Cyclone Debbie - Can Buyers Terminate?
Cyclone Debbie - can buyers terminate? That is a question many sellers are asking given that their property is under contract but not yet settled.
INSURANCE & RISK
The REIQ Contract clause 8.1 provides that the property is at the Buyer’s risk from 5.00pm on the first Business Day after the Contract Date. Therefore, if the Contract was signed and dated before 5:00pm on Monday 27th March 2017 the risk transfers to the Buyer at 5.00pm on Tuesday 28 March 2017 and the buyer then becomes responsible for all repairs to the property. This is why it is recommended to Buyers to organise their insurance immediately after the Contract is signed.
It is important to check the Contract to make sure there is not a special condition or other notation that reverses the risk so that the property is at the risk of the Seller from the Contract Date until Settlement.
The Buyer can make a claim on their insurance policy for the
repairs if their policy allows it to.
What if the Buyer doesn’t have insurance?
If the Buyer didn’t organise insurance like they should have, they may get some protection from section 50 of the Insurance Contracts Act 1984 (Cth). There is no requirement under the REIQ Contract for the Seller to maintain insurance. Accordingly, this will only apply if the Seller has insured the property.
Under section 50, 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. The Buyer is deemed to be insured under the Seller’s policy until settlement or when the Buyer enters possession.
The Buyer may then make a claim on the Seller’s insurance policy for damage occurred during Cyclone Debbie. Obviously, this is all subject to the Seller having insurance and the policy of insurance extending to flood and cyclone (whichever is relevant).
Clause 8.3 of the Contract provides that the Seller must use the property reasonably until settlement. The Seller must ensure that the property is maintained and not do anything that would result in later expense for the Buyer.
The Seller would ordinarily have to ensure that the property (interior and exterior) is maintained up until settlement.
DAMAGE OR DESTRUCTION AS A RESULT OF CYCLONE DEBBIE
Firstly, there is no automatic right for the Buyer to pull out of a Contract because the property has been damaged or affected by flooding or from Cyclone Debbie after the Contract has been entered into.
This means that the Buyer cannot terminate on the Finance condition due to damage sustained as a result of Cyclone Debbie.
The Buyer is still required under clause 3 of the Contract to take all reasonable steps to obtain approval.
It is important to note that the Buyer is not required to provide any evidence that it has not obtained satisfactory finance approval.
Building Inspection Condition
If damage occurs prior to the Building Inspection Date, the Buyer has a right to terminate pursuant to clause 4 of the Contract if the Buyer obtains a Building Inspection Report. If the Buyer has obtained a Building Inspection Report and is not satisfied with that report (e.g. the flooding or Cyclone Debbie has caused defects) then the Buyer may terminate the Contract by giving notice to the Seller or the Seller’s Solicitor.
The Seller may still request a copy of the Building and Pest Reports.
It is important to check the Contract and make sure that there are no special conditions limiting the Buyer’s right to terminate the Contract on the Building Inspection Date.
Property damaged, destroyed and unfit for human habitation
If the Contract has gone unconditional, but has not yet settled or possession has not been given to the Buyer, and the property becomes severely damaged or destroyed which renders it unfit for occupation as a dwelling house, the Buyer may terminate the Contract pursuant to Section 64 of the Property Law Act in limited circumstances.
If the Buyer sought to terminate under section 64, it is
required to give written notice to the Seller or the Seller’s Solicitor seeking
to terminate the Contract before settlement or before the Buyer is in
possession of the property.
If the Contract is terminated under section 64, all monies paid by the Buyer in accordance with the terms of the Contract (e.g. deposits) will be refunded to the Buyer and all transfer documents returned to the Seller.
The Seller will then have the sole benefit to any insurance policy relating to the destruction or damage to the property.
This is however, extremely rare and would only apply in the most extreme circumstances. The property would have to be deemed unfit for human habitation before a Buyer could terminate under section 64.
Property damaged but not destroyed
In accordance with clause 8.1 of the Contract, following Cyclone Debbie the Buyer assumes the risk of the subsequent damage to the property. The Buyer has no basis of refusing to settle or claiming any compensation.
The Buyer has no statutory termination or compensation rights if the house is damaged to a lesser extent.
The Buyer must still settle on the settlement date whether or not the property has been repaired or is waiting for repairs.
The worst case scenario would be that the Buyer is left with a significant repair bill for damage to the property over and above the purchase price and is still required to settle.
Pursuant to clause 6 of the Contract, time is of the essence of the Contract. This means that strict time limits apply to the taking of steps under the Contract. For example, the Buyer and Seller must settle on the settlement date (unless otherwise agreed).
There is however a general provision in the Contract that applies if a party to the Contract is unable to perform a settlement obligation (e.g. pay settlement monies, provide transfer documents for settlement etc) as a consequence of a natural disaster. A natural disaster is a tsunami, flood, cyclone, earthquake, bushfire or other act of nature.
Clause 6.2 of the REIQ Contract provides that time for the performance of the parties’ settlement obligations will be suspended and cease to be of the essence of the contract and the parties are deemed not to be in breach of their settlement obligations. Once the affected party is no longer prevented from performing its settlement obligations due to the natural disaster the affected party must give the other party notice of that.
Once that suspension period ends either party may give the other party a notice to settle stating:-
(a) That the suspension period has ended;
(b) The settlement date – which must not be less than 5 or more than 10 business days after the date of the notice;
(c) That time is of the essence.
If the Seller makes a claim on their insurance or the Buyer makes a claim with their insurer (or on the Seller’s policy) the parties can agree to delay the settlement date until the Buyer’s insurer assesses the claim and then effects the repairs.
Alternatively, the Seller may assign the benefit of the insurance to the Buyer, settle and then the Buyer arranges for the repairs to be effected post settlement.
This information is general in nature and prepared for informational purposes only, and not for the purpose of providing legal advice. If your property or the property you are purchasing has been damaged in some way by Cyclone Debbie we urge you to contact your solicitor as soon as possible.