Sunday, December 18, 2005
Total Destruction
Although most real estate transactions complete without a glitch, there are at times extreme circumstances that render finalization of a contract problematic, to say the least. One such instance is the frustration of a contract.
In generalities, frustration is a legal doctrine which provides that where the existence of a specific thing is necessary for the performance of a contract the duty to perform is discharged if the thing, for reasons beyond anyone’s control, is no longer in existence at the time of performance. After a contract has been made, but before it has been performed, it will be frustrated if events outside the control of the parties destroy the subject matter or change it in such a way that it becomes fundamentally different from that originally contemplated. For example, in Real Estate frustration would occur where a house was destroyed by fire or lightning after a contract of purchase and sale was entered into and prior to its completion. Unless the contract provides otherwise, such event will relieve the parties of their future obligations.
In practicality, the determinant factors of frustration are on the one hand the terms and construction of the contract read in the context of the then existing circumstances, and on the other hand the events which have occurred. In fact, to be more specific, special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. Frustration is not called into play merely by hardship, inconvenience or material loss. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing altogether from that contracted for. Obviously, frustration cannot be self-induced and the disruption must be permanent, not temporary or transient. The change must totally affect the nature, meaning, purpose, effect and consequences of the contract so far as it concerns either or both parties. Finally, the act or event that brought about such radical change must not have been foreseeable.
Typically, real estate contracts for the purchase and sale of residential interests in land provide that the risk of loss or damage to the subject property, or to the fixtures, equipment and personal property included in the sale, by fire or other cause,is assumed by Seller until the time of closing. However, contracts relating to the purchase and sale of industrial or commercial real property sometimes include optional provisions for the Seller, without any obligation on the Seller’s part to do so, to repair or replace damaged property entirely at his own discretion. In such instance, the Seller must notify the Buyer within a prescribed period of time of his intentions to replace or repair or to do otherwise. Should the Seller elect to go forward with the replacement or repairs, Seller must notify Buyer of the timeframe in which he will carry out the restoration work and the closing will be adjourned for this purpose and without cost or penalty to either Seller or Buyer.
If, conversely, the Seller does not elect to make the repairs or replacement, or if he elects to make the repairs or replacement but fails to complete the same before the adjourned completion date, a Buyer of an industrial or commercial interest is under the obligation to advise the Seller of his intention to either: i) declaring the contract of purchase and sale cancelled in which event the deposit or down-payment paid by Buyer shall be refunded to Buyer and neither party shall have any further obligation or liability to the other; or (ii) completing the purchase without reduction in the purchase price. In this instance, if Seller's insurance covers the loss or damage, Seller shall turn over to Buyer at the closing the net proceeds actually collected by Seller under the provisions of any insurance policies, to the extent that they are attributable to the loss or damage to any property included in the sale. In the eventuality that the Seller has not yet received such proceeds, Seller shall irrevocably assign to the benefit of the Buyer any future collection of any such insurance proceeds.
Clearly, frustration does not follow the general path of negotiating, performing and closing contracts of purchase and sale. Exceptional care must be taken by the parties – and their Agents - to make sure that any amended terms be carried out swiftly and fully for everyone’s best interest.
Luigi Frascati
Real Estate Chronicle
