INSURANCE RISK AND BUYING AND SELLING PROPERTY

With the recent weather events in Queensland, we thought it was timely to summarise the position on risk when buying and selling property in Queensland, New South Wales and Victoria.

QUEENSLAND

When buying property in Queensland, the default position under the standard REIQ contract terms is that the risk passes to the buyer at 5pm on the first business day after the Contract Date. This means that the buyer is responsible for any damage or destruction from that point and should have insurance in place.

Please also note that even if a buyer validly terminates a contract, they may still be liable for any damage that occurred when the property was at their risk. It is therefore critical that a buyer takes out sufficient insurance by the deadline above and not wait until the contract is unconditional. Similarly, we advise all our sellers that it is prudent to maintain insurance up until the settlement date. Sellers are also obliged to take reasonable steps to prevent further loss – eg. moving undamaged items or making temporary repairs.

If the property is so severely damaged it is deemed unfit for occupation, a buyer may have a right of termination under section 64 of the Property Law Act 1974 (Qld). In such circumstances, a buyer may elect to rescind the contract by notice in writing to the seller before the date for settlement or possession, in which case the deposit would be refunded.

The determination of whether a property is “unfit for occupation” is a complex assessment, and if it is determined that the property is damaged to a lesser extent, the buyer will still be required to comply with the contract and settle on the due date, regardless of whether or not the property has been repaired prior to settlement.

Some agents offer buyers free initial insurance coverage – it is essential that you satisfy yourself as to whether the terms are satisfactory to you and the property you are purchasing (in particular, check to see if flood and/or natural weather events are covered). You should also review Council’s online mapping information to see if the property is located in a flood/cyclone risk area.

Risks of amending the default position in Queensland

There has been a recent trend to amend the default position by way of special condition in the contract placing the risk of the property on the seller up until settlement. While on the face of it, this has some merit, such an approach presents the following risks:

the Seller’s insurance may not be adequate and if there is damage, but the dwelling is still habitable, there is potential for a dispute to arise as to whether the buyer is still obliged to settle and whether the seller is only required to have insurance in place, but not necessarily complete any repairs;
if the property is at the seller’s risk and the buyer took out an insurance policy, the buyer’s insurer may refuse to pay out on that policy as it is debatable whether the buyer had an insurable interest;
if the property is damaged to such an extent that it is not habitable, a buyer may be forced into a position where the only option is termination under the Property Law Act 1974 (Qld). If the buyer had their own insurance, they could make a decision as to whether they wish to terminate, or make a claim under their insurance policy; and
if a buyer did not arrange insurance, they may be afforded some protection under section 50 if the Insurance Contracts Act 1984 (Cth). Under this section, if the risk in respect of loss or damage has passed to the buyer, the buyer is deemed to be insured under the seller’s home insurance until settlement or possession (assuming of course that the seller has insurance in place and of sufficient coverage). If the contract is amended to place the risk on the seller, this protection may not be afforded to a buyer. Any protection under the Insurance Contracts Act is however obviously dependent upon the seller having adequate insurance in place and should ultimately not be relied upon.

For the reasons set out above, it is our view that the default position under the REIQ contract is preferable – the buyer retains control over the level of insurance and is not reliant on a third party.

If you do require a special condition to amend the default position, it is important that it is carefully drafted. Feel free to contact us for further advice.

VICTORIA

The property remains at the risk of the vendor until settlement and the vendor must deliver the property in the same condition as at the day of sale, fair wear and tear excepted.

If the property suffers damage that is not considered fair wear and tear, such as damage from a fire or flood, the vendor is responsible for rectifying this before settlement. The purchaser may have the right to claim compensation or potentially rescind the contract if the damage is so substantial and materially affects the property’s value or the purchaser’s use and enjoyment of it.

General Condition 31 of the current standard LIV form of contract notes that the vendor carries the risk of loss or damage to the property until settlement. The purchaser cannot delay settlement but may claim compensation from the vendor after settlement. The Purchaser can nominate an amount no greater than $5,000 to be withheld in a stakeholder account at settlement. The nominated amount may be deducted from the amount due to the vendor at settlement and paid to the stakeholder, only if the purchaser also pays an amount equal to the nominated amount to the stakeholder. The stakeholder must then pay the amounts as determined post settlement.

Notwithstanding the above, we recommend buyers take out insurance from the date the contract is signed by both parties. Buyers should also ensure their bank is noted on the policy as mortgagee (or ‘interested party’) as the bank will usually require this as a condition of settlement. While the vendor must maintain the property in its current condition until settlement, having your own insurance will give you peace of mind if the vendor does not have insurance or if its cover is not adequate.

NEW SOUTH WALES

In New South Wales, the general rule is that the risk of loss or damage to a property remains with the vendor until settlement or possession, whichever occurs first. This is outlined in section 66K of the Conveyancing Act 1919 (NSW). Therefore, if any damage occurs to the property after the exchange of contracts but before settlement, the vendor is typically responsible for repairing the damage or compensating the purchaser.

However, if the property is substantially damaged and materially different from what was agreed upon, the purchaser may have the right to rescind the contract under section 66L of the Conveyancing Act 1919 (NSW). The determination of what constitutes “substantial damage” can be complex and depends on the specific circumstances of each case.

If land is damaged between exchange and completion, whether substantially or not, the Act provides for an abatement of the purchase price which may be adjusted on settlement. The price reduction should be ‘just and equitable in the circumstances’.

If a price reduction cannot be agreed and is not made on settlement, then the purchaser will have a right to recover an amount as a debt after settlement. Enforcing this can become a challenge and as such, the parties may instead decide to proceed to settlement with a fund retention held in trust pending resolution of the dispute.

Notwithstanding the above, we strongly urge purchasers to take out insurance from the date of the Contract, especially in circumstances where the purchaser may not wish to rescind the Contract but instead prefer to make a claim under their own insurance policy.

WHAT IF DAMAGE IS SUSTAINED BEFORE THE CONTRACT GOES UNCONDITIONAL?

There is no automatic right to terminate a contract under the finance condition because of damage sustained to a property and the buyer is obliged to take all reasonable steps to obtain approval. However, if a lender is made aware of damage, they may require a fresh valuation or decline to provide finance on a property that is significantly damaged. A buyer will need to consult with its bank or broker to confirm if they can still finance the purchase.

If damage occurs to a property prior to the Building and Pest Inspection Date, a buyer may have a right of termination if the reports identify major structural issues, and the contract is subject to the buyer obtaining satisfactory building and pest reports.

KEY TAKEAWAYS

If buying, take out insurance from the contract date.
If selling, retain insurance coverage up until the settlement date.
Review the terms of insurance coverage and ensure they are satisfactory to you and the property you are purchasing/selling (in particular, check for stand down periods, exclusions and whether flood/natural weather events are covered).
Review Council’s online mapping information to see if the property is located in a flood/cyclone/bushfire risk area.
Obtain insurance premium quotes before signing a contract.
If you are aware of potential events and there is an insurance embargo in place, we recommend you include a special condition making the contract subject to you obtaining satisfactory insurance approval within a certain number of days from the contract date, failing which, you can terminate and have the deposit refunded.
If purchasing a residential house, not in a strata scheme or community title scheme, you will need to arrange for building, contents and public liability insurance. If you are obtaining finance, it will be necessary for your financier to be noted on the policy as mortgagee or interested party.
If you are purchasing in a strata scheme or community titles scheme, the body corporate/owner’s corporation is often required to take out strata/building insurance for the building, common property and common contents. We do however recommend you confirm this and ensure you take out coverage for the lot’s contents (carpets, curtains, appliances etc) and public liability insurance for the lot’s interior.
Take photos, videos and record evidence of the condition of the property at the date of the contract and when you become aware of any damage.