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Buyers Beware - The Risk of Damage to Purchased Property
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A recent decision of the High Court in Christchurch
shows that difficulties for vendors and purchasers remain where the property suffers damage before the property changes hands.
The purchaser, Herbert, had entered into a contract to buy a rural property off the vendor, Duncan. After the contract became unconditional but before settlement, parts of the property were damaged by fire. Unfortunately, the damaged parts of the property were only covered through the vendor's insurance for nominal value. The actual reinstatement costs were considerably higher. Therefore, there was no point in the purchasers taking over the vendor's insurance, which they could legally do. However, the vendors would also be very keen to proceed with settlement, rather than bear the costs of any reinstatement themselves.
The contract provided that there was to be a reduction in the amount paid by Herbert, reflecting the diminution in value of the damaged property.
Ultimately, Herbert and Duncan could not agree on the reduced amount. An independent expert was appointed to assess the amount. Duncan then issued a notice requiring Herbert to settle based on the independent's assessed reduction.
Herbert disputed the independent's assessed reduction and sought an interim injunction postponing the imminent settlement.
The Court decided that it could not order an injunction. To do so would undermine the contract, which anticipated and made provision for such a dispute. This meant settlement would have to proceed at the purchase price less the independent's assessed reduced amount.
This case highlights the difficulties with the provisions for risk and damage in the standard agreement sale and purchase. It would appear that while the risk provisions are drafted so as to provide that the risk of damage remains with the vendor, there is still a possibility that the purchaser will be reliant on the vendor's insurance. If this is inadequate, but the property is not rendered untenantable and so neither party can cancel the agreement, then there is almost bound to be a dispute over the amount to be paid at settlement.
While calculation of the actual amount of compensation for a purchaser survives settlement, purchasers of property should consider seriously whether they want to bear the risks. A purchaser could seek the vendor's agreement to vary the standard risk provisions. A vendor will, of course, be concerned if any variation allows for a delay or cancellation of settlement, particularly if they require the sale proceeds to purchase another property. However, perhaps a better balance can be met over the passing of risk agreed between the parties.
The decision also raises the question whether it should be a matter of course for purchasers to take out insurance as soon as the agreement becomes unconditional. This question takes on even more relevance now with most residential properties shortly (if not already) to be insured on a "sum insured" rather than "full replacement" basis, which increases the risk that the vendor's sum insured at the time of damage is insufficient to reinstate the house.
Herbert & Clem v Duncan & Roscoe
, High Court, Christchurch, Fogarty J, 20 March 2013 (CIV-2013-409-558)
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