188: COVID-19 means I can’t complete my property transaction

Our previous note described how it ought to be possible to progress a property transaction despite the government’s unprecedented restrictions on personal freedom necessarily imposed by reason of the COVID-19 outbreak. This note considers when one or both of the parties are not ready to complete a transaction, and whether a contract might be considered to be terminated because it cannot be performed by reason of matters outside the parties’ control.

As is well known, if one party to a contract has not completed a contract when due to do so, the other, if it is ‘ready willing and able’ to compete, may serve a ‘notice to complete’. Service of the notice to compete requires the parties to complete within 10 working days of the service of the notice: if completion does not take place either party that is ‘ready willing and able’ to complete at that point may terminate the contract. It does not matter which party actually served the original notice to complete.

To be ‘ready willing and able to complete’ a party must have complied with all of its primary obligations under the contract. In Hanson v South West Electricity Board for example, the contract was conditional on the seller carrying out certain works. The works were completed but the buyer claimed they had been done badly. He refused to complete the contract. The seller served a notice to complete and ended the contract. The Court of Appeal held that although the buyer might be entitled to damages (a secondary obligation under the contract) he could not refuse to complete the contract: the seller had actually done what it was obliged to do. The lesson for buyers hoping to preserve a contract is that they must look for fundamental breaches of contract by the seller. A failure to deliver vacant possession will satisfy the test for example, as will a failure to deliver properly executed documents.

Force majeure and frustration

When contracts become difficult to perform or onerous, lawyers’ thoughts turn to ‘force majeure’ and ‘frustration’ as a way of terminating such contracts without penalty. What are these doctrines?

In Hackney Borough Council v Dore, the judge said, ‘[force majeure] means some physical or material restraint and does not include a reasonable fear or apprehension of such a restraint.’ However, under English law the occurrence of a force majeure event (traditionally storm or earthquake for example) will not of itself allow a contract to be terminated unless the contract itself allows it. Force majeure clauses are common in contracts for the sale and purchase of new build property where the developer seller undertakes to build the property as well as sell it, but are not usually included in contracts for other property transactions.

Where a force majeure is included in a contract, whether it can be invoked to excuse delay or even cancel the contract depends on the drafting of the contract and the nature of the event. Typically an event will need to be specified in a contract as a force majeure event to enable a force majeure clause to be invoked, so unless the contract refers to ‘public health’ or ‘disease’ or similar, COVID-19 will be unlikely to trigger such a clause. It is arguable that COVID-19 is an ‘Act of God’ – words commonly included in force majeure clauses – but it seems unlikely that ‘an unanticipated, unforeseeable and cataclysmic downward spiral of the world’s financial markets” would of itself constitute force majeure.

In any event, merely identifying disease as a force majeure event may not be enough: in the Ebola outbreak of 2014 Morocco invoked force majeure to justify refusing to host the Africa Cup of Nations but the Court of Arbitration for Sport ruled that Ebola did not constitute ‘force majeure,’ because the virus had not made hosting the event impossible – just more difficult. In English conveyancing contracts for new build property, force majeure contracts typically only benefit the developer/  seller so the buyer cannot usually rely on them.

Instead a buyer may seek to rely on the doctrine of frustration. In the words of Lord Radcliffe in Davis Contractors Ltd v Fareham UDC (1956):

‘frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.’

It seems unlikely that contracts for the sale and purchase of property will be frustrated by the COVID-19 outbreak: if the contract is completed the parties will still get what they bargained for. The case of Universal Corporation v Five Ways Properties Ltd is instructive: here the purchase monies did not become available from Nigeria (they arrived 11 days after the contract was terminated) because of changes in Nigerian exchange control law, and the seller terminated the contract. The buyer argued the contract was frustrated by events outside its control, but the argument did not succeed: in the Court of Appeal Buckley LJ said that while:

‘the purchasers were unable, by reason of matters beyond their control, to complete the contract when they should have done so, [this] is something quite different from the contract having become incapable of performance.’

We should briefly mention the possibility of supervening illegality: under English law, a contract is discharged if its performance becomes illegal. A law that merely hinders performance does not satisfy this test, and so – since government has not made performance of property contracts generally unlawful and indeed is expressly permitting homeowners to move house during the COVID-19 outbreak – it seems unlikely that contracts would be terminated on this ground given, as mentioned above, government clearly expects transactions to proceed if renegotiation is not possible.

What then is a buyer to do if it fails to complete a contract by reason of COVID-19 induced difficulties? In such circumstances the seller is entitled to forfeit the deposit and may in addition sue for damages if those are greater than the amount of the deposit.

Section 49(2) of the Law of Property Act enables the Court to order the return of a deposit to a buyer at its discretion. Of course if the contract is terminated due to a default of the seller, the buyer is entitled to the return of the deposit anyway: section 49(2) provides a mechanism to protect the buyer ‘when justice requires it’ in ‘mitigation of the vendor’s right at law to forfeit the deposit’ when the buyer is in default. When might justice require return of a deposit? We consider this in our next note.