The current pandemic is forcing the government to urgently consider all aspects of the economy and the day-to-day running of the country, in particular the effect of COVID-19 on property transactions in view of the 'stay-at-home' guidance.
The guidance confirms that "there is no need to pull out of transactions", but compliance with the measures for self-isolating, shielding and social distancing is required. This may mean that moving house is not possible. Where the property being moved into is vacant, the parties may continue with the transaction, provided they follow the government's guidance. Where the property being moved into is occupied, parties are encouraged to delay the move, if possible, until the stay-at-home measures are lifted. Critical home moves are exempt from the police emergency enforcement powers in the event that a new date cannot be agreed.
Conveyancers are advising clients not to exchange contracts on an occupied property unless the contract contains express provisions for the risks presented by COVID-19.
However, there will undoubtedly be situations where parties cannot agree to the inclusion of those clauses, or where contracts have already been exchanged.
Whilst the legal position will vary depending upon a variety of factors our Litigation Team have considered the potential outcomes where a buyer/seller cannot complete a residential sale contract due to COVID-19.
Could the contract terminate?
While COVID-19 might delay completion, it does not completely render the contract frustrated (but this will turn on the facts) and it is very unlikely that a the contract would terminate.
The Standard Conditions of Sale contain provisions dealing with delayed completion and also some remedies. Under Standard Condition 6, a notice to complete may be served when the completion date has passed, and completion has not taken place.
A notice to complete may only be served by a party who is ready, willing and able to complete. Therefore, if completion cannot happen because of measures relating to COVID-19, then it may be impossible for a party to serve notice to complete. There might be situations where this is possible, for example, person A is selling their second home in Old Town to person B. Person B needs to sell their property in New Town in order to raise the funds needed to complete the purchase from A, but B is a High Risk individual and is isolating for a minimum of 12 weeks. There is no direct problem for A in completing, so they could perhaps serve notice to complete, even though B's failure to complete is entirely outside of B's control.
If notice to complete is served, time will become of the essence, which could mean that B could try to claim that completion is impossible for them. Before time was of the essence, B might not be able to show that completion, at some point, would be impossible, but once a strict time limit for completion applies, B might then be able to claim that the contract has been frustrated. However, in the example we give, the frustrating event really relates to a separate contract, so we cannot be sure that B's argument would succeed. Frustration is difficult to establish and it is very unlikely that a contract for the sale of a property would be terminated. If B were unsuccessful, that could leave B out of pocket without any fault.
Late completion
If a party is unable to complete on time, liability will depend upon exactly who is affected, and to what extent.
Under the Standard Conditions of Sale, if either or both parties default in performing their obligations under the contract and completion is delayed, the party who has been in default the longest must pay compensation to the other. Compensation is calculated at the contract rate on the purchase price (less the deposit, where it is the buyer who is paying compensation). The contract rate is the rate of interest charged on the completion monies due if completion takes place after the contractual completion date. It is payable for the shortest of:
The period by which the paying party's default exceeds that of the receiving party.
The period between the completion date and actual completion.
In the above example, B might be liable to pay A damages for late completion, even though B's failure to complete is for reasons outside of its control.
The seller may want to provide that a defaulting buyer should pay the seller's costs, for example, relating to temporary accommodation or the interest charges on a related purchase (if higher than on the sale) or bridging finance.
The buyer may want to provide that a defaulting seller should pay the buyer's costs, for example, relating to temporary accommodation, storage costs or re-arranging the removal firm.
However, any compensation provisions must constitute a genuine pre-estimate of a party's loss or they may be deemed a penalty and unenforceable.
There could also be a risk to buyers if completion is delayed, because of the possibility of a mortgage offer running out. UK Finance has confirmed that lenders are working on ways to support would-be borrowers that have exchanged contracts. This includes looking at extending mortgage offers for up to three months to enable the move to take place at a later date.
What are the consequences of a buyer or seller not completing with a notice to complete?
If the seller serves a notice to complete on the buyer and the buyer still does not complete, the seller may rescind the contract and:
- Forfeit and keep any deposit and accrued interest on the deposit.
- Re-sell the property and its contents.
- Claim damages including consequential losses.
The seller also retains any other rights and remedies it may have for example, specific performance (see our article on specific performance for further details).
If the buyer serves a notice to complete on the seller and the seller still does not complete, the buyer may choose to rescind the contract. If so, the seller must repay the deposit, with accrued insert to the buyer and the buyer must return any documents received from the seller and at the seller's costs, must cancel any registration of the contract.
The buyer also retains any other rights and remedies it may have for example, specific performance (see our article on specific performance for further details).
The remedies available to a party will depend very much on the precise facts, including the terms of the contract, the nature and scope of any lockdown, and particular facts, such as the availability of removals people.
This is of course an unprecedented event and the situations currently faced are therefore unusual and the government may decide to put in place emergency legislation.
If you are in the process of buying or selling a property and you are concerned about the effects of COVID-19 then please speak to one of our Litigation Team who would be happy to assist. Contact us on 01603 693500 or email us using the 'Make an enquiry' form.
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*This article is provided for general information purposes only and does not constitute legal advice or other professional advice.
