COVID-19 Issues: Frustration, Subject-To Clauses and Contracts of Purchase and Sale

COVID-19 has resulted in a number of issues which put the performance of purchase contracts for real property at risk. Some of the more obvious concerns include reduced cashflows, layoffs, economic slow down, dropping housing prices and general inability to conduct business in ordinary fashion. Such challenging circumstances can and do lead to an uptick in purchase contracts not completing either because conditions do not get removed or one side of the transaction refuses to complete.

With the extreme circumstances created by COVID-19, a question that arises is whether related issues might support an argument that at purchase contract has been frustrated, which would release all parties from performing the purchase contract. The Supreme Court of Canada in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58 (CanLII), succinctly summarized the doctrine of frustration at paras. 53 and 55 as follows:

Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes “a thing radically different from that which was undertaken by the contract…

The court is asked to intervene, not to enforce some fictional intention imputed to the parties, but to relieve the parties of their bargain because a supervening event… has occurred without the fault of either party.

Frustration is a high bar; it does not apply just because intervening circumstances make performance of a purchase contract unreasonably harsh or onerous or because things unfold in a manner that the parties didn’t anticipate.[1] Frustration is not just encountering the unexpected, it is encountering something that the parties could not anticipate.[2]

While COVID-19 may be a relatively unique concern, the issues that arise out of it -housing prices dropping, purchasers losing the value of their investments, purchasers losing their jobs or sudden challenges and delays in effecting a conveyance or obtaining financing- are ordinary risks of purchase contracts. Further, a global pandemic and its economic effects may be a remote possibility, but it is arguable that a global pandemic is always a foreseeable risk.

COVID-19 concerns, at present, do not radically alter the purpose of a purchase contract, but such concerns do heighten the need for all contracting parties to better understand the legal effects and consequences of various contractual terms they are bound by or may draft. Land is still available to transfer and can be transferred and money is still able to be exchanged. Legal aspects of a purchase contract can be performed through remote and/or electronic means if requiring including securing financing and transferring title. For example, our real estate team is prepared to assist remotely for virtually all aspects of a conveyance.

It appears unlikely that present concerns raised by COVID-19 could give rise to a successful argument about frustration barring a uniquely drafted purchase contract that is particularly and unexpectedly affected by such concerns. A standard purchase contract does not appear to have the potential of being frustrated with present COVID-19 concerns.

That said, circumstances are evolving every day. If more restrictive measures get put into place, there is the possibility that it becomes impossible for parties to either satisfy subject-to clauses or even effect the purchase and sale of real property. For example, if it no longer becomes possible to effect a transfer of title through the Land Title Office, the doctrine of frustration may apply.

Where COVID-19 has and is likely to continue to affect purchase contracts is with respect to subject-to clauses, also know as conditions precedent. The three types of categories of condition precedent clauses was described in the dissenting opinion in Wiebe v. Bobsein, [1985] 64 B.C.L.R. 295; 39 R.P.R. 228; 20 D.L.R. (4th) 475 as follows:

  • conditions so imprecise and/or dependant on the subjective state of mind of the purchaser that the purchase contract is still regarded as at the offer stage (for example: “Subject to the purchasers liking the carpet”)
  • conditions that are clear, precise and objective that a purchase contract is complete and parties can no longer withdraw (for example: “subject to no new sales tax coming into force prior to purchase); and
  • conditions that have subjective and objective components dependant on a determination or decision. Such conditions require purchasers to take all reasonable steps to satisfy such conditions (for example: “subject to approval of the purchaser’s development plan” which would impose an obligation for a purchaser to subject a properly created plan in a timely fashion).

Parties should carefully consider how their conditions precedent may or may not be affected by COVID-19 concerns.

Further, parties should give more careful consideration to the drafting and interpretation of condition precedent clauses. Creatively drafted clauses could directly account for issues that might arise as a result of COVID-19. Other drafting considerations could include longer closing and completion dates to accommodate unusual delays created by COVID-19.

A discussion of condition precedent clauses and the effect of their waiver or satisfaction can be found in my previous article, Contracts of Purchase and Sale: Removing Subjects.

Practically speaking, people can expect and require the process of purchasing real estate to adjust to COVID-19 concerns. For example, virtual home tours are becoming more widely utilized or parties are requesting confirmation from each other that neither has exhibited symptoms or travelled out of the country in the previous 14 days before showings. Purchasers may be requesting vendors to make more detailed representations about a property than would be found in the ordinary property disclosure statement. Parties may wish to craft what will occur in the event of certain breaches of a purchase contract instead of relying on what the law might otherwise impose.

In short, the business of buying and selling real property is expected to carry on at present with a heightened need for parties to carefully consider their contractual terms and an expectation that we’ll continue to see practical and contractual responses to concerns raised by COVID-19.

For a more general discussion on frustration and contracts, please consider reviewing Practical Legal Advice and COVID-19: Relying on Force Majeure Clauses or the Doctrine of Frustration and for a view more focused on employment contracts, COVID-19 and Frustration of Contracts.

Please continue to check out our blog for updates on COVID-19 related legal information.

[1] Delta Food Processors Ltd. v. East Pacific Enterprises Ltd., 1979 CanLII 668 (BC SC)

[2] KBK No. 138 Ventures Ltd. v. Canada Safeway Ltd.2000 BCCA 295

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