With millions confined to their homes and face-to-face meetings on hold, as you might guess, real estate transactions (especially residential ones) have been turned upside down and sideways.
The California Association of Realtors (CAR) – an association of which I am a 40 year (or so) member – has been nimble, and prepared forms and Q&As for its real estate licensee constituency, in an effort to offer uniform guidance. As with all things, understanding the impact of what the “Forms” do – is important.
While I am a fan of CAR, and recommend use of its Forms as often as practicable, especially in the residential real estate context, I am *not* always a fan of the positions those Forms put a Buyer or Seller in.
The first of the new Forms is the CVA (Corona Virus Addendum or Amendment).
Some will ask “Why is it called an Addendum or Amendment”? It’s an astute question.
An Addendum to a contract is a supplement or an addition to a contract that is added, before the contract is entered into. It’s like tacking on an extra page that you didn’t have room for in the original contract’s template form.
An Amendment is a supplement that is added AFTER you’ve already reached a deal and signed the original contract. Why is that difference important? Because to have an Amendment to a contract, you have to have “consideration” different and apart from the “consideration” that was given for having entered into the original contract in the first place.
The question you’d need to ask is: “If you are going to Amend the contract, what do you get for doing so?” This is really important in the context of a real estate contract that has a “Liquidated Damages” clause.
Imagine this scenario:
On Feb 1, Buyer and Seller enter into an agreement where Buyer puts $30,000 as a down-payment on a $1,000,000 house. The Liquidated Damage provision is signed off on by both parties. The escrow was to close April 1. On March 22, the Buyer signs off the Release of All Contingencies, including the loan contingency. On March 26, the Federal, State and Local governments all issue Stay at Home Orders. Confusion reigns. The loan does not timely fund, the escrow does not timely close on April 1.
The Buyer didn’t do a darn thing wrong.
Neither did the Seller.
But the fact remains that the Buyer did not timely close, and the contract has a “time is of the essence” provision. The contract also does NOT have a “force majeure” or other clause that allows for unexpected delays to act as a continuance or termination of the contract.
(Even if there was a “force majeure” clause, it might not apply in the current context of COVID 19.)
So, what happens next?
Can the Seller keep the $30,000, and put the property back on the market in 30 or 60 days?
Technically . . . yes.
Doesn’t seem fair, right?
Well, what if that same Seller was buying a $2,000,000 replacement house, had put up $60,000 as their down-payment, and needed the balance of the Buyer’s money to close their escrow. Just like the Buyer of the Seller’s property, the Seller has a Liquidated Damages Clause in their contract, and also waived all contingencies. AND Seller #2 of the $2MM house has a kid with cancer, needs the money for medical care and has no insurance. That Seller #2 NEEDS the $2,000,000. Now. Seller #2 wants, desperately, to get that $60,000.
Still not fair?
So, what does the CAR Form CVA do? It acknowledges that the original purchase agreement does not address the concept of “force majeure” – first thing. Why? To set up the next thing it does. Which is to state that the purpose of the CVA Form is to “reflect the Parties’ (i) mutual obligation to deal fairly with each other and to act in good faith to accomplish the purpose of the Agreement.”
Notice something important here … there is no “new” consideration for the use of this CVA “Amendment.” The CAR has couched this new supplement as an acknowledgment of previously agreed to term. (“It’s purpose it to reflect … the parties obligation to …”.)
Sounds a little like trying to put toothpaste back in the tube.
Yes, there is a legal doctrine to act in “good faith” and “deal fairly” with one another – but that doesn’t – necessarily – mean that you have to give up already bargained for rights – or expose yourself to new potential liability from others. It’s a lot of wiggling to get where CAR would like it’s Members to be.
After all, who is going to get brought into a lawsuit (or thousands of them) when a Buyer and Seller go snipping at each other? The Brokers, of course. And what the heck did THEY do wrong? (Except, perhaps, use a Form prepared by their Trade Association that didn’t include an “unforseen circumstance” provision. Ahh, hindsight…)
The next thing that the CAR CVA Form does is note that to use any of the three options outlined in it (delay inspection deadlines, delay post-inspection closing deadlines, or cancel the deal), one or the other of the Buyer or Seller must deliver yet another CAR Form, the NUCC (Notice of Unforseen CoronaVirus Circumstances).
OK, so, first the Buyer and Seller have to agree to the terms of the CVA, then one or the other has to say that they have been impacted by COVID 19 and want to trigger the provisions of the CVA by using the NUCC.
What are the NUCC “impacts” that trigger an option in the CVA?
Loss of income (Ok, makes sense. Can’t get a loan, can’t do the deal…)
Notary appointment delay (Really, that’s a “thing?” I guess it could be.)
Lender delay (Yeah, I’ll bet there will be a lot of that…)
OR (and here’s where is gets interesting – as a basis for use of the CVA Amendment)
Difficulties in scheduling things because of a Stay in Place Order, like …
Home, Pest Control, Appraisal Inspections (Ok – but not ‘roof’?)
Governmentally required inspections (Ok)
Final Verification of Condition (Wait, what? This isn’t even a contract contingency…)
OR (and now we get up close and personal)
A confirmed diagnosis of COVID 19 (HEPPA Violation anyone?)
COVID 19 hospitalization (Yeah, no kidding.)
Governmental quarantine (is anyone NOT impacted by this, at least in California?)
Physician ordered quarantine
“Other” Just, “other.” Fill in the blank.
Then one is required to “verify” the Unforseen CoronaVirus Circumstance. (Umm, how, exactly? That’s not stated.)
So. If a Buyer or Seller has an “other” reason that either can “verify” – or if either desires to use a “Stay in Place” order (or merely “suggestion”?) by any Local, State or Federal source, then the contract can be delayed – or cancelled – without penalty.
But wait, there’s more.
CAR has also put together a CoronaVirus Property Entry Advisory and Declaration (PEAD) Form. And this one, well, it’s a doozy.
The PEAD Form notes that “real estate transactions” have been deemed an “essential activity.” Cool. (If true. Other sources say, Not so.”) If true, agents can still make money. (Sort of.)
Then we get to the meat of the matter. “Social Distancing.”
After acknowledging that “showing or visiting properties may be dangerous or unsafe”, the Form has a prospective Buyer or Seller acknowledge that doing either is an activity done “at your own risk.”
Then a prospective Buyer and Seller get to agree that they will take “all” reasonable and necessary precautions to protect themselves from risks. (“All” – what’s that mean?)
A Buyer and Seller agree that it is their responsibility to protect themselves.
And then they are called upon to represent that they are not (to the best of their knowledge) currently afflicted with, and have not knowingly within the last 14 days, been in contact with someone afflicted with COVID 19. (How, one wonders, when/if there is a problem, will it be determined if someone “knew”? Does “best of their knowledge” mean they should investigate first?) Practically speaking, doesn’t this mean that you fill out the form and then WAIT 14 MORE days to go inspect the house?
And then there is this: “You believe that you are not likely to transmit or contract COVID 19.”
What? No one can make that representation. No one.
Let us continue… The next “agreement” is to, when visiting a property, to the extent available, “wash your hands with soap and water or use hand sanitizer, to wear rubber gloves, a protective face mask, and protective shoe coverings.” So, is it the agent’s responsibility to provide a washing station? Gloves? Masks? Booties? “If available?”
Then, after showing a property, it is the “sellers, landlords, tenants and occupants” responsibility to “clean and disinfect the property.”
Did you see “agent’s” or “broker’s” on that list? No? Neither did I. Then again, it’s the Realtor trade association that drafted the form…
And finally, paragraph 5 of the PEAD form states that “you agree to take all recommended and reasonable actions to protect yourself and others from exposure to COVID 19, and that you assume the risk, as applicable, of entering the Property, or allowing someone to enter the Property. You understand and agree that no one, including but not limited to real estate brokers and agents, can guaranty that you will not be exposed to COVID 19.”
If you want to go inspect a property you might want to buy, YOU and the Seller are taking the risk that you’ll get COVID 19. The real estate people, as Trump would say, “are not responsible.”
Alright – these Forms so far make it possible to get out of or at least postpone the closing of a purchase agreement possible – where it wasn’t possible before; without tagging the broker for liability of a failed closing. They also set forth a lot of restrictions on how a Buyer and Seller go about showing a home being sold.
Now, what about a listing; how is an agent protecting themselves in the first place?
Fear not, there’s a Form for that too: RLA-CAA (Listing Agreement CoronaVirus Addendum or Amendment).
Once again, you’ll note that there is that “Amendment” language. How does CAR deal with the “consideration” issue? Here’s the language used:
“Seller and Broker acknowledge that there are mutual benefits in addressing the effects of the COVID 19 pandemic …” “In consideration of the mutual benefits contained herein…”.
They acknowledge there are mutual benefits, and in consideration of those mutual benefits, the listing is amended. How, exactly, is a Seller benefitted? We’ll explore that as we go.
The next thing of import is to recognize that this Amendment is to stay in effect “until the termination of ALL governmental orders, including local, State and Federal, impacting the Property due to the COVID 19 pandemic.” (EMPHASIS added.)
Wow; this stays in place until ALL the “orders” “effecting the Property” are lifted. Umm, what “orders” are there effecting “property”? There are a lot of orders effecting how people move about; but what’s that got to do with “the property”?
We’ll put that aside for a minute and go on.
Next, with regard to Property showings, the RLA CAA Form is explicit:
“Prospective purchase visitors will be asked not to enter … nor will they be given permission to do so, until and unless:”
Two things: 1) “Prospective purchasers will not be given permission to enter”, so if they do, are they trespassers? 2) “until AND unless”, so everyone better do all the following things on the list.
The prospective purchaser SIGNS A STATEMENT that,
A. to the best of their knowledge they are not afflicted with COVID 19, and have not knowingly – within the last 14 days – been in contact with anyone who is, nor are they experiencing a fever, or signs of respiratory illness AND they agree to abide by (undefined) “safe practices” while at the property.
B. They provide verification that they are financially able to purchase the property, such as verification of an all-cash payment ability or a pre-approval (not pre-qualification) from a lender
C. That the prospective Buyer has already viewed the property “on line”
OK, so this just killed about 90% of all property showings, even after waiting 14 days. No open houses people.
For Sellers (and Buyers) that can’t or won’t make the kind of representations needed to gain access to property, the Form has a provision for “pausing” the marketing of the Property Listing, or extending the Listing termination date.
Notice “cancellation” of the Listing is NOT one of the options here.
And then there is the Whopper Clause. Paragraph 5 of the PLA-CAA:
“Seller understands and agrees that Broker will abide by the terms of the Addendum or Amendment and use Broker’s best efforts to obtain compliance by others. Broker cannot and will not verify the representations of others nor guarantee their compliance with Seller’s and Broker’s instructions. Broker cannot and will not physically prevent entrance to the Property by others who do not agree to the instructions. If Broker becomes aware of such person’s failure to comply with the instructions, Broker will promptly inform Seller and take efforts to prevent such person’s future access to the property. Seller agrees to and shall hold Broker and its agents harmless from any and all claims, liabilities, obligations, attorneys’ fees, or actions and shall indemnify Broker for any damages, costs, attorney’s fees and/or other fines from any third party, that arise from or are related in any manner to this Addendum or Amendment.” (Emphasis added.)
If that ain’t an example of overwhelming CYA (that’d be Cover Your Ass) language, I don’t know what is. And the shift of liability from the Brokerage to the Seller is – breathtaking.
A Seller in desperate need to sell, or someone simply not well advised, may just sign away – after all, the Listing Agent likely doesn’t understand what the Form just did to their client anyway. And if that Listing Agent does, and didn’t explain it – well, then; that’s another story, isn’t it?
I get it; I get that real estate licensees want to keep as many of their existing Listings as possible. And they’d like to extend the Listing period to make up for the lost month (two? three?) that we are all going to experience. And I get that they can’t predict what the home buying-selling environment is going to be like in our soon-to-be future. And I get it that they have deals in the hopper right now, that no one knows what’s going to happen with. And I get it that there are unintended consequences that will arise from breaches of current contracts.
Here’s what I want readers of this memo to get.
These proposed forms may do exactly what you want them to do. And they might not. They may result in your lost opportunity to collect a Liquidated Damage amount you’re entitled to, or expose you to additional unintended liability.
What these forms don’t have on them is some bold, all caps notice that:
THESE FORMS ARE NOT MANDATORY AND ARE SUBJECT TO NEGOTIATION.
Ask yourself: Why not?