Force Majeure
A “force majeure” clause (French for “superior force”) is a contract provision that relieves the parties from performing their contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible.
Home buyers, sellers and Canadian real estate investors wondered whether a pandemic is considered force majeure (unforeseeable circumstances or “acts of God”), which could free them of their obligations in case housing prices were to plummet in the next few weeks. Others may be facing other liquidity issues.
A force majeure clause typically operates to absolve the non-performing party of liability for its failure to meet contractual obligations as a result of the extenuating circumstance, but its precise effect will depend on the language of the provision.
Quebec usually have this clause in their contracts.
Historically, force majeure events were recognized as forces of nature or acts of God events. However, the clause can and has been expanded to include events which are industry or transaction specific. Certain events created by extraneous human intervention can also fall under the category of force majeure events.
Example: fire, flood, earthquake, storm, hurricane, other nature disasters, war, invasion, act of foreign enemies, hostilities, civil war, rebellion, revolution, insurrection, military or usurped power or confiscation, terrorist activities, nationalization, government sanction, blockage, embargo, labor dispute, strike, lockout or interruption or failure of electricity or telephone service.
Data from the Canadian Real Estate Association (CREA) indicates that 65,494 homes were sold across Canada in the first two months of 2020, meaning that as many as 130,000 families may be in limbo, waiting for their transactions to close.
In the province of Ontario, Canada buyers, sellers and Canadian real estate investors are bound by their obligations under the Ontario Real Estate Association’s (OREA) Agreement of Purchase and Sale.
The only way a deal cannot close is if the government registration system closes down or lenders cannot fund loans, which is not the case right now.
Real estate businesses have been deemed an essential service in Ontario. Thus, real estate brokerages and law firms are allowed to function but with new guidelines to observe social distancing. At the same time, financial institutions are working and extending mortgage credit.
While buyers’ remorse is real, it is no ground to back out of the deal. During and after the Great Recession in 2008-09 and when the foreign home buyers’ tax was imposed first in British Columbia in 2016 and later in Ontario in 2017, many buyers tried to avoid closings after housing prices declined.
Courts, though, have found in favor of sellers in cases where buyers reneged on a signed deal.
An Ontario couple who reneged on a firm offer to buy was ordered by the court to pay $470,000 to make up for the difference in the price they agreed to pay and the subsequent sale price paid by a different buyer.
force majeure is not covered in OREA’s Agreement of Purchase and Sale, parties can include additional clauses in Schedule A of the Agreement. However, such terms must be entered at the execution of the agreement and not after the fact.
In some circumstances, parties may invoke frustration of contract when unforeseen circumstances make it impossible to perform their obligations under a contract. However, the bar to prove the frustration of contract is very high.
If a deal hits a snag, the best way forward is to work it out collegially. Instead of trying to nullify a contract, the parties could agree to a postponement until such time that the transaction can be completed. It is up to the parties to demonstrate that they have made reasonable, good faith efforts to fulfill their obligations.
Given the current pandemic and recent uptick in flooding and severe weather, which can cause severe damage to homes, it might be time to review standard buyer and seller agreements, which are province-specific.
Much can transpire during a sale and its closing. Introducing new standard clauses to protect both sides while providing opportunities for insurers to price risk will offer greater stability in uncertain times.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.