As uncertainty mounts in response to COVID-19, buyers across the nation are adding what are known as “coronavirus clauses” to their real estate contracts. While these coronavirus clauses vary location to location, the general premise is they permit contract extensions and even termination without repercussion.
So what do these coronavirus clauses mean for sellers?
“What these clauses really mean in the end is that at any time the buyers could back out of this,” explains Nick Shivers, a top real estate agent in Portland, Oregon.
While that sounds intimidating, other facets of the coronavirus clause can come to your aid as a seller as much as they can to a buyer. For instance, if you become ill or unexpectedly lose your job, a coronavirus cause may allow you to cancel the sale or extend the closing deadline to accommodate.
To get you up to speed on these clauses, we’ll break down each component and how they can impact your home sale.
For added insight on how these clauses vary, we interviewed Shivers on the West Coast and Amanda Howard in the Southeast, a top real estate agent in Huntsville, Alabama.
What are coronavirus clauses?
Coronavirus clauses, also referred to as coronavirus addenda or coronavirus amendments, provide leeway if the parties involved (buyer and seller) cannot perform their contractual obligations due to restrictions, delays, or other unanticipated events caused by the COVID-19 pandemic.
For context, some real estate contracts contain a force majeure provision which excuses contractual obligations made impossible or impracticable by an unanticipated event or effect that the parties cannot control (e.g. natural disasters, war, strikes, riots, or epidemics). While the COVID-19 pandemic may classify as a force majeure event, real estate professionals decidedly created a special clause specific to COVID-19 to leave nothing up to interpretation from a legal standpoint.
What do these clauses include?
Coronavirus clauses vary by region and even broker to broker to address COVID-19’s impact on the particular location. Many state Realtor associations have set forth a recommended coronavirus clause for agents to use as a base template in contracts.
For instance, the Alabama Association of Realtors provides a COVID-19 Addendum and encourages agents to check their MLS to ensure the addendum complies with the MLS rules.
Closing extensions
Most coronavirus clauses enable closing extensions for a set period (usually 30 days) or for a length to be mutually determined by buyer and seller when such need occurs.
Your region’s social distancing measures and closure of non-essential services may cause delays with:
- Home inspection: Home inspectors may require homes to be vacant during inspection, leading to scheduling difficulty, or inspection services may be canceled or delayed.
- Loan approval: Loan approval may take longer if your buyer’s lender is overwhelmed by mortgage refinances due to historically low interest rates.
- Presence at closing: Travel restrictions and mandatory quarantines may prevent parties from signing closing documents in person.
The likelihood of delays varies depending on your region’s response to COVID-19. Shivers shares a large portion of home sales in Portland are facing COVID-19 related delays, commenting:
“We’ve had a lot of extensions. I would say at least 30%-35% of the deals we closed [in March] had extensions.”
Howard, on the other hand, shares her market has yet to slow significantly, perhaps because statewide COVID-19 regulations in Alabama were introduced later than in other states.
“We had challenges with accepting a virtual notary until our governor mandated that it was approved . . . So that took some time for the attorneys to get used to and for the mortgage companies to catch up,” she explains.
COVID-19 related procedures
A coronavirus addendum may also contain contingencies that address what would happen if any of the parties get sick, providing alternatives for each stage of the closing process. For peace of mind, the addendum may ask buyers and sellers to declare if they have any known symptoms or have recently come into contact with a person who has tested positive for COVID-19. This declaration provides transparency so real estate agents can coordinate in-person meetings and moving dates appropriately.
Contract termination
The coronavirus clause, such as the one provided by the California Association of Realtors, may also contain a provision that allows the buyer or seller to cancel the contract without penalty if the buyer can no longer get financing because of a COVID-19 related income loss (i.e., furlough or lay off), even if they’ve removed their loan contingency.
Some may even allow a mutual cancellation of the sale if both parties get cold feet and no longer wish to proceed in this uncertain environment. For example, in the California Association of Realtors’ Coronavirus Addendum/Amendment, there is a check box which states, “If checked: Buyer and Seller agree to mutually cancel the Agreement and Buyer’s deposit shall be returned to Buyer, minus fees and costs incurred by Buyer.”
Unless otherwise specified, generally the provision states that the buyer will keep their earnest money (a deposit of 1%-3% of the property’s purchase price) in these instances.
Who benefits most from these clauses, buyers or sellers?
As a seller, it’s natural to feel nervous about adding a coronavirus clause to your contract since it seems to provide an easy out for a skeptical buyer. With this clause, buyers can exit the deal with their earnest money if they are unable to obtain financing, face health issues, or lose their job, leaving you in the lurch.
However, this clause may play to your benefit in several ways. To start, buyers may be more likely to make an offer in the first place knowing they can include a clause which would provide an emergency exit if COVID-19 impacts their ability or desire to follow through with the purchase.
The clause also encourages the seller and buyer to proactively communicate about worst case scenarios. By outlining procedures for anticipated problems before they occur, a coronavirus clause allows both parties to come to a mutual agreement on alternatives while in a neutral state. This planning helps keep closing drama to a minimum, explicitly stating the options available to both parties if a disruption occurs.
Lastly, the coronavirus clause may allow you to cancel or postpone your home sale in the unfortunate circ*mstance your household loses income or faces medical expenses related to COVID-19.
What’s the worst case scenario this clause can create?
As we touched on, the worst case scenario permitted by this clause is your buyer exiting the transaction with their earnest money in their pocket. If the buyer pulls out, your home goes back on the market, accruing more “days on market” and you must continue paying any carrying costs (mortgage, property taxes, maintenance, etc.) until you find a new buyer.
However, keep in mind that there are many situations when a buyer would keep their earnest money in a typical real estate transaction under normal circ*mstances. For example, if the buyer includes contingencies in their offer for mortgage approval, home sale, appraisal, or any other closing factor, they are entitled to keep the deposit if any contingency is unmet.
In addition, with circ*mstances surrounding the coronavirus causing so much disruption, buyers are less likely to care about how long a house has been on the market during these times.
Is there room for negotiating the terms of the coronavirus clause?
In real estate, everything is negotiable; coronavirus clauses are no exception. If your real estate agent or your buyer’s agent suggests adding a coronavirus clause to the contract, you may negotiate the stated deadline extensions, who keeps the earnest money in what scenario, and anything else included.
You could even negotiate to remove the clause entirely; however, it’s not always wise to do so. Not only does this clause benefit you if the pandemic deals you the bad hand, but it also can help allay buyer concerns and encourage them to move forward with purchasing your home. In these uncertain times, you want to keep your buyer on board so you can swiftly close your home sale while the opportunity remains.
What other COVID-19 related forms might my home sale include?
In addition to a coronavirus clause in your contract, you may encounter other COVID-19 related documents during your home sale. The most common documents pertain to declaring if you have any known symptoms of COVID-19 or have recently been in contact with a person with the virus.
This document may present as a questionnaire or a waiver in scenarios requiring face-to-face communication, for instance, between you and your Realtor or you and your buyer at closing.
You may also request that prospective buyers fill out a questionnaire before entering your home for a viewing so long as you require every buyer to do so, while abiding by the Fair Housing Act.
These waivers and questionnaires provide assurance that no one to the best of their knowledge is infected with COVID-19 while also recognizing the risk of coming into contact with the virus from an involved party who may be asymptomatic. These documents act as hold harmless clauses, relinquishing legal liability for all parties if someone involved becomes infected with COVID-19 during the transaction.
Coronavirus clauses go hand in hand with communication
Coronavirus clauses are a useful tool to protect buyers’ and sellers’ interests while negotiating during this challenging pandemic. What’s even more important than this written clause is maintaining excellent, ongoing verbal communication between everyone involved in the transaction. Shivers emphasizes:
“The number one key right now is massive communication . . . You should do your due diligence up front before you even have that addendum. You need to make sure that all parties understand what’s going on.”
Be transparent with your real estate agent about your concerns, health, and expectations for your sale. Check in with your attorney and the buyer’s attorney, real estate agent, and lender to ensure that everyone is on the same page with new procedures adjusted for COVID-19. The clearer the communication is upfront, the faster your home is likely to sell.
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