It seems as if the Coronavirus crisis came upon us without much of a warning.  Spring was around the corner and the real estate market was just starting to pick up. How does a global pandemic affect those Pennsylvania buyers and sellers that are already under contract or might be considering entering into an agreement?  As is the answer to most broad legal questions, it depends on the circumstances and the language of their agreement.

If an agreement has what is known as a “force majeure” clause, the non-performance may be excused. A force majeure clause excuses non-performance of a contract upon the occurrence of specifically defined unforeseen events. Gulf Oil Corp. v. Fed. Energy Regulatory Com., 706 F.2d 444, 452 (3d Cir. 1983).  “A force majeure clause lists a series of events such as earthquakes, storms, floods, natural disasters, wars, or other ‘acts of God’ which the parties to a contract have agreed upon as excuses for nonperformance.” Kaplan v. Cablevision of Pa., Inc., 448 Pa. Super. 306, 316 n.3, 671 A.2d 716, 721 (1996) citing John Edward Murray, Jr., Murray On Contracts, 639 (1990). For a party to use a force majeure clause, the event must be beyond the party’s control and without the party’s fault or negligence. Id.; Martin v. Commonwealth, Dep't of Envtl. Res., 120 Pa. Commw. 269, 273, 548 A.2d 675, 678 (1988).  In addition, the non-performing party has a duty to show what action it took to perform the contract regardless of the occurrence of the excuse. Id.

The vast majority of residential real estate transactions use the Pennsylvania Association of Realtors®' Standard Agreement for the Sale of Real Estate. However, that agreement does not contain a force majeure clause. With the pandemic upon us, parties to a contract may want to consider including an appropriately tailored force majeure clause to cover the inability to close based on the fast-moving change of events.  For instance, Governor Wolf has just ordered most real estate businesses to close.  The parties to the contract may want to consider adding language to the agreement providing for automatic extensions of certain dates (as an example for inspections, a mortgage commitment and/or closing).   The language could be broad or specific depending on the parties' wishes. 

But what about all the parties currently under contract?  Is there performance excused if contingencies in the Agreement of Sale cannot be met because of the Coronavirus pandemic?  If no home inspection is possible within the time period prescribed in the Agreement of Sale, then what?  What if closing is the only remaining thing to be done, but no title company is open on the date of closing and the agreement of sale says time is of the essence, thereby technically requiring performance on the dates specified in the Agreement of Sale?  Finally, what if the buyer no longer has the funds to close because he/she has lost significant sums in the stock market or lost his/her job?

Initially, if the Agreement contains a mortgage contingency, and the buyer is no longer qualified for the loan and as a result, is rejected for the loan, under the PAR Agreement of Sale, the buyer or seller is entitled to terminate the Agreement of Sale and the buyer receives back the deposit monies.   If the buyer is still qualified to purchase but does not want to (maybe the buyer lost significant monies in the stock market), the buyer’s performance would not be excused under the mortgage contingency.  A change of heart is not usually a basis to walk away from an Agreement of Sale.

As for being unable to meet the terms of the contract because of the Coronavirus (for instance the buyer cannot do a home inspection and/or the title company cannot handle the closing because everything is closed down), this is another matter.   If the contract does not contain a force majeure clause, the doctrine of “impossibility of performance” (also known as “impracticability of performance” or “frustration of purpose”) may provide some relief. “Pennsylvania law recognizes the doctrine of frustration of contractual purpose or ‘impracticability of performance’ as a valid defense to performance under a contract.” Hart v. Arnold, 2005 PA Super 328, ¶ 33, 884 A.2d 316, 334.  The Pennsylvania Supreme Court has held that:

When people enter into a contract which is dependent for the possibility of its performance on the continual availability of a specific thing, and that availability comes to an end by reason of circumstances beyond the control of the parties, the contract is prima facie regarded as dissolved. … A court can and ought to examine the contract and the circumstances in which it was made, not of course to vary, but only to explain it, in order to see whether or not, from the nature of it the parties must have made their bargain on the footing that a particular thing or state of things would continue to exist. And if they must have done so, then a term to that effect will be implied, though it be not expressed in the contract.

Greek Catholic Congregation of Borough of Olyphant v. Plummer, 338 Pa. 373, 382, 12 A.2d 435, 439 (1940) (internal citations and quotation marks omitted).  Further, the Restatement (Second) of Contracts specifically provides:

261. Discharge By Supervening Impracticability

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

…

264. Prevention By Governmental Regulation Or Order

If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.

Hart v. Arnold, citing Restatement (Second) of Contracts, (1981). Once the impossibility or impracticability of the contract occurs, it is up to the parties to terminate the agreement or waive the difficulties causing the impossibility or impracticability. Id.  If the parties proceed and one party cannot perform, that party would be in breach. Id.

Against the backdrop of these theories, facts have to be applied to determine whether a party may be excused from performance under an agreement of sale.  For example, was a buyer unable to close because he or she was prohibited from travelling by government restrictions?  Could closing have taken place electronically?  Was the title company unable to conduct the closing because of staffing shortages?  Was the seller unable to clear the title requirements because municipalities were closed, or lenders were not able to provide payoffs in time?  Every case will be fact specific, so it is impossible to provide a bright line rule.

Hopefully when events take place that are unexpected, the parties to the contract can come together and work it out.  However, even buyers or sellers who carefully planned the transaction may find themselves in a scenario where the Coronavirus has wreaked havoc on the transaction and the parties cannot agree on how to proceed. If you find yourself in the middle of a transaction, or you are about to enter into one, contact an attorney with experience to help you through the process. 

Please call or contact us today to arrange an initial consultation.
Contact us by phone: (610) 640-7500 - Click here to use our online form.

• Acquisitions
• Adverse Possession
• Agreements of Sale
• Arbitrations
• Boundary Disputes
• Broker Commissions
• Buyer/Seller Disputes
• Closings
• Commercial Leases
• Conditional Use
• Condominiums
• Construction Agreements
• Contract Negotiations
• Contract Reviews
• Contractor Disputes
• Deeds
• Deposit Disputes
• Easements
• Ejectments
• Errors and Omissions Defense
• Evictions