When a buyer agrees to purchase a property from a seller and the parties then sign a contract of sale, settlement of that transaction, that is when actual ownership of the property passes from seller to buyer will typically occur at some point in the future, generally 30, 60 or 90 days from the day of sale.
During this period between sale and settlement, who is responsible if any damage to the property occurs, is it the buyer or the seller?
A starting point is General Condition 24.1 contained in the contract of sale, which obligates a seller ‘to deliver to the property to the buyer in the same condition it was on the day of sale.’ This means the seller will carry the risk of damage to the property until settlement and must ensure the property is maintained in the same condition it was, at the day of sale.
However General Condition 24.2 also contained in the contract of sale provides for an exclusion for ‘fair wear and tear.’
This means should damage result in the normal course of owning a property, the seller will not have to repair the damage and the buyer will have to accept the property in that condition. Such an example could include the breakdown of a wall oven.
If the seller was to replace the wall oven, the property is in fact being put in a better condition than what it was at the time of sale, remembering the seller only has to keep the property in the same condition.
Conversely should damage occur that is outside of normal property ownership, such as accidental damage, the seller must repair that damage.
At settlement should the property not be in the same condition as at the day of the sale, the seller will be breaching the terms and conditions of the contract of sale.
Depending on the amount of damage to the property, the parties may chose to activate General Condition 24.4. In the event of a dispute and in order not to delay settlement, the buyer is entitled to request that an amount, up to $5,000.00 be withheld at settlement subject to the buyer also contributing an equal amount of funds.
These funds are then held in trust and the parties will attempt to settle the matter post settlement. Funds will then be released in accordance with that settlement.
However if there is major damage to the property, the buyer may elect to delay settlement until such time as the property is reinstated to the same condition it was as at the day of the sale. In this event the seller may not seek penalty interest for the delay in settlement.
Should the property be substantially destroyed, the buyer would be within its rights to terminate the contract of sale.
As the seller carries the risk of damage until settlement, the buyer is not obligated to insure its interest in the property, as they can rely on the sellers insurance to make good any damage.
However the seller is not compelled to insure its property, meaning that in the event of damage prior to settlement, there may not be funds to effect repairs that may jeopardise settlement.
Some purchasers will go the expense of insuring their interest in the property to ensure that in the event of damage prior to settlement, there will be funds to make any required repairs.
As always this article contains general information only and should not be relied on for detailed advice related to your particular circumstances. Should you require such advice, please contact your lawyer.
Adam Zuchowski is a principal property lawyer with Network Legal & Associates.