Can Buyers terminate? Does the Buyer or the Seller pay repair costs?
As real estate agencies and law firms begin to re-open following Cyclone Debbie, some Buyers and Sellers will be asking the question “Who bears the loss of the damage or destruction – is it the Buyer or the Seller?”.
Who bears the loss – Buyer or Seller?
A number of Buyers and Sellers who have contracted to buy and sell may be left with a property that is damaged or destroyed before settlement. We need to then turn to the Contract to determine who bears the loss under Contract necessitated by flood or cyclone damage.
The terms of the Contract state that the property is at the “Buyer’s risk” from 5:00pm on the first business day after the Contract Date. For example, if the Contract was signed and dated before 5:00pm on Monday 27 March 2017 the risk transfers to the Buyer at 5:00pm on Tuesday 28 March 2017.
When the ‘risk transfers to the Buyer’ the risk of damage to the property moves from the Seller to the Buyer. The Buyer then becomes responsible for all repairs to the property.
The Buyer has no basis of refusing to settle or claiming any compensation.
As we are aware, strict time limits apply to the taking of steps under conveyancing contracts. The Buyer must still settle on the settlement date whether or not the property has been repaired or is waiting for repairs.
The worst case scenario would be that the Buyer is left with a significant repair bill for damage to the property over and above the purchase price and is still required to settle.
If the Buyer has insurance they may be able to make a claim on their insurance policy for the repairs.
What if the Buyer doesn’t have insurance?
If the Buyer didn’t organise insurance it may get some protection from section 50 of the Insurance Contracts Act 1984 (Cth).
Under this section, if the risk in respect of loss or damage has passed to the Buyer, the Buyer is deemed to be insured under the Seller’s home insurance. The Buyer is deemed to be insured under the Seller’s policy until settlement or when the Buyer enters possession.
However, there is no requirement under the Contract for the Seller to maintain their insurance.
The Buyer may then make a claim on the Seller’s insurance policy. Obviously, this is all subject to the Seller having insurance and the policy of insurance extending to flood and cyclone (whichever is relevant).
If the Seller makes a claim on their insurance or the Buyer makes a claim with their insurer (or on the Seller’s policy) the parties can agree to delay the settlement date until the Buyer’s insurer assesses the claim and then effects the repairs.
Alternatively, the Seller may assign the benefit of the insurance to the Buyer, settle and then the Buyer arranges for the repairs to be effected post settlement.
Can the Buyer pull out of the Contract?
Firstly, there is no automatic right for the Buyer to pull out of a Contract because the property has been damaged or affected by flooding or cyclone after the Contract has been entered into.
This means that the Buyer cannot terminate on the Finance condition due to damage sustained as a result of the cyclone. The Buyer must take all reasonable steps to obtain approval. The Buyer’s financier however may not be prepared to grant finance to the Buyer if there is significant damage or destruction.
Building Inspection Condition
If damage occurs prior to the Building Inspection Date, the Buyer has a right to terminate under the Contract if the Buyer obtains a Building Inspection Report. If the Buyer has obtained a Building Inspection Report and is not satisfied with that report (e.g. the flooding or cyclone has caused damage or defects) then the Buyer may terminate the Contract by giving notice to the Seller or the Seller’s Solicitor.
What if the property is damaged, destroyed and unfit for human habitation?
If the Contract has gone unconditional, but has not yet settled or possession has not been given to the Buyer, and the property becomes severely damaged or destroyed which renders it unfit for occupation as a dwelling house, the Buyer may terminate the Contract.
There is a statutory protection for Buyers in limited circumstances. In accordance with Section 64 of the Property Law Act, the Buyer may potentially terminate the Contract if the property is deemed unfit for human habitation.
This is however, extremely rare and would only apply in the most extreme circumstances. The property would have to be deemed unfit for human habitation before a Buyer could terminate under section 64.
If you are a Buyer or a Seller that is in this position you may wish to contact our office for further legal advice.