Ask an Attorney: Can I Back Out of a Real Estate Contract Due to COVID?

“I’ve never seen anything like this,” says Jim Goldman, a partner with the firm Miller Barondess in Los Angeles.

Goldman is referring to the tangled web of factual and legal issues that are popping up pertaining to real estate and the coronavirus. His practice focuses on complex commercial litigation involving real estate, financing, and professional liability.

Q&A With a Real Estate Attorney

Q: What type of legal issues are you seeing due to the coronavirus?

A: Right now, we’re mainly seeing a lot of landlord/tenant issues, because with rent due, often at the first of the month, that is something pressing that is happening right now. Our commercial tenants started contacting me in large numbers in mid-March, asking what kind of contractual provisions and governmental requirements might relate to mandatory business shutdowns and how they might relate to paying rent or a mortgage.

Q: There’s uncertainty as well in residential real estate, with homebuyers and investors wondering whether they’ll be able to close on deals in progress, especially with all the delays. Are contracts being extended?

A: True, there are a lot of delays. For instance, shelter-in-place orders have prevented property inspectors and appraisers from doing their jobs. So, buyers can’t complete their due diligence in the time allotted, and lenders may not have what they need to approve financing.

It puts closings at a standstill. Not to mention getting documents recorded. We are in unchartered waters right now and kind of at a standstill with extensions of contracts.

Q: What about buyers who want to get out of contracts? Especially since their financial situation might have changed with the coronavirus. Plus, the market has changed and buyers who signed a contract for a certain price a few months ago may now feel like they are overpaying.

A: Even though we are in unprecedented times, in general, you cannot just walk away from a contract because your situation has changed—even if it was because of an event beyond your control. Unless some sort of provision was written in the contract allowing a cancellation for this type of unforeseen event, you may still be legally obligated—for now.

It’s hard to say what will be allowed when this is over, because no one knows how long this pandemic will last or how any new laws and ordinances will affect everyone’s rights. And since we’ve never had what is close to a nationwide shutdown of the economy, there is no legal precedent for this situation.

Q: Can’t a “Force Majeure” provision get you out of a contract since such a clause provides for when there are “major forces” beyond your control?

A: It depends. Many “Force Majeure” provisions are merely designed to protect one or both parties from being liable for damages as a result of not being able to perform. But there are other legal theories that one party or the other might be able to rely on in not performing or delaying performance.

For instance, say the coronavirus has prevented a builder from receiving shipping materials on time from China, so he or she won’t be able to finish the project on time. The builder might not be entitled to scrap the project, but they might be entitled to extend the time it takes to complete it.

Q: When we had the H1N1 “swine flu” pandemic 10 years ago, didn’t people learn from that unforeseen event to write in more substantial provisions that address such situations?

A: Some leasing contracts and insurance policies were re-written with provisions that prevent liability due to pandemics. But the economic fallout from that crisis wasn’t nearly as severe as what we have now, so such provisions don’t necessarily cover the current situation.

Q: So what can those who want to buy and maybe pick up some deals right now do to protect themselves?

A: Honestly, right now, I wouldn’t advise buying! If you absolutely want to put yourself out there, I would say you have to write in good loan contingencies if you need financing and as long of a due diligence and closing period as you can get.

Q: Do you think this pandemic will affect the way future contracts are written?

A: Yes. Anyone preparing a contact is going to have to consider the circumstances we have now and who bears the risk. I suspect insurance policies will also be revised to make it clear what is covered or not covered related to a similar outbreak. There’s probably a way for a rider to cover it, but it’s got to be addressed. Leases and purchase agreements may also include provisions to address pandemic-related issues.

Q: Are you seeing a lot of lawsuits filed over these contractual issues?

A: Not yet. They will no doubt come, but now there’s too much uncertainty. Also, the courthouses are generally closed except for true emergencies. The only filings we’re doing are for existing cases. For right now we have to see how this all plays out. It’s pretty much wait and see.

Were you under contract when coronavirus hit? How are you handling the situation?

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.