KPA Lawyers – May 7, 2020

As an extension of my article posted April 2, 2020 entitled “COVID-19 and Ontario Real Estate Agreements,” I thought it would be a good idea to delve into the clauses real estate brokers are adding to Ontario Agreements of Purchase and Sale to contend with potential implications caused by COVID-19. As I have mentioned before, adding boilerplate clauses to any Agreement of Purchase and Sale without thorough discussion of what the clauses say and their implications with Buyers and Sellers is risky.

As a Buyer or Seller, it is important to analyze the proposed COVID-19 clauses critically and I highly recommend you discuss them with your real estate lawyer prior to signing any Agreement.

The first of three proposed COVID-19 clauses that are making appearances in Agreements reads as follows:

Buyer and Seller agree that if (i) Buyer’s bank and/or mortgage lender or (ii) the applicable Land Registry Office, temporarily ceases operations, such that either party is frustrated from completing this transaction for reasons wholly outside the control of that party, then the closing date shall be automatically extended to the date that is two (2) business days following the resumption of the interrupted bank or land registry services (or sooner if the parties agree).

Let’s deconstruct the above clause. While it is attempting to address closures, the reality of those closures occurring is very unlikely. Jeffrey Lem, who is the Director of Titles for Ontario’s Land Titles Act, the Registry Act and other related legislation, has advised that Land Registry Offices are not going to cease operation. Furthermore, Land Registry Offices have been identified as an “essential service” in the Province’s original and revised lists of essential services. As for banks and lenders, there has been no indication that they would “cease operations,” albeit it is not clear what ceasing operations actually entails in the context of the clause.

Second, if a bank, lender or LRO cease operations, it does not seem probable that the release of funds and closure of a transaction would be feasible within two (2) business days following the commencement of operations, let alone “sooner if the parties agree.” Dates would need to be amended, a new mortgage payout statement provided, mortgage approval and disclosure statements prepared and signed.

Ultimately, the clause addresses a situation that is very unlikely to happen and if it were to happen, the timeline to contend with that situation is unrealistic.

The second clause found in Agreements addresses delays as opposed to closures, but the overlap between the two suggest they can’t be used together.

Buyer and Seller acknowledge that due to measures taken by the Provincial Government in response to the current COVID-19 pandemic, there could possibly be a delay at land registration that would affect the actual registration date from the date herein contemplated. In such event, the Buyer and Seller hereby agree to extend the completion date of this transaction until the next possible date following the scheduled date of completion that registration could actually be effected, with no additional charges being made to the Buyer. Notwithstanding the foregoing, in the event the Buyer’s title Insurer has provided “gap coverage” to the Buyer, and all closing funds have been paid to the Seller’s Solicitor in trust, keys may be released (possession transferred) to the Buyer with title transfer and registration to take place at a later date. In such circumstances all expenses and risk related to the property shall be the responsibility of the Buyer from the date of such escrow closing.

Notwithstanding that it is unclear whether the measures taken by the Provincial Government in the clause include a cessation of operations, the extension of the completion date until the “next possible date” contradicts the first clause. If both the first and second clause are to be used together, this will need to be amended amongst other things.

The concept of closing with funds held in trust also raises issues as to costs that would then be attributed to the Seller. Any mortgage on title to be discharged would be charging interest for each day beyond the closing date that funds are not paid to payout the mortgage. This is an unreasonable cost to the Seller given the Buyer will be benefitting from possession of the property.

If an Agreement plans to account for an escrow closing, Buyers and Sellers are encouraged to have their real estate lawyer prepare the relevant clauses and conditions for it. They should not be relying on this clause.

The third and final clause that has been added to Agreements of Purchase and Sale in light of COVID-19 is as follows:

The Buyer and Seller agree and acknowledge that in the event that the Buyer or Seller to the Agreement becomes the subject of a mandatory COVID-19 virus quarantine at the time of performance hereunder that results in the parties’ inability to complete the transaction as scheduled, the closing shall be automatically extended at the request of either affected party for a period of fourteen (14) calendar days, unless the parties otherwise mutually agree to extend the Completion Date further. If this clause is invoked, the Buyer and Seller shall continue to act in good faith and use their responsible best efforts to ensure the completion of the transaction occurs on as timely a basis as possible, and will not use this as a means to delay closing in anticipation of any such quarantine or closure, or for reasons unrelated to COVID-19. Time shall remain of essence for any extended closing date as a result of this clause.

The above clause is interesting in that it refers to a mandatory quarantine and only accounts for an infected individual being sick for 14 days. Quarantining yourself once you become sick as a result of COVID-19 is not a law, but a policy. Additionally, there is no guarantee that the infected party will be well within 14 days. The clause should also account for the party being sick longer, but it doesn’t. It goes from a hard deadline of 14 days to a soft deadline wherein arguments may be made that a sick party is attempting to delay a transaction. It is best to address this situation within the clause.

Additionally, many real estate lawyers are now allowing for electronic signing of documents, provided lenders agree to it, so there is a very good possibility that the transaction can still close without the need for “original” documents.

Ultimately, it is wise to account for delays to closings as a result of COVID-19, but Buyers and Sellers should really analyze what they hope to achieve by including such clauses. Contradictions, unrealistic situations and incomplete or impractical solutions will only create uncertainty in the Agreement and could lead to litigation if interpreted differently between the parties.

This article is intended to be information and does not constitute legal advice. Every situation is different. KPA Lawyers is open and offering free telephone consultations in an effort to maintain public access to legal information during this difficult time. If you need advice about your transaction, give us a call at 905-965-626