Saving your real estate sales contract from unforeseen disasters

September 15, 2011

Most real estate sales contracts require that the settlement occur on a date certain. If the contract provides that “time is of the essence,” that means that if the settlement does not occur on that date, the contract automatically becomes null and void.

But what happens if the contract settlement date lands at the same time as a natural disaster, such as a hurricane or earthquake — or another event that makes doing business as usual almost impossible?

Judicious use of a carefully crafted clause known as “force majeure” addresses this circumstance and could salvage a deal that might otherwise become null and void. It might even help you avoid a lawsuit.

Force majeure means “greater force.” The legal concept of a force majeure is derived from the Napoleonic Code of France. This clause provides that the parties’ performance under a contract is excused if an unforeseeable event beyond their reasonable control occurs that prevents their performance. Force majeure events are often defined in the contract to include political events such as: war, insurrection, riots, strike, lockouts, terrorist threats or action, or explosions. It also applies to acts of nature such as: hurricanes, floods, earthquakes, landslides, tornados, tsunamis, volcanic eruptions, sinkholes and storms.

The parties can agree that a force majeure event can permanently excuse both parties’ performance. In such case, the contract should state that: the contract shall become null and void; the earnest money deposit shall be returned to purchaser; the parties agree to sign a mutual release; and that neither party shall have any further liability under the contract.

Alternatively, parties can agree that a natural disaster or similar event should simply postpone the settlement date for a period of time such as 60 days.

While a force majeure event may not be foreseeable, I recommend that buyers and sellers should consider including it in the contract.

An example of legitimate force majeure event would be if the buyer orders a title search and survey in a timely manner, such as within two business days after the ratification date of the contract, and an earthquake occurs. Or, say, a hurricane blows down trees making it impossible for the surveyor to reach the property and then an unforeseeable string of rainy days floods the county courthouse such that a title search of the land records cannot be conducted. These events will likely rise to force majeure events and will likely excuse a buyer’s inability to reach settlement in a timely manner.

Another example of a legitimate force majeure event would be if a seller’s home is destroyed by a tornado after contract but before settlement. That event would clearly be unforeseeable, not due to seller’s negligence and beyond his reasonable control.

However, force majeure is not designed to excuse a party’s negligence or failure to plan for foreseeable events. This is true for both buyer and seller.

For example, if a buyer waits until the last minute to order a title search and survey and those tasks are not completed in time for the lender to approve the loan and the buyer is unable to go to settlement on the contractual settlement date, that failure to meet the settlement deadline due to buyer’s negligence would not be excused.

In the harshest case, seller could deem buyer to be in default for failing to settle on the settlement date and buyer could potentially lose his earnest money deposit or suffer additional damages.

Harvey S. Jacobs is a real estate lawyer in the Rockville office of Joseph, Greenwald & Laake. He is an active real estate investor, developer, landlord, settlement attorney and lender. This column is not legal advice and should not be acted upon without obtaining your own legal counsel.

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