The recent flooding in New South Wales has left several communities destroyed and uninhabitable. Those currently in the process of selling or purchasing property within the affected areas will be curious as to how the current climate affects their position.
Each state is subject to their own property rules and regulations, so it would be in a party’s best interest to familiarise themselves on what options are available. This article will explore what rights and obligations a Vendor and Purchaser have in New South Wales under an exchanged contract, specifically in the instances where the property has experienced substantial damages prior to settlement.
Who takes responsibility for the risk?
The Conveyancing Act 1919 (NSW) (‘the Act’), section 66K provides that risk in respect to damage will not pass onto the purchaser under a contract of sale, until the earlier of settlement or upon the purchaser entering into possession of the property (see also standard condition 18.4 of the 2019 Contract for Sale).
Therefore, if both parties have agreed on earlier possession of the property, then the risk will pass on to the purchaser from the date of possession making it their responsibility for any damages.
What Statutory rights are available?
Substantial damage to a property is defined within the Act as something that has materially changed the land prior to settlement. Flooding would likely fall under this characterisation (depending on the extent of the damage), as may significantly alter all facets of the property, potentially rendering it unliveable.
Pursuant to section 66L of the Act, if the land is substantially damaged after the entering into the contract but before the risk passes to the purchaser, a purchaser has the opportunity to rescind the contract before settlement. The Purchaser would have to serve written notice to the Vendor, within 28 days of becoming informed of the damages or within such longer period as may be agreed to by the vendor and purchaser. A purchaser’s statutory right of rescinding from the contract cannot be modified by the terms of the contract.
By withdrawing from the contract, the Purchaser is entitled to their deposit and the contract ceases to have any legal effect. If the damage was caused by the Purchaser’s carelessness, they are unable to claim for damages.
Insurance
As the property normally remains at the Vendor’s risk before settlement, it would be in their best interest to retain insurance. If the purchaser has agreed to earlier possession, then the purchaser should ensure that appropriate insurance has been organised as and from the date of possession.
Notwithstanding the foregoing, given the right to rescind is a purchaser right, some purchasers may choose to effect insurance from the date of contract (and this is in fact recommended), especially in circumstances where the purchaser my not wish to rescind the contract but make a claim under their insurance policy.
Price Reduction
The purchaser may wish to proceed with the purchase of the property.
Under section 66M of the Act, if the land has been damaged during the period of exchange and settlement (prior to the risk passing to the purchaser) and the purchaser agrees to still go ahead with the process, the price of the property may be reduced on settlement by such amount as is just and equitable in the circumstances.
Under subsection (4), if the purchase price is not reduced on completion, the amount by which the purchase price should have been reduced may be recovered by the purchaser from the vendor as a debt.
At RCR lawyers we make it known to our clients of their obligations at the time of exchanging contracts. We do this to minimize any unnecessary costs and avoid surprises if damage where to occur to the property in question. We highly encourage individuals to ensure that they have reliable insurance from the date of exchange of contracts and that inspections are completed prior to taking possession of the property. Contact us at [email protected] Or 02 9307 8900 for an initial discussion for any property-related questions.
The blog published by Rostron Carlyle Rojas is intended as general information only and is not legal advice on any subject matter. By viewing the blog posts, the reader understands there is no solicitor-client relationship between the reader and the blog published. The blog should not be used as a substitute for legal advice from a legal practitioner, and readers are urged to consult RCR on any legal queries concerning a specific situation.
