This is the second in a series of articles on insurance issues that property owners must contend with.
In my previous article on insurance I discussed the importance of a purchaser of residential property obtaining insurance prior to the contract for the purchase of the property becoming unconditional. However, the policy they take out will only have effect from the date of settlement. The next question then is what happens if there is a natural disaster or other event that results in the property being damaged while the contract is unconditional, but before the purchaser takes possession on the settlement date and their own insurance policy starts to run? The answer largely revolves around when the purchaser takes possession of the property, which is usually the date of settlement (where the purchase itself is completed) but can be earlier by agreement.
The starting point is found in clause 5 of the standard ADLS/REINZ agreement for the sale and purchase of real estate which is the most common contract used for the purchase of land. Subclause 5.1 states that the property and chattels remain at the risk of the vendor until the purchaser takes possession.
Typically the vendor will have insurance in place until the date of possession because it is they who carry the risk. The vendor acts as a trustee for the purchaser from the date the contract is unconditional, and as a result should have insurance in place to protect the purchaser’s interest. Section 13 of the Insurance Law Reform Act 1985 states that if there is an unconditional contract for sale and the vendor has an insurance policy for the property in place, that the purchaser obtains the benefit of the policy in recognition of the interest that they have in the property. This allows the purchaser to deal with the vendor’s insurer and enforce the policy if the property is damaged prior to the taking of possession. Again, this is because the purchaser’s own insurance policy will only have effect from the date of possession.
Subclause 5.2 of the ADLS agreement deals with what happens if the property is destroyed or damaged prior to the taking of possession and completion of the settlement. If damage caused prior to the purchaser taking possession has not been fixed prior to settlement, and the damage has been to such a level as to render the property untenantable, then the purchaser may either complete the purchase less any amount payable under the vendor’s insurance policy, or cancel the agreement by serving notice to the vendor and then take steps to reclaim their deposit.
If the damage is not significant enough to consider the property untenantable as a result of the damage, the purchaser is then required to complete the purchase, less a sum equal to the loss of value the property has experienced as a result of the damage. The situation is more complex if the purchaser and vendor disagree as to the extent the property is devalued, in which event subclause 8.4 is followed, which details how the parties should deal with disputes relating to compensation. Essentially the parties must agree on an interim figure that the purchaser pays to a stakeholder where the sum is held on trust until the dispute is resolved. If even the interim amount cannot be agreed on, then there is a regime to appoint an experienced property lawyer to determine the interim amount.
Overall, it can be said that the vendor carries the risk during the period between the contract becoming unconditional and the purchaser taking possession. If the purchaser cannot cancel the contract due to the damage not being severe enough then in the first instance they should look to the vendor’s insurer to make good any damage to the property. The situation becomes increasingly more complex if the vendor has no insurance or inadequate cover. That situation should be rare but the purchaser may still have a right to claim damages against the vendor.
Although damage caused by earthquakes to property between the period when the contract is confirmed or unconditional and settlement can result in complexities in the sale and purchase process, there are legal remedies available in most circumstances.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
