Delays to Commercial Property Transactions due to COVID-19
As the famous idiom goes “better the devil you know” – we have considered various ways in which the COVID-19 pandemic could impact a commercial property transaction.
Prior to exchange of contracts, parties may experience the following obstacles:
- Lenders withdrawing loan offers or offers being revised and based on a lowered valuation for the Property
- Visits to the Property for valuations and surveys being delayed
- Local authority searches being delayed – we are aware of a number of local authorities closing such services for the time being
- If the Buyer already has searches in hand, the searches could become out of date and therefore obsolete due to delayed transaction – you could consider search delay indemnity insurance if a delay arises. Although if there is a lender assisting with the purchase then their instruction should be checked to see if they too are willing to rely on indemnity insurance
Between exchange of contracts (if applicable) and completion, the parties could also be affected by:
- Restrictions on movement to the Property in order to handover and limited removal services being available
- Decontamination being required to the Property (if it is presently occupied) due to the occupiers being infected by COVID-19
- Difficulty obtaining witnesses when executing deeds and circulating the original documents back to the Solicitor in readiness for completion
- Failure and disruption to the banking system – we are aware that CHAPS services are being restricted by some Banks to matters that are urgent
- The inability of the seller to give vacant possession of the property on completion (where applicable) due to the occupants self-isolating or shielding
Due to the various risks, a lot of parties are presently taking the “wait and see” approach and not exchanging contracts or proceeding by way of simultaneous exchange and completion (to ensure they will be ready to complete on the completion date before they exchange and are contractually bound).
The Government have recently provided guidance, albeit with reference to residential conveyancing, suggesting that:
- if the property being moved into is vacant, the transaction can proceed
- if the premises is occupied, for completion dates to be changed to a time when movement restrictions are expected to be lifted
Overall they are encouraging parties to delay moving where possible.
What are the consequences of failing to complete (due to a matter arising relating to COVID-19) if you have exchanged contracts to do so?
There are a number of consequences for being in breach of your contract such as:
- the non-defaulting party can serve a Notice to Complete making the completion date “of the essence”. Under the standard conditions the completion date will be set from 10 working days after the Notice to Complete is given. If completion does not happen by that fixed date then the non-defaulting party can choose to rescind the contract. The non-defaulting party should, however, carefully consider its position prior to serving a Notice to Complete as, if the tables were to turn before the expiry of the Notice to Complete so that the defaulting party could then complete and the non-defaulting party could not (e.g. the defaulting party’s period of self-isolation ends only for the non-defaulting party to have to go into self-isolation), it will be the non-defaulting party that will be in breach of contract and will potentially incur the following penalties;
- if the buyer is in default:
- the seller will be entitled to retain any income from the property (e.g. rent from a tenant) for the period from the original completion date to the date of actual completion
- if the buyer paid a reduced deposit on exchange, the deposit is to be topped up to the full deposit required (typically 10% of the purchase price)
- interest is payable on the purchase price from the original completion date to the date of actual completion (calculated under the terms of the contract)
- upon recession of the contract, the deposit will be forfeited and damages will be due to the seller, e.g. if the seller goes on to sell the property to a third party for a lesser price than as a agreed with the buyer, that may be the difference between the prices
- if the seller is in default:
- the Buyer can choose to rescind the contract, and the deposit must be repaid to the Buyer with accrued interest
Parties to contracts are being encouraged to take a “good faith” stance if completion cannot go ahead due a matter arising relating to COVID-19 in view of the unprecedented nature of it.
However you cannot reliably expect the non-defaulting party to take a good faith view.
If you are willing to proceed to enter into a contract further to considering the potential disruption that may be caused by COVID-19, then you could consider adding a bespoke COVID-19 clause to the contract.
There is no standard form of such clause at present, however generally they are drafted so that the parties can delay the contractual completion date if completing on that date may be impeded by matters relating to COVID-19. If completion cannot go ahead by a pre-agreed long stop date, then the parties can choose to rescind the contract and the deposit can then be returned to the buyer.
Written by, Annie Webb, Solicitor at Bennett Griffin LLP
Other articles in this series:
- Does your commercial contract contain a Force Majeure clause?
- Commercial Lease Rent Payments, Enforcement
- Buildings Insurance, Lease Covenants
- “Exit” options in existing Leases
Please note that this update is not intended to be exhaustive or be a substitute for legal advice. The application of the law in this area will often depend upon the specific facts and you are advised to seek specific advice on any given scenario.
Please feel free to contact us in order discuss your circumstances, and how we can structure the transaction and draft the contract to match your objectives and appetite to risk associated with COVID-19 – Simply call the team on 01903 229999, visit the team page to contact the relevant department or complete the form below.