What is the law when a property is damaged immediately before settlement?

Property

What happens when a property is damaged by fire just days before settlement? We recently assisted a vendor client who found himself in this unwelcome situation, courtesy of the purchasers.

What happens when a property is damaged by fire just days before settlement? We recently assisted a vendor client who found himself in this unwelcome situation, courtesy of the purchasers.

The purchasers, while undertaking the pre-settlement inspection four days before settlement, caused an electrical fire in the property. The Fire Service were called and needed to break down the garage door to gain entry and fight the fire. The damage was mainly superficial, namely burnt carpet, smoke damage to chattels, some charring to particleboard flooring and floor joists, and of course, a mangled garage door.

The vendor had already moved out of the property. The purchasers were less than keen to settle, having had quite a frightening experience in the property.

Clause 4.2 of the Agreement for Sale and Purchase applies. The essential question is whether the property is tenantable on the settlement date. If the property isn’t, the purchaser has two options:

  • Cancel and receive a refund of any money paid; or
  • Settle: in full if the vendor’s insurance company will reinstate the property. Or, if reinstatement isn’t an option, less an amount equal to the insurance money received by the vendor.

If the property is tenantable, the purchaser is obliged to settle but less an amount that will cover the reasonable cost of reinstatement or repair. If the vendor’s insurers will fully reinstate, then the purchaser needs to settle in full.

The Agreement does not define “tenantable”. We interpret it as meaning “liveable” i.e. is the property fully serviced with power, water, telecommunications and is it secure and safe?

In our case, we urged the vendor’s insurance assessor to work quickly to make the property tenantable by the settlement date – including making the garage door secure, removing all burnt carpet, placing a temporary cover over the burnt floor area, checking the entire electrical system and restoring power, and de-odourising the property. The assessor then provided a statement confirming that the property was tenantable on the settlement date and would be reinstated by the insurance company within the next couple of weeks. Accordingly, the purchasers were obliged to settle.

This situation shows the importance of insurance – vendors need to maintain insurance right up to the settlement day. If settlement is delayed, vendors should ensure that their insurance is extended until the new settlement date.

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