A little known property law may allow owners-in-waiting to terminate a contract for a flooded property, although some most likely will have to go through with their purchase, experts warn.
Under a standard Queensland contract of sale, the ‘risk’ of the property passes to the buyer on the first business day after it is signed, said veteran property law specialist Duncan Murdoch.
Conditions, such as pest and building inspections and subject to finance, may provide enough wriggle room for the buyer to pull out of a contract, the director of Ryan Murdoch O‘Regan Lawyers said.
“Under standard contract terms, the risk passes to the buyer on the first business day after the contract is signed,” the 30-year property law specialist said.
“If you’ve bought a house and it’s flooded, effectively the buyer is left holding the baby unless it is uninhabitable but that definition is different for each property.”
If a house is deemed to be damaged or destroyed to the point it is “unfit for human habitation”, then buyers could terminate a contract and recover their deposit, according to Queensland Legal Assistance Forum (QLAF) guide to practitioners.
However, whether a dwelling is fit for human habitation is a “question of fact and degree in each case”, the guide states.
“Mere water inundation would not be enough to rely on this section; there must be some physical damage to the property that requires repair.”
Where walls are watermarked and need repainting or replacing, or carpets require treatment or replacing, this would fall within the usual meaning of the word ‘damage’,” they said.
“A property that has been completely inundated and is covered in a layer of mud may be considered unfit for habitation,” the QLAF guide states.
“Where the only damage to a property is to the meter board, and as a result power cannot be reconnected, it would be highly questionable whether the Act would apply.”
In the case of apartments, the damage must be to the actual lot as common areas or common property are not covered under the Act.
“In any contract for the sale of a dwelling house where, before the date of completion or possession whichever earlier occurs, the dwelling house is so destroyed or damaged as to be unfit for occupation as a dwelling house, the purchaser may…rescind the contract by notice in writing … not later than the date of completion or possession whichever the earlier occurs,” the s. 64 of the Act states.
Buyers are warned not to terminate a contract on grounds of the dwelling being unhabitable without first seeking legal advice as the “threshold” is high, say REIQ CEO Antonia Mercorealla.
“A buyer can rescind the contract up to the settlement date, however the threshold to meet is high and buyers should seek legal advice before attempting to invoke the statutory provision as there may be legal and financial consequences if a buyer tries to rescind or terminate a contract invalidly,” she said.
For sellers there is hope, but it’s a race against time.
If they can return a dwelling to being habitable by settlement date then the sale is likely to proceed, Mr Murdoch said.
“It depends on your settlement period and if the seller can rectify the damage before that date,” he said.
“If your settlement date is next week, then it’s highly unlikely the damage will be repaired in time.
“But if it is three or six months, then potentially the seller could fix the property to the state of habitability.”
Another avenue to terminate a contract, would be if the seller misrepresented the property being prone to flooding although that may be hard to prove if it was a verbally communicated, Mr Murdoch said
“If the seller had a made a specific representation that property does not flood and that can be a possible way out of the contract for the buyer,” he said.
All buyers affected by the floods should seek legal advice about the terms of the contract and when the “risk” has passed on to them, said the Insurance Council of Australia.
“The time the risk passes between a vendor to the purchaser is the key to determining the parties’ rights if the property is damaged between exchange of contracts and settlement,” an ICA representative said.
Real estate giant Ray White offers buyers immediate house insurance through their concierge service to protect them until settlement.
“A little known fact is that all Ray White buyers – through our in-house Concierge service – are offered an insurance cover-note the minute their contract is signed so no one is uninsured through to settlement,” a Ray White spokeswoman said.
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