With reservations and sales grinding to a halt due to COVID-19, so has cash flow. Naturally, housebuilders are looking at their obligations to pay land payments under existing contracts to see whether they can be deferred to such time as their cash situation improves. But are there ways of doing so, without being in breach of contract?
Unfortunately, most land contracts will not expressly cater for what is happening at the moment. In other words, they do not contain any express provisions (such as force majeure clauses) that allow for deferral of payments due to the financial fall-out from a pandemic or epidemic.
Some housebuilders have asked us whether the legal doctrine of frustration might apply to the situation. If it did, then parties could be discharged from their contract. However, frustration only applies when a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken under the contract. This does not cover the situation where a party finds it financially more difficult to perform the contract, or indeed where a party cannot afford to do so.
So, there is no obvious way in which housebuilders can validly defer payments under land contracts. However, a close look at the terms of the contract may reveal other ways of deferring.
Many land payments are linked to completion of the transaction, which in turn is conditional on certain conditions being satisfied. Some land payments are themselves conditional on certain conditions being satisfied. So, the first thing to do is check very carefully whether those conditions have actually been satisfied. Usually the condition will be defined by reference to a number of criteria that are set out in the contract.
In summary, whilst there is unlikely to be an ‘easy way out’ in terms of deferring payments under a land contract, a close examination of the terms of the contract, and especially any conditions, may reveal ways in which payments can be deferred, even if only for a short time. It should also be remembered that identifying any such ways will also give the housebuilder leverage in any commercial negotiations it is having with the seller in respect of deferring payments.