Floods & storms: Can buyers terminate? Should buyer or seller pay repair costs?
As floodwaters swirl through many of the state’s regional centres and towns and threaten Brisbane, our thoughts and best wishes go out to all real estate offices, law office personnel and their families who are affected by this ongoing tragedy.
There will be some people whose situation will be compounded by having a property that they have contracted to buy or sell being innundated or damaged before completion. What are the legal issues? Who bears the loss – buyer or seller?
If damage occurs prior to the building inspection date, the buyer obviously has a right to terminate pursuant to the relevant contract provision if the buyer obtains a building inspection report confirming such a defect.
Otherwise, the question as to who bears the loss associated with repairs to a dwelling under contract necessitated by storm or flood damage, depends to some extent on whether the contract is in ADL or REIQ format.
The REIQ provision states that “the Property is at the Buyer’s risk from 5pm on the first Business Day after the Contract Date”. (Clause 8). Thus the buyer would assume the risk of subsequent damage to the property and would have no basis of refusing to settle or claiming compensation.
On the other hand, in addition to providing as above in its clause 28, clause 8 of the ADL version states that the seller “must hand over the Property at Settlement without damage or loss to the condition, as at the Date of Contract (fair wear and tear excepted)” and that the buyer may claim the reasonable cost of rectifying any damage from the seller after settlement (provided the buyer gives notification of its intention to do so prior to settlement).
ADL clause 28 also requires a seller to maintain its policy of insurance over the property (if there is one) as long as the seller remains in possession. There is no similar provision under the REIQ version and there is nothing to stop such a seller cancelling insurance immediately after the contract is signed.
Buyers get some protection from the Insurance Contracts Act 1984 (Cth) which deems the buyer to be insured under the seller’s home insurance policy in many cases. The buyer is deemed to be insured up until settlement or when the buyer enters into possession, whichever is earlier (note: There is some legal controversy over the practical interpretation of this Act).
Even so, there is no protection under either contract format if the seller has no insurance or if the insurance does not extend, for example, to flood.
The buyer can of course take out their own insurance immediately on signing the contract.
All of the above is subject to some statutory protection for circumstances where a house is “so damaged or destroyed as to be unfit for occupation”. In such circumstances, s 64 of the Property Law Act 1974 (Qld) states that the buyer may terminate the contract before completion or possession. But this only applies in the most extreme cases and it leaves open the possibility of an argument as to whether the extent of damage is sufficient to “be unfit for occupation”. ADL standard contract clause 8.7 repeats the statutory provision.
The buyer has no statutory termination or compensation rights if the house or property is damaged to a lesser extent. In such a case the buyer must still settle on the due date whether or not the property has been repaired. If the buyer has omitted to take out house insurance, the buyer could claim under the seller’s policy only if the seller is properly insured and only if the provisions of the Insurance Contracts Act can be made to apply.
The buyer may, in the worst case, be left with a substantial repair bill for the damage to the property over and above the purchase price.
As we are all aware, strict time limit apply to the taking of steps under conveyancing contracts. There is no general provision to extend times in cases of extreme natural disaster. Indeed both ADL and and REIQ contract forms provide for time being “of the essence”. In the various government press statements issued since the beginning of this disaster, there has been no talk of any statutory extension of time limits that otherwise apply either in contractual or litigious circumstances.
Buyers and sellers found in this position should seek prompt legal advice. See also update to this post.