What happens if your house is damaged before settlement?

You’ve walked the streets, negotiated with agents and vendors, signed contracts and loan documents and finally await the settlement date with great anticipation.

With just a week to go before the big day your lawyer calls to advise you that last night’s big stormfront hit your dream home. The roof of your house is no more and there is extensive water damage to most of the internal fixtures.

Can you get out of the contract? Is the vendor obliged to fix the damage before settlement? What if you still want to proceed with the purchase but the vendor does not?

This article explores the legal position of a purchaser and vendor when the subject of the sale is damaged after exchange of contracts but before settlement – the information is relevant to both parties involved in a residential conveyancing transaction.

The passing of risk

In Queensland, standard contract terms generally provide that the risk of loss or damage to a property passes from the vendor to the purchaser at 5.00 pm on the first business day after the date of the contract. It is therefore essential that a purchaser takes out insurance to protect the property and for public risk, from this time.

Although the risk passes to the purchaser, the vendor has an obligation to take reasonable care of the property until settlement and not do anything that would significantly alter the property to the detriment of the purchaser. In other words, if a vendor is reckless or negligent in caring for the property, the purchaser would likely have rights to claim damages.

Can the purchaser terminate the contract if the property is damaged?

The right for a purchaser to terminate a contract due to damage depends on the significance of the damage.

The Property Law Act 1974 (Qld) entitles a purchaser to rescind the contract if, prior to possession or completion (whichever is the earlier), a dwelling house (including a unit in a strata complex) is ‘so destroyed or damaged as to be unfit for occupation as a dwelling house’. This is a statutory right of termination and cannot be omitted or altered by a contrary provision in the contract.

If the purchaser wishes to rescind, he or she must give written notice to the vendor or vendor’s solicitor before possession or completion. The purchaser is entitled to recover the full deposit.

Whether or not a house or unit is unfit for occupation will be a matter of fact and degree in each case. Generally, if the property is unsafe or where it would be impossible to live in the dwelling without a reasonable level of comfort, then the purchaser will have the right to terminate.

Minor damage / fair wear and tear

A purchaser has no statutory right to terminate a contract or be compensated for damage that does not make the dwelling unfit for occupation. The purchaser must therefore settle on the completion date relying on his / her own insurance to recover any loss.

In some circumstances, purchasers who fail to take out insurance at the contract date, may be able to claim under an insurance policy held by the vendor but it is unwise to rely on the vendor’s insurance and always prudent for purchasers to obtain their own.

Summary

The extent of damage sustained to a property will affect the termination rights of the parties to a contract after exchange and prior to completion.

Vendors and purchasers should be aware of their respective rights and ensure adequate insurance is maintained to cover the risk of loss.

This article is intended to provide general information only. You should obtain professional advice before you undertake any course of action.

If you or someone you know wants more information or needs help or advice, please contact us on 07 3281 6644 or email mail@powerlegal.com.au.