What happens when a natural disaster damages the property you intend to buy after the Agreement is signed, but before settlement?

A couple recently decided to purchase their first home. After finding their dream house, they were ecstatic when their offer was accepted, and quickly entered into an Agreement for Sale and Purchase.

Before the couple could settle and take possession of the house severe weather conditions for a number of days caused serious damage to the property’s foundations. While this is fixable, as the rest of the property remained intact, the couple decided to seek legal advice about their options.

Recent events in the North Island of Aotearoa have caused many people to face extremely difficult circumstances. As a result of the rainfall severe property damage has been caused to houses in many areas of the country. Many people who are in the midst of settling the purchase of a new property may be concerned about how this may impact their Agreement if the property is deemed untenantable.

If a property has been damaged, the vendor has an obligation to disclose this to the purchaser otherwise they risk breaching the Agreement under the vendor’s warranties.

Therefore, in the unfortunate event that a natural disaster has damaged the property leaving the property untenantable by the settlement date, the purchaser can either:

1. Complete the purchase at the original purchase price, minus a sum equal to the insurance pay out which has been received; or
2. Cancel the contract by serving notice on the vendor (in this case, the vendor must return the deposit and neither party has a claim against the other in relation to the termination).

However if the vendor’s insurance company agrees to repair the damage, and restore the property to its original state, then the purchaser must proceed with the settlement and cannot negotiate a reduced price.

If the property is damaged but still considered tenantable then the purchaser is obliged to complete the purchase at the original purchase price, with a reduction for the loss in value of the property.

This typically would be calculated by the reasonable cost of repair work based on estimates that have been provided by the relevant tradespeople or suppliers.

If there are disputes regarding the estimate of this loss the Agreement for Sale and Purchase provides for a disputes procedure, which provides that an interim amount should be paid on settlement to a nominated stakeholder.

The interim amount must be a reasonable sum having regard to the circumstances at hand. If parties cannot agree on what is reasonable, then an independent valuer or surveyor must be appointed.

This process ensures that there are funds available to carry out the necessary work.

If you are unsure about your rights and obligations regarding the sale and purchase of a damaged property, it is important to seek advice from your solicitor as soon as possible. This will ensure that you are fully aware of all the potential options you may have in the circumstances at hand.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.