Thousands of Canadians bought a home just before the coronavirus crisis hit. As the market conditions are changing, many are wondering whether their deals will close.
At the beginning of 2020, Canada’s real estate market seemed it was headed for a high-yielding spring season. In February, home sales increased by almost 27% year-over-year while the average home price rose by 15% compared to the same month a year ago. However, as the coronavirus outbreak took its toll, the housing market is now faced with new challenges entering the spring season.
Thousands of people bought a home just before the coronavirus crisis set in. Data from the Canadian Real Estate Association (CREA) showed that there were 65,494 homes sold in January and February 2020. This means that 130,000 families are now waiting to see whether their deals will close in the upcoming months. With prices predicted to fall, many are wondering if the pandemic is considered force majeure and will free them from current obligations.
Usually, it takes a few weeks or months until a deal is closed. After a transaction is booked, buyers transfer a deposit that is held in escrow by the seller’s lawyers and the rest of the amount is transferred at closing. Considering the length of the process and the uncertainty that surrounds coronavirus, the situation could definitely change until the deal is closed. With prices dropping just before closing the deal, many buyers could regret paying a larger amount.
For those who want to close the transaction regardless of the amount paid, other challenges may surface. As declining prices could increase the loan-t0-value ratio, valuation metrics may change until closing, leading to buyers paying additional funds.
Experts point out other potential concerns. Though a highly unlikely scenario, financial markets might not extend credit; thus, sales can’t be closed which affects sellers as well. Moreover, many buyers are trying to sell their current properties to be able to afford the new one. In case of severe liquidity constraints, they won’t be able to follow through with the new transaction. Buyers who planned to cash in on their investments to make their down payments could also be affected.
What Buyers and Sellers Need to Know
In an effort to learn what might be helpful for buyers and sellers to know during these times, Financial Post reached out to lawyers specializing in real estate transactions and contract law for information.
According to their statements, in Ontario, B.C. and Quebec the standard residential real estate transactions don’t include force majeure provisions. In Ontario, for instance, buyers and sellers will have to respect their obligations under the Ontario Real Estate Association’s (OREA) Agreement of Purchase and Sale. Mark Weisleder, a partner with the law firm Real Estate Lawyers.ca LLP said:
“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.”
Considering real estate businesses were deemed essential in Ontario, real estate brokerages and law firms are allowed to function while following the new guidelines on social distancing. Moreover, financial institutions are working and extending mortgage credit.
While force majeure is not covered in OREA’s Agreement of Purchase and Sale, experts mention that parties can add additional clauses in Schedule A of the Agreement at the execution of the agreement.
Furthermore, parties can choose to cancel the deal by invoking frustration of contract as unforeseen events prevent them from performing their obligations. As a best practice, parties should agree to a postponement rather than nullifying the contract. The parties have the responsibility to prove they made reasonable efforts to fulfill their obligations given that the bar to prove the frustration of contract is high.
Given the coronavirus pandemic, it might the time to review the standard buyer and seller agreements which are province-specific. New clauses to protect both parties as well as provide opportunities for insurers to price risk could provide stability during this period.