Force Majeure in Residential Real Estate Transactions: How Are Hurricanes Treated and How Might the COVID-19 Pandemic be Treated

Apr 23

In residential real estate transactions, there are sometimes unforeseeable circumstances that can cause delays in the contractual closing date. Certain closing delays are caused by Force Majeure, a French term that literally means “superior force.”

Today, we are seeing closing delays caused by the COVID-19 pandemic and in the coming months will likely see delays from hurricanes.

This article provides:

An overview of what constitutes Force Majeure;
An outline of the Force Majeure provisions in the Florida Realtors and Florida Bar Residential Contract for Sale and Purchase and the“AS IS” Residential Contract for Sale and Purchase (together, the “FAR/BAR Contracts”);
A discussion of how closing delays caused by hurricanes are handled under the FAR/BAR Contracts; and,

An analysis of how closing delays caused by the COVID-19 pandemic may be handled under the FAR/BAR Contracts.

What is Force Majeure and How is it Treated Under the FAR/BAR Contracts?

“Force Majeure” refers to an unanticipated event or circumstance that makes performance of certain obligations under a contract difficult or impossible. Most contracts contain provisions that dictate the effects of a Force Majeure event on the time frames for completing contractual obligations. There is no statutory definition for Force Majeure. Therefore, what constitutes Force Majeure depends on the specific language in the contract in question, and how courts have previously interpreted similar Force Majeure situations.

The FAR/BAR Contracts define Force Majeure in Paragraph 18(G) as “hurricanes, floods, extreme weather, earthquakes, fire, or other acts of God, unusual transportation delays, or wars, insurrections, or acts of terrorism, which, by exercise of reasonable diligent effort, the non-performing party is unable in whole or in part to prevent or overcome.”

Under this provision, the buyer and seller are not required to perform the contract obligations and are not liable to each other for damages when a Force Majeure event occurs and the Force Majeure event causes services essential for closing to be unavailable. These services can include utilities such as electricity, water and sewer, as well as homeowners’ insurance.

If an event constituting Force Majeure causes services essential for closing to be unavailable, all time periods under the FAR/BAR Contracts are extended for up to 7 days after the Force Majeure no longer prevents closing.

If Force Majeure continues to prevent performance for more than 30 days beyond the closing date, the FAR/BAR Contracts allow either party to terminate the contract by delivering written notice to the other party. In such an event, the buyer will receive a return of their earnest money deposit, thereby releasing the parties from all further obligations under the contract.

Force Majeure and Hurricanes

We most commonly see Force Majeure events causing closing delays for residential real estate transactions in Florida due to hurricanes.

The most obvious concern for the parties when there is an impending hurricane is what happens in the event the hurricane causes damage to the property. In that case, Paragraph 18(M) of the FAR/BAR Contracts provides that if the cost to repair the property does not exceed 1.5% of the purchase price, then the cost of repair is a seller obligation and the seller can escrow 125% of the estimated cost to complete the repairs at closing, so that the repairs can be completed after closing.

However, if the cost to repair the property exceeds 1.5% of the purchase price then the buyer has the option to go forward with the purchase together with the 1.5% or to terminate the contract and receive a refund of their earnest money deposit, thereby releasing both parties from all further obligations under the contract.

Beyond the risk of property damage posed by hurricanes, hurricanes can also delay closings by:

Preventing a buyer from being able to conduct appraisals, inspections and walk-through obligations under the FAR/BAR Contracts;

Delaying any repairs that the seller agreed to make under the contract;

Causing utilities (such as electric, water, and sewer) to be unavailable; or,

Preventing homeowners insurance companies from binding policies for buyers.

In these situations, the FAR/BAR Contracts Force Majeure provisions automatically extend the dates under the contract, including the closing date and inspection periods, for up to 7 days after Force Majeure no longer prevents performance. If performance of contractual obligations is delayed by more than 30 days, then the FAR/BAR Contracts allow either party to terminate the contract and refund the earnest money deposit to the buyer, as mentioned earlier.

In the event the parties choose to terminate, they should execute a Cancellation and Release Agreement memorializing that decision.

The COVID-19 Pandemic

Potential Closing Delays

The COVID-19 Pandemic presents an unprecedented situation that impacts all transactions at a global scale. In terms of residential real estate transactions, there are several potential issues where closings can, and have been, delayed due to COVID-19.

Similar to when there is a hurricane, the COVID-19 pandemic can cause delays by preventing a buyer from being able to conduct appraisals, inspections and walk-through obligations under the FAR/BAR Contracts and delaying any pre-closing repairs under the contract. However, the COVID-19 pandemic has caused additional unique issues that we do not see with hurricanes, which we discuss below.

Availability of In-Person Closings and Notary Services
First, the lack of availability of in-person closings and notary services for those signing remotely can cause delays in closing. Although Governor Ron DeSantis declared real estate an essential service in Executive Order 2020-91 and most title companies are still able to facilitate in-person closings in Florida, many buyers and sellers prefer to sign remotely during this time and they are having trouble finding notaries to execute the required documents since most banks are closed. Furthermore, buyers and sellers are sometimes located in nursing homes or other care facilities, in other states, and even in other countries which have imposed strict restrictions on leaving their homes at this time.
As we discussed in a previous article, the Florida legislature enacted Sections 117. 201-305, Florida Statutes, in 2019 which authorizes Florida notaries to perform remote online notarizations (RON). However, many lenders do not approve of the use of RON for real estate transactions and still require wet signatures on the loan documents.
Inability to Obtain Loan Approval Due to Changes in Employment
The second issue we are seeing is that buyers with changes to their earnings and/or employment status due to the COVID-19 pandemic are unable to obtain loan approval. Lenders are rapidly implementing policies and procedures to verify there has been no change in employment or earnings within 24 hours of closing due to the ever changing circumstances and great increase in unemployment. Additionally, it has been more difficult for lenders to verify employment due to the increase in people working from home.
Banks Temporarily Closing Branch Locations
Third, buyers are having difficulty initiating wires or obtaining cashier’s checks with the increase in physical bank branch locations closing. The amount the buyer needs to bring to closing is often not finalized until the day before closing but buyers are having to initiate wires or obtain cashier’s checks further in advance than usual as it is taking some banks longer to process these requests.

Force Majeure and COVID-19

Unlike with hurricanes, pandemics are not specifically listed in the definition of Force Majeure under the FAR/BAR Contracts. The classification of COVID-19 as a pandemic by the World Health Organization (WHO) does not automatically trigger the time extensions under the Force Majeure clauses in the FAR/BAR Contracts.
Pandemics may fall under the catch-all provision in the FAR/BAR Contracts Force Majeure definition as “acts of God . . . which, by exercise of reasonable diligent effort, the non-performing party is unable in whole or in part to prevent or overcome.”

To date, we are unaware of any courts that have directly addressed this question so it is unclear whether the COVID-19 pandemic constitutes Force Majeure at this time. Even if the COVID-19 pandemic qualifies as Force Majeure, it is not enough to trigger extensions under the FAR/BAR Contracts unless it also causes “services essential for closing to be unavailable.” See Paragraph 5(b) of the FAR/BAR Contracts. At this time, services essential for closing are still available; they are just more difficult to access.

In March 2020, the Florida Association of Realtors released the Coronavirus (COVID-19) Extension Addendum to Contract that allows for time periods and dates to be extended as a result of the COVID-19 pandemic. The Addendum covers extensions for the closing date, financing period, inspection period, title cure period, feasibility study period, due diligence period, and homeowners’/condominium association approvals as well as a provision for a loan-approved buyer if there are changes from the lender as a result of the COVID-19 pandemic.

While the Addendum could provide clarity for the time periods and dates to perform contractual obligations for parties that are already under contract, it does not address the timing for completing any repairs, surveys, or certain other inspections under the FAR/BAR Contracts. We should also note that this Addendum was not approved by the Florida Bar at the time of publication of this article.

Conclusion

Ultimately, there are no clear answers to if and how the Force Majeure provisions of the FAR/BAR Contracts apply to the COVID-19 pandemic. However, as a rule of thumb, a “more difficult” or a “more challenging” closing does not equate to “impossible.” Buyers, sellers, and their agents should “think outside the box,” and assess all available options to close. In the event that a closing becomes impossible or next to impossible to perform, the parties should document their attempts to complete the closing.

The disruption caused by the COVID-19 pandemic is unprecedented and there are many uncertainties during this time. The attorneys at Mangrove Title & Legal, PLLC, are continuing to monitor the developments for real estate transactions and are available to help navigate these uncertain times.