank or lender or the land registry office temporarily ceasing operations. To be clear, lenders and the land registry office have not closed or ceased operations. Further as both the banks and land registry offices have been deemed by the provincial government to be “essential services” it is unlikely that they will be closing at all. Accordingly, the clause is inapplicable. Second, the clause contains terms such as “temporarily ceases operations”, “frustrated” and “wholly outside the control of that party”. These terms are not defined and are open to interpretation. Thirdly, the clauses provides for an extended closing of “two business days” after the resumption of bank or land registry services. Even if the banks or land registry office were to close and subsequently reopen, closing a deal only 2 days after they reopen is not possible or realistic. Finally, and most importantly, the clause gives either party the option to terminate the transaction. Assuming that the parties entered into the transaction in good faith and expecting it to close, giving either party the right to terminate the transaction is likely the exact opposite of the parties original intentions. The vagueness of this clause may result in disputes, and possible litigation, not to mention that the realtors being deprived of their commissions. Imagine a scenario where either party wanted to get out of the deal? This unusual and poorly drafted clause could allow a party to delay or even worse, cancel a transaction.
Another clause that I have seen in many offers provides the following:
“If there is a delay in registration due to measures taken by the Province in relation to land registry offices, closing is extended to the next possible date following the scheduled date of completion with no additional charges payable by the buyer. If there is title insurance with gap coverage and all closing funds are paid to the seller’s lawyer in trust, possession can be transferred and all expenses related to the property become the responsibility of the buyer from the date of such escrow closing”.
When reading this and the first clause together, it is clear that they cannot be used in the same Agreement. The first clause refers to a closing two business days after services are resumed and the second clause contemplates a closing on the “next possible date”. Further this clause refers to an escrow closing without providing any details of how such a closing would take place. Finally, the clause seems to indicate that the Buyer could get possession of the property, but the Seller would not receive the closing funds as they are held in trust. How long are they held in trust? When can they be released? This hardly seems fair to the Seller who may still be paying for its mortgage which cannot be paid off until the funds are released from trust.
The last clause that I have seen provides:
“If the buyer or the seller is the subject of a mandatory COVID-19 virus quarantine at the time of performance hereunder that results in the parties’ inability to complete the transaction, the closing is automatically extended at the request of either party for a period of 14 days. Time remains of the essence of the agreement”.
Again, this clause cannot operate with the two previous clauses. If read together, they create confusion. Further, the concept of a mandatory Covid-19 quarantine disrupting the closing is highly unlikely in light of the fact that even if quarantined at home, an individual can still sign closing documents using electronic or other means. The Law Society has issued a number of bulletins to lawyers which permit alternate methods of signing, witnessing and exchanging documents. Many lawyers have adopted these practices to facilitate closings in this new environment.
As can be seen, the Covid clauses will create confusion and possibly lead to disputes and deals not closing. Clearly, this was not the intent of those who drafted and suggested these clauses. I have advised many realtors of the dangers of these clauses and that realtors and their clients should obtain legal advice before blindly inserting them into Agreements of Purchase and Sale.
While I do not endorse these clauses, there are some clauses that I have seen which do make sense and should be used wherever possible. The first clause sets out that the keys to the property will be left in a lockbox for the Buyer’s to pick up following closing. I encourage the use of this clause as it eliminates the need for the Buyer’s to attend at their lawyer’s office following closing. The second clause allows for closing funds to be deposited with wire transfer. Many lawyers are now using wire transfers to avoid having to go to the bank to certify cheques. The third clause allows the use of electronic signatures on all closing documentation. These three clauses are beneficial and I recommend that they be used during the pandemic.