Effect of Covid-19 on property sale agreements

© Susan Richey-Schmitz – 123RF.com

South Africans are required to stay in their homes due to social distancing rules, with the exception of essential workers in the health, food and media industries etc. Shops and businesses are to remain closed unless they are classified as essential service providers. Many South Africans are expected to be left unemployed, and businesses closed due to the effects of Covid-19. It is anticipated that the unemployment rate will follow the trend of other global economies, and it will take a further knock from its present souring rate of 29%.

In light of the above, many individuals and companies are concerned about whether they will be in a position to fulfil their obligations in terms of contracts of sale they may have entered into or intended concluding. This article will highlight some of these concerns, and the legal implications that will be required to be addressed in order to resolve these concerns.

Many wish to suspend or terminate the agreements that they have entered into for various reasons, which from a purchaser’s perspective may include:

1. Inability to pay the purchase price due to permanent or temporary loss of employment.

2. Termination of bond grants by financial institutions to secure the purchase price.
   
3. Closure of business.
   
4. Decrease in the value of the property purchased, due to tenants defaulting on payments or request for rental deductions or abatement due to government regulations.
   

A Seller may wish to resile from an agreement due to:

1. A purchaser’s inability to perform timeously in terms of an agreement.

2. Delays caused by the Deeds office and municipalities to effect transfer, resulting in the sale not being economically viable anymore.
   
3. Inability to have transfer documents signed and commissioned due to the lockdown regulations, resulting in delays in transfer.
   

The question arises, can either of the parties to the sale agreement have it suspended or terminated?

To answer the above question, one must first examine the sale agreement to determine if a force majeure clause is included therein. Force majeure means a “greater force” or an act of God or man that is unforeseen and out of the reasonable control of one or both the parties to a contract, which makes it objectively impossible for one or both parties to perform their obligations under the contract.

The agreement of sale may indicate what constitutes a force majeure event e.g. a pandemic, strike, fire, war, act of God or a natural disaster, and may exclude a party from performing its obligations either partially or in full. It may further entitle a party to suspend or claim for an extension of time to perform an obligation. Many force majeure provisions require the following provisions to be satisfied, prior to allowing this provision to be invoked.

1. The event must be beyond the reasonable control of the party,
   
2. The affected party’s ability to perform must have been caused by the event, and
   
3. The affected party must have taken all reasonable steps to mitigate the event and the consequences thereof.
   

A party wishing to rely on a force majeure clause due to Covid-19 must ensure that the requirements as set out in the force majeure clause are satisfied, and this clause is wide enough to include the pandemic. Performance cannot be avoided as a result of one’s negligence, failure to exercise due diligence and care, or due to a party’s poor financial condition which was not a result of the spread of the virus. Each force majeure provision must be considered on its precise terms and its specific context.

Case law

In the case of Rumdel Cape and Others vs South African National Roads Agency (2015), the applicant was a joint venture company which was appointed by Sanral to improve a road, and construct a fly-over system at a road interchange in Durban. A construction agreement was concluded between the parties, and construction began by the joint venture company (applicant). Violent protests then ensued by neighbouring communities which led to a disruption in construction. The applicant stated that these riots constituted a force majeure event as contemplated in the contract, and claimed release from performance of its obligations.

The court held that a force majeure clause was not applicable in the above circumstances, as the applicant could have taken all reasonable precautions to prevent riotous conduct on the site. It further stated that the applicant was not prevented from performing its obligations due to a vis majeure event, namely the riot, as measures could have been taken by the applicant to obtain insurance, or personally finance the amount required for security in order to ensure performance of the contract.

Therefore, although the contractual agreement included the occurrences of a riot, commotion and disorder as being force majeure events, the court held that a force majeure event was not the cause of the applicant not performing in terms of the contract. The court referred to the matter of B & S Contracts and Design Limited v Victor Green Publications, where the court stated that where every effort had not been made to perform in terms of the contract, reliance could not be placed on the force majeure clause. The court emphasised that for a force majeure clause to be invoked, the applicant would have taken all reasonable efforts to avoid the various effects set out in the clause which entitles him to vary or cancel a contract.

Deed of sale meets force majeure

Reverting to the question, can a party suspend or terminate a sale agreement due to effects of Covid-19? The answer is yes, it is possible, provided that the force majeure clause is included in the deed of sale and it includes a pandemic of this nature. All requirements, as set out in the force majeure clause are required to be satisfied and all reasonable steps to avoid the effects, which entitles one to suspend or cancel the contract must have been taken.

If you wish to resile from the contract due to your financial status having become poor due to the effects of Covid-19, you may be required to prove that you made every attempt to increase your earnings or have applied for alternative methods of obtaining finance to comply with the contract, and these attempts have not been successful. If you have lost your job, you may be required to prove that alternative employment could not have been secured, or working remotely was not possible. In the instance of the party being a seller, he will not simply be able to terminate the contract based on delay in registration of the transfer. He will be required to take all steps reasonably necessary in order prevent a termination of the contract, such as enter into an addendum, and allow for a reasonable extension to the agreement prior to cancellation of the agreement.

Supervening impossibility

If the contract does not have a force majeure clause, the common law principle of “supervening impossibility of performance” may be relied upon. This defence is used to suspend or in some cases terminate a party’s obligations where an unforeseable event has made fulfilment of one’s contractual obligations impossible.

The performance of the obligation must be objectively impossible, and not subjectively impossible. Performance needs to be more than just more difficult or more onerous to perform as a result of an unforeseeable event.

Can one suspend or terminate an agreement due to the effects of Covid-19 using the aforementioned defence? This will depend on whether the performance has actually become impossible as a result of Covid-19, and this will be determined on the particular facts of each case.

The anxiety being felt as a result of this unprecedented event of Covid-19 is something people everywhere are experiencing, in one way or another. In the coming days, our government is expected to draft further resolutions that mitigate the effects of Covid-19 on the business community.