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Damage to a property after exchange and before settlement

What happens when a tree falls in the woods…or on the prize pizza oven in the yard which clinched the sale of a property? Is it the Vendor’s problem or the Purchaser’s problem?

Short answer – it depends on the amount of damage caused to the property.

What remedies are available?

When can a Purchaser rescind the contract?  This is a very grey area but the key points include:

  • under the legislation, and most Contracts for sale, the passing of risk from the Vendor to Purchaser does not occur until Completion of the Contract (unless the Purchaser has taken early possession);
  • the key issue will be the amount of damage caused to the property – what is “substantial“?
  • insurance:
    • a prudent Vendor should maintain an insurance policy over the property until Completion; and
    • Purchasers should give consideration to taking out an insurance policy on the property after exchange.

How is this resolved?

  • In most cases where the damage is minor – for e.g. the pizza oven on a $2 million property is damaged – common sense will prevail and the parties will come to a suitable arrangement.
  • However, significant delays may be caused to the settlement date while the matter is resolved; or
  • in some cases the contract will be rescinded by a Purchaser; and
  • In many instances, the parties will agree to settle as per the Contract and a portion of the deposit is withheld in the agent’s trust account until the matter is resolved.

The key is that the Property remains properly insured during the period between exchange and settlement.  We have previously blogged about the importance of insuring a property following exchange.  Given the gale force winds currently lashing NSW, we thought this blog and our earlier blog are timely reminders for Vendors and Purchasers.

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