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COVID-19 and the Minnesota Real Estate Market

Business As Usual?

With the recent evolution of the COVID-19 pandemic, the phrase “business as usual” has taken on an entirely new meaning. Many sectors have shut down entirely. Employees in other businesses are working remotely from home. Business owners are scrambling to understand new regulations and assistance programs, working to keep employees safe, and trying to cover costs in hopes of keeping their businesses afloat during this unprecedented time of uncertainty.

Most recently, Governor Walz’s March 25, 2020 order mandates that all citizens “stay at home” starting at 11:59 pm on Friday March 28 through April 10, 2020. There are applicable exceptions, including for certain sector workers who cannot work from home. Paragraph 6 (hh) of the Order excepts certain “workers who facilitate and finance real estate transactions and real estate services, including appraisers and title services.” Thus, for most real estate professionals, while business may not be business as usual, at least business can continue.

MAR’s New COVID-19 Addendum

In response to COVID-19, the Minnesota Association of Realtors® (“MAR”) created a new form for local agents to use titled “Addendum or Amendment to Purchase Agreement: Coronavirus Disease of 2019 (COVID-19).” The form provides, in part:

  1. An automatic extension of the deadlines contained in a Purchase Agreement upon written notice of a “COVID-19 Related Event.” The form allows the parties to determine the length of the extension in days and defines the new extended deadline as the “COVID-19 Extension Date”;
  2. The ability of the parties to negotiate additional extensions; and
  3. Termination of the Purchase Agreement at the election of either party by providing written notice no later than the end of the COVID-19 Related Event.

Should realtors be using this new form? If so, when? At first glance, the form appears to provide buyers with a “get out of jail free card.” If they want to back out of a transaction and blame it on COVID-19, the new form lets them do so. Despite this, there may still be reasons for agents to consider using the form for their clients’ transactions.

As a preliminary note, the addendum should not have any impact on a transaction unless one party provides written notice of a “COVID-19 Related Event.” This phrase is defined by the form as meaning one or more of four things:

  1. Quarantine ordered by a government authority or an attending physician;
  2. Hospitalization of Buyer or Seller for COVID-19 illness;
  3. Inability of the Buyer or Seller to access the services of other persons or entities to fulfill the terms agreed to in the Purchase Agreement as a result of COVID-19 pandemic restrictions, including, but not limited to, agents, attorneys, title or property insurers, inspectors, or governmental entities; or
  4. A similar unforeseen impediment related to the COVID-19 pandemic that is outside the reasonable knowledge or control of the delayed party.

While this all sounds well and good, noticeably absent from the form is any required verification of the COVID-19 Related Event. Thus, if a client wants to trigger the extension or a subsequent termination, all they have to do, in theory, is alert their agent to provide requisite notice to the other party. The other party is not entitled to any documentation or verification and would be left with little, if any, recourse. This may also place an agent in a precarious position if there is suspicion that the alleged COVID-19 Related Event has been fabricated.

So is this new form really pro buyer? Not necessarily.

For buyers, this addendum does appear rather favorable. If they lose their job because of COVID-19, they can get out of a deal. If they become quarantined, or decide that the timing is not ideal, chances are that they could get out of the deal using this new form.

The flip side, of course, is that sellers are afforded the same “protections” under the addendum. If a seller decides on the eve of closing that they are not comfortable with the status of the pandemic, they might try to use the addendum to delay or avoid the transaction altogether.

While the added flexibility—or perceived added flexibility—appears to be equally beneficiary to both parties, there are also potential drawbacks. First, adding another form and contingency also opens the door for gamesmanship. With the low inventory levels that have persisted for the past several years, many stories have surfaced about agents counseling clients to make offers above list price—in some cases, well above list price—to secure a deal, and then rely on the inspection contingency to try to negotiate the price back down after the fact. This addendum opens the door to similar issues, and as such, may present one more hurdle to getting an offer accepted.

Another concern is stacked transactions. It is not uncommon in this market for several linked transactions to be scheduled on the same day, where the parties’ sales and purchases are linked to other transactions. For a buyer that is selling their current home prior to closing on the purchase of their new home, it would be very problematic if the seller of their new home elected to delay or terminate the second transaction due to a COVID-19 Related Event. Similarly, if a seller needs to sell their current home before going on to purchase, a delay could create a ripple effect that could delay or to derail many other transactions. Inconsistent extension periods could present the same issue and create a domino effect causing multiple deals to fall through of be delayed.

Use of the addendum could also potentially result in more disputes. Was notice of a COVID-19 Related Event provided “as soon as reasonably possible?” as the form purports to require? Is notice required upon a party’s suspicion that they may have COVID-19? Is a party with COVID-19, but that is not hospitalized, required to attend a closing, or are they also entitled to an extension? Time will tell how such situations will be handled, but these issues will likely need to be addressed and resolved by agents an individual basis.

Practice Pointers

If your clients do decide to use the new COVID-19 addendum, here are a few things to consider:

  1. Make sure that the addendum is properly incorporated into the purchase agreement if the documents are being executed at the same time. You should specifically identify the addendum in the purchase agreement.
  2. Be mindful in determining how long of an extension to specify. Consider keeping the extension period as short as possible to prevent unnecessary delay and complications with the closings of other related transactions. The parties can always agree to additional extensions if they are needed. Discuss with agents involved in any related transactions so that all addendums use the same extension period to avoid unintended consequence and further headache.
  3. Consider whether language should be used that only provides extensions as necessary and permits termination only upon the agreement of the parties.
  4. Give some thought as to whether some documentation verifying the COVID-19 Related Event should be required to effect appropriate notice.
  5. Consider adding language in the “Other” section of the addendum that specifies that no agents will be entitled to or will receive a commission if the purchase agreement is terminated pursuant to the COVID-19 addendum.

What is the point of the new addendum?

Agents should discuss with their clients the pros and cons of using the new addendum. In reality, the addendum does not seem to add much to the existing terms of the standard purchase agreement other than a solid agreement to extend or terminate the agreement in certain circumstances. Of course, in practice, if a party to a transaction contracted COVID-19 and a closing needed to be delayed, that most likely would happen even without the addendum. Similarly, if a party couldn’t close due to other COVID-19 related issues, the chances are the deal wouldn’t close anyway. In this regard, the new form does not appear to be a significant departure over past practice.

On the other hand, using the addendum may prove to be very useful to agents in setting and managing client expectations. Most clients will not understand the real estate transaction process and use of contingencies as well as agents. This form should provide a potential client with peace of mind knowing that if something comes up due to the pandemic, they should be able to get out the transaction. This peace of mind will hopefully quell fear and reduce uncertainly in a manner that will encourage buyers to continue looking for their perfect home and encourage potential sellers to list now rather than wait and speculate as to when this may blow over.

Hopefully, the COVID-19 pandemic will be short lived, in which case, the addendum will only serve as a short-term patch. To the extent the patch eases customer concerns though, the patch functions as a great step to help the industry get back to business as usual.

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2020-04-07T20:28:56-05:00 April 6th, 2020|News|