Contract Questions Following a Natural Disaster

QUESTION: I have several residential and commercial listings under contract that were supposed to close around the time Hurricane Helene arrived. What do buyers and sellers have to do when a property is damaged? What happens if there is no damage, but the closing attorney, lender, or insurance company cannot complete closing on time?

ANSWER: If a transaction has not yet closed and the property is destroyed or materially damaged, paragraph 11(a) of the Offer to Purchase and Contract (Standard Form 2-T) states that the buyer may either:

1.     Terminate the contract by written notice delivered to the seller, and the Due Diligence Fee and Earnest Money Deposit shall be refunded to the buyer; or

2.     Proceed under the contract, in which case the buyer shall be entitled to receive, in addition to the property, the proceeds of any insurance claim filed by the seller due to damage or destruction of the property.

Commercial transactions using the Agreement for Purchase and Sale of Improved Real Property (Standard Form 580-T) are governed by a very similar provision in Section 6(b), which gives the buyer two similar options: (1) terminate the contract and receive a refund of the Earnest Money Deposit; or (2) proceed with the closing, and receive any insurance proceeds payable on account of the damage or destruction applicable to the property.

If there has been damage to the property, disclose it so the buyer can conduct further inspections and decide whether to terminate the contract or proceed. If the buyer decides to terminate and the parties can agree on how to allocate the Due Diligence Fee and the Earnest Money Deposit, then you can use Form 390-T (residential) or Form 582-T (commercial) to terminate and insert the proper monetary figures in the provided blanks. If the buyer decides to terminate and the parties cannot agree on how the money should be split, then the buyer may unilaterally terminate and should consult with legal counsel about their options. The seller should also consult with counsel.

If the buyer inspects the damage and decides to close, the parties should consider amending the settlement date to allow enough time to schedule a closing and perform any remaining due diligence, given the likelihood of delays.

Under extraordinary, unexpected circumstances like catastrophic flooding caused by a hurricane, contract terms might not be rigidly enforced should the buyer and seller end up in court. There are legal doctrines known as the doctrine of impossibility and the doctrine of frustration of purpose that courts will consider when determining if a party should be excused from their contractual obligations. In essence, if an unexpected event makes performance under a contract impossible or substantially frustrates the contract’s principal purpose through no fault of parties to the contract, the affected party’s performance may be excused or temporarily suspended. Agents should encourage their clients to discuss issues of this nature with legal counsel.

Accordingly, if there is no damage to the property and one party is unable or unwilling to complete the transaction, they may also consider these sorts of claims with their counsel to see if they apply. Hopefully, buyers and sellers will be flexible and willing to agree on extending performance dates or accommodating each other when strict contract compliance becomes difficult or impossible due to the hurricane. But if the parties cannot work out the transaction by consent, then agents should recommend their clients seek legal counsel.

Release Date: 10/10/2024