187: Can I still buy property despite the COVID-19 outbreak?
As the restrictions on freedom of movement and association imposed on society as a result of COVID-19 bite across the world, ordinary daily and commercial life becomes more and more disrupted. The residential and commercial real estate market is as affected as anything else. But is buying and selling property still possible?
This note looks at some of the problems that may arise and how to overcome them to secure an exchange of contracts. Separate notes will look at whether COVID 19’s occurrence might enable the parties to treat the contract as terminated, and whether a buyer is able to recover its deposit even if it fails to complete.
Dealing in property
Government urges ‘parties involved in home moving to adapt and be flexible to alter their usual processes’, including self-isolating or shielding. The practical difficulties of complying with movement restrictions means that it is extremely difficult for private individuals to buy and sell residential property for ordinary residential purposes in the usual way involving physical inspection. There is no exemption for dealing in property from the movement restrictions imposed by the Health Protection (Coronavirus, Restrictions) (England) Regulations 2020 (the COVID Regulations) under which no person may ‘leave the place where they are living without reasonable excuse’.
Determined people will find a way, provided they can ensure everyone involved observes social distancing rules. The COVID-19 Regulations provide (at Regulation 6(2) (f)) for travel to and from work where home working is not a practical alternative. That will allow energy performance certificates and virtual tours for example to be prepared and valuations carried out both for commercial and residential properties. Solicitors will have access to the Land Registry and online Council documents to assist to with preparing sales packages and can work from home to prepare contracts. Prospective buyers can obtain mortgage offers where necessary, provided they meet the usual financial criteria.
Once a transaction has been agreed subject to contract the usual conveyancing process can start. It would be unrealistic to expect that the usual 10 or 15 working day period to get to exchange can be achieved given the likely difficulties, but we think undertaking due diligence and negotiating contracts is achievable in the usual way, or, where it is not, market acceptable alternatives are available.
The most important and significant problem is likely to be obtaining local authority searches which are essential to allow contracts to be exchanged in most cases. Buyers may be willing to rely on representations from sellers who are financially stable that the property is not adversely affected by compulsory purchase orders for example, but this approach is not for the risk adverse or a lender; in any event a better alternative – which a bank may accept – is search indemnity insurance.
Such insurance typically pays out a reduction in value of a property where a search cannot be obtained before exchange of contracts but when it is eventually received disclosed a burden that devalues a property such as a planning enforcement notice. Such insurance is not for every buyer since if an issue is revealed, time and expense is always needed to deal with it, and sometimes money alone only compensates for the issue and does not solve it. In addition not all lenders accept the insurance solution; nevertheless, for those willing to accept the risk such as people buying a second home or buy to let property search insurance could be a practical solution.
More generally the legal market rapidly has evolved standard contract clauses that can be inserted into contracts that allow for the delays that maybe caused by COVID-19 issues, including some of the practical difficulties set out below.
Both buyer and seller may suffer practical difficulties in dealing with the logistics of a transaction. Postal and courier services are disrupted, so it is prudent to leave plenty of time in obtaining signatures. In many cases digital signatures can be applied or authority delegated to solicitors. Unhelpfully it remains uncertain whether a deed is properly witnessed where the purported witness observed the act of signature over a video link. Accordingly parties will need to make arrangements for social distancing of witnesses when a deed is executed. Electronic execution is possible in accordance with section 91 of the Land Registration Act 2020, but some do not accept this is legally effective despite the Law Commission’s opinion to the contrary.
Execution of deeds by third parties may also be required, such as a landlord giving licence to assign or a planning authority completing a statutory agreement enabling completion of a conditional contract. In a chain of residential transactions, completion of one transaction will be dependent on completion of a number of other transactions – and thus on execution of many documents by unconnected buyers, sellers, lenders and (possibly) landlords. Choreography worthy of Diaghilev may be necessary.
Even if documents can be properly executed, a seller still needs to deliver vacant possession at the completion date. The seller’s obligation under a standard contract is to deliver the property empty of people such that the purchaser must be able to assume and enjoy immediate and exclusive occupation and control. The property must also be empty of chattels that would substantially prevent or interfere with the enjoyment of possession. A seller may not be able to rely on its removal company to empty the property to the buyer’s satisfaction.
The problem a buyer is most likely to face is money. This must be tendered in full at completion, and will often be dependent on a mortgage. As in the credit crunch of 2007-8, contracts with long gaps between exchange and completion are likely to be most vulnerable since a buyer dependent on mortgage finance is unlikely to be able to secure a mortgage more than six months ahead of the due date. The problem will be most acute for those buying new build property ‘off-plan’ at high leverage: lenders are already withdrawing some mortgage products; but those at the bottom of a chain of transactions may not be able to deliver funds if the chain collapses and their sale falls through.
The government has issued guidance for the residential market that is well meaning but which does not unilaterally solve many problems: property owners are urged to ‘work together to agree a delay or another way to resolve’ difficulties. The same advice applies in the commercial market. It is helpful there is a specific exemption from the police’s emergency enforcement powers for home moves, should it not be possible for a new completion date to be agreed. The government is working with banks to extend the life of mortgage offers, but it is clear that at the moment the government expects both residential and commercial property transactions to proceed where parties are already legally committed to a transaction.
Attendance at non-residential properties at completion will be permitted for the purposes of work, but only if it is ‘essential’. A well advised purchaser of any kind of property will always wish to inspect it before parting with the completion monies on completion day, but very many transactions complete without such inspection taking place without any difficulty. In any event, a purchaser that discovers that vacant possession has not been delivered can recover damages from the seller if vacant possession is not delivered.
Parties who are determined to buy and sell property will be able to do it under the Coranavirus restrictions currently in place, albeit with some increase in risk and with probable delays. Our next note will look difficulties in achieving completion, and what happens if completion cannot be achieved at all.