Kydon Segal Lawyers


Can Purchasers rescind contracts for sale due to Covid-19?

Over the last few weeks the world as we know it has been turned on its head by the Covid-19 virus.

The majority of the population is facing unprecedented unemployment and financial uncertainty, financial markets are in freefall and financial institutions are, again, tightening their lending criteria.

The current situation is particularly problematic for purchasers, who only a few weeks ago thought that the property market was rebounding, to obtain the finance required to complete their purchases.

So what options are available to purchasers who are unable to complete their purchase and what measures, if any, can a purchaser take when entering into a contract?

Purchasers who have already entered into Contracts

Pre-covid-19, purchasers who were unable to complete their purchases would forfeit their 10% deposit and be liable to being sued for damages by the vendor.

Unfortunately, nothing has changed. The standard Contract for Sale provides no mechanism whereby the purchaser could rescind the contract or delay settlement due to the current impact of covid-19 and the reality is, many purchasers will lose their deposits.

So what can a purchaser do?

  1. Frustration 

    It may be possible to argue that the contract has been frustrated.

    Frustration is a common law doctrine which operates to bring a contract to an end in circumstances where an intervening, post-contract event, has occurred through no fault of the parties. The intervening event must:

    1. make a contractual obligation impossible to perform; or
    2. transforms a contractual obligation into a fundamentally different obligation.

The problem with arguing frustration is that it is enormously difficult to establish when it comes to Contracts for the Sale of Land or Property.

2. Negotiate with the Vendor 

The best option available to a purchaser is to talk to the vendor and attempt to reach a commercial agreement.

For example, a purchaser may offer to pay the vendor a fee in return for their agreement to delay settlement finance has been secured.

In the current environment where there are restrictions on public gatherings, open house inspections and auctions, a vendor has no incentive to terminate the contract (ie there is no guarantee that they will be able to resell their property at a reasonable price and in a timely fashion) and therefore there is a strong incentive for the vendor to do all that it can to reach a commercial resolution to ensure that the contract can be completed.

Purchasers who are currently Negotiating Terms

For prospective purchasers there are some options available to them which may provide protection in these uncertain times.

  1. A Force Majeure Clause

    A force majeure clause allows the contracting parties to be excused from contractual obligations and liabilities in circumstances where they were prevented from performance.

    Force majeure clauses are often found in commercial contracts and they detail the event(s) or circumstance(s) in which the contracting parties could terminate the contract.

    There is no standard force majeure clause contained in the standard Contract for sale and it will require the purchaser’s solicitor to carefully draft a clause to sufficiently deal with the current covid-19 situation.

    We have now drafted a specific force majeure clause that specifically refers to the impacts of Covid-19.

  2. A Subject to Finance Clause

    Another option is to incorporate a Subject to Finance clause into the Contract for Sale. These are commonly used in Queensland but have been less common in NSW in recent years.

    A vendor usually requires a purchaser to warrant that they have finance prior to entering into the Contract for the sale of land and property. However, it is open to a purchaser to negotiate that a Subject to Finance clause is included in the Contract for sale.

    A Subject to Finance clause provides the purchaser with an opportunity to terminate the contract in circumstances where they are unsuccessful in obtaining finance.

    A well drafted Subject to Finance clause will provide for a period of time whereby the purchaser is required to take all reasonable steps to obtain a loan and the purchaser must, prior to the expiration of that period of time, notify the vendor that they have been successful in obtaining finance or, alternatively, they have been unsuccessful and wish to terminate the contract without any penalty.

    Additionally, it should be noted that, if you are a vendor who’s sale is subject to a finance clause, you should avoid committing to purchasing a new property until the sale of your existing property is unconditional and no longer subject to finance.

    We hope that this post finds you in good health and that the information in the post becomes redundant as soon as possible as we all work together to defeat this horrible virus.