The standard REIQ contracts for the sale of properties in Queensland provide for risk to pass to the buyer at 5.00 pm on the next business day after the contract date. This means that if anything happens to the property after that date (such as damage or destruction) then that is the buyer’s risk, the buyer should have insurance in place to cover it, and the transaction can proceed, leaving the buyer to make a claim under his or her insurance after settlement.
Recently we have seen a trend for a special condition to be inserted simply saying that risk remains with the seller until settlement. We are not sure why this trend has emerged, but speculate that it has something to do with recent natural disasters and the difficulty and expense of taking out insurance. It seems a simple solution to leave risk with the seller, but it is a bad idea. Here is why:
- If the property is not at the buyer’s risk, it is likely that the buyer has no insurable interest in the property, and therefore even if the buyer took out insurance (and what would be the point of changing the clause if the buyer intends to insure?) then the insurer may decline to pay up, as it is the seller’s loss.
- If the property is damaged after contract but before settlement, the buyer only has a clear right of termination if the damage is so bad that it is unfit for occupation as a dwelling. If the damage is less than that, then it is likely that the buyer will have to proceed to settle, at the full price.
- If the property is unfit for occupation, termination might not be an attractive option to the buyer, if the buyer is keen on the location and the market is rising. The buyer would then be faced with the choice of settling and taking the loss, or potentially losing the property.
- If there is damage, but the dwelling is habitable, there is scope for a dispute about whether in fact the buyer is obliged to settle (most likely, yes) and whether the seller is obliged to carry out repairs (most likely, no). The final answer may depend on the extent and cause of the damage.
- If the buyer settles, the buyer is entitled to be paid any loss which the seller recovers under the seller’s insurance policy, but:
- if the seller is not insured, the buyer loses out; and
- it would be up to the seller to make and prosecute a claim, and the buyer will have no control over it. The seller might not be too interested in progressing a claim, since the seller will already have received the sale price.
There is a reason why the REIQ contract passes risk to the buyer shortly after the contract is signed – it is the simplest and most practical way of dealing with risk during the contract period. If the risk clause is to be changed, any replacement clause will need to deal in detail with the rights of the parties if the property is damaged to various extents, which is likely to be difficult to do without the use of a crystal ball.
This article contains general information only, and should not be relied on as legal advice. Differing circumstances and contract terms may result in substantially different outcomes. If you are involved in a situation similar to that described in the article, you should immediately seek legal advice.