COVID-19 Clauses in Contracts of Sale
By Nafsika Starvaggi
18 August 2021
The uncertainty and instability of the COVID-19 pandemic continues, as Melbourne endures lockdown 6.0 and other parts of Australia are in various stages of lockdowns and/or restrictions being reimposed in response to spread of the Delta variant of COVID-19.
Over the past 18 months this uncertainty and instability has naturally disrupted and created uncertainties and risks in Contracts for the sale and purchase of properties of all asset classes. This has been made more difficult by stay-at-home orders, bans on in-person inspections and auctions and most recently, the reintroduction of the Commercial Tenancy Relief Scheme (CTRS) (of which you can read more about by clicking here).
COVID-19 is ever-evolving and so too are the far-reaching implications it has on existing and future contractual obligations of sellers and purchasers. The additional risks created by COVID-19 are unique to each property and unique to each seller and purchaser. Each situation requires careful review on a case-by-case basis.
Having said this, the below are some general points that may need to be considered in a Contract of Sale. This blog will not examine force majeure clauses or the doctrine of frustration in any detail, other than to note that these are separate concepts which, depending on the circumstances, may also have some application to COVID-19 affected contractual obligations:
- What specific contractual obligation(s) could a party need to be excused from complying with if COVID-19 precludes their compliance? For example, if the seller is required to carry out works pre-settlement.
- What happens if COVID-19 delays settlement or precludes settlement from occurring, and what are the resulting consequences (i.e. time extension)?
- For residential properties purchased sight unseen or with the benefit of virtual inspections only, will the purchaser have a later right to inspect and what rights (if any) flow from that later inspection if the purchaser is unhappy.
- For residential properties sold subject to a residential rental agreement, has the seller granted any COVID-19 rent relief (that is required by law, or which the seller has decided to grant voluntarily)?
- For commercial properties sold subject to leases:
- how will any COVID-19 rent referrals from CTRS 1.0 and/or 2.0 be dealt with between the seller and purchaser at settlement?
- has the seller granted any further COVID-19 rent relief as required by CTRS 2.0, or which the seller has decided to grant voluntarily? If so, does this result in any extension to the duration of the lease term?
- For residential or commercial properties where COVID-19 relief has been provided as required by law or granted voluntarily, what power will the seller have to enter into further COVID-19 arrangements after the day of sale up until and including settlement? A purchaser is likely to want oversight and visibility on this after the day of sale, particularly on any voluntary arrangements intending to continue post-settlement.
- For Contracts of Sale that are subject to a due diligence period, what happens if COVID-19 precludes a purchaser and its consultants from completing its due diligence enquiries?
The above is not intended to be exhaustive or complete, but rather some general examples of issues that may require consideration and inclusion in a Contract of Sale.
Ultimately, in preparing a Contract of Sale during these uncertain times, it is important to first and foremost bear in mind the risk that the seller and/or purchaser is seeking to deal with. This will inform how the Contract of Sale clauses are drafted and to whom and under what circumstances flexibility is given. A well thought out and drafted Contract of Sale can help provide some assurance and guidance to the parties on dealing with the ever-evolving COVID-19 uncertainties.
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