In these testing times, as the global and local situation continues to develop with regard to the Covid-19 pandemic, the business and legal impacts present opportunities to adapt real estate transactions to future-proof them.
We're well placed to help you navigate these uncharted waters. In recent weeks we have seen an increase in queries from both vendors and purchasers of high-value residential properties who have exchanged contracts to sell or purchase a property but are unable to close due to a number of reasons linked to the Covid-19 pandemic. We have also seen an increase in requests for bespoke Covid-19 clauses to be included in real estate contracts to address certain closing concerns that may be relevant during the course of the Covid-19 pandemic.
In this briefing note we consider the legal position of a purchaser and vendor who have exchanged contracts but cannot close due to the Covid-19 pandemic and look at how Covid-19 clauses can assist real estate transactions.
What happens if you have entered into a CIREBA Contract but cannot complete due to the Covid-19 pandemic?
When buying and selling residential properties in the Cayman Islands, vendors and purchasers typically enter into a standard form of contract known as the Cayman Islands Real Estate Brokers Association ("CIREBA") Offer to Purchase (the "CIREBA Contract"). Unsurprisingly, where the CIREBA Contract is unconditional or where the conditions in the CIREBA Contract have been satisfied or waived, the CIREBA Contract does not provide any protection for a purchaser or a vendor who is unable to close on an agreed completion date due to reasons arising from the Covid-19 pandemic.
Without a specific provision or condition in the CIREBA Contract, there is a risk that a vendor who is unable to complete on the specified completion date will be liable for damages and losses pursuant to clause 17 (b) of the CIREBA Contract. Furthermore, under clause 17 (b) (2) of the CIREBA Contract, if the specified date for completion has passed and the vendor is in a position to complete it may serve a Completion Notice on the purchaser requiring the purchaser to pay the balance of the closing monies within 7 days after service of the Completion Notice. If a purchaser fails to comply with the Completion Notice, the vendor is entitled to the purchaser's deposit (usually 10% of the purchase price) together with any interest earned as liquidated damages and the CIREBA Contract will terminate immediately.
Whilst the CIREBA Contract does contain wording which allows the parties to complete after the specified completion date this is entirely at the vendor's discretion, which is not ideal for a purchaser who is faced with the risk of losing its deposit and is left relying on the goodwill of a vendor.
How can including Covid-19 clauses in a CIREBA Contract help both vendors and purchasers?
In the current climate most parties will not want a CIREBA Contract to terminate immediately where there is a delay to completion or difficulty complying with other provisions of the CIREBA Contract because of issues that are entirely outside of a party's control due to the Covid-19 pandemic. For this reason, and for the reasons mentioned in the paragraphs above, we strongly recommend that all new CIREBA Contracts include Covid-19 clauses as conditions to the CIREBA Contract. Where CIREBA Contracts are already exchanged and completion is not imminent, we would also recommend that vendors and purchasers consider varying the contract to include a Covid-19 clause.
We would be happy to assist realtors, vendors or purchasers with drafting specific Covid-19 clauses or varying existing contracts to include Covid-19 clauses. Covid-19 clauses can take a variety of forms depending on the specific circumstances of the transaction but they generally provide that:
- a party will not be in breach of its obligations under the CIREBA Contract because of a delay caused by Covid-19 (i.e. "a Covid-19 Event");
- the vendor's right to serve a Completion Notice and the purchaser's right to pursue a vendor for failing to complete on a specified completion date will be suspended where a Covid-19 Event is preventing the other party from completing;
- either party will have rights to terminate the CIREBA Contract if completion does not occur by a specified date (for example, 1 month after the original specified completion date) so as not to create an open-ended contract.
In the new clause, "Covid-19 Event" should be defined widely and may include any of the following: illness/self-isolation of the purchaser or vendor, any government measures designed to reduce transmission, inability to get documents executed and notarised and the unavailability or withdrawal of financing.
Although Covid-19 clauses are not a perfect solution, including these in your CIREBA Contract ensures that closing can be delayed for an agreed period with no penalty or breach for either party if there is a genuine Covid-19 Event.
In this new world of uncertainty, Covid-19 clauses provide some reassurance particularly for a purchaser who, under the terms of a CIREBA Contract absent of Covid-19 clauses, risks losing its deposit if a Completion Notice is served and the purchaser then fails to complete due to complications arising from the Covid-19 pandemic.
We would be happy to discuss Covid-19 clauses with realtors, purchasers or vendors so please do get in touch with a member of the team.
Partner | Cayman Islands
Senior Associate | Cayman Islands