Before answering the main event question, it is necessary to provide an overview of the steps in a standard property purchase (‘conveyance’):

An interested buyer makes an offer to buy a house for $1,000,000. The seller accepts the offer. The buyer and seller each sign a contract which has their details and the price. The buyer signed contract and purchaser signed contract are then ‘exchanged’, usually through a real estate agent, or conveyancer/solicitor, and the contract is dated that day of exchange.

Contracts for sale of land generally include a 42 day (6 week) settlement period. Sometimes, the buyer or seller may seek to have a shorter or longer settlement period.

At settlement, the buyer provides the balance of purchase monies to the seller, and a Transfer is registered with the Land & Registry Services recording a change of ownership. The buyer now owns the property.

Who is responsible for the property after exchange?

Regardless of the settlement period, the seller remains responsible for the property until settlement, or ‘completion’ of the contract (unless there is an agreed special condition which may alter responsibility for the property where, for example, a buyer wishes to occupy the property before settlement). This is found in section 66K of the Conveyancing Act 1919 (NSW):

(1)    The risk in respect of damage to land shall not pass to the purchaser under a contract for the sale of the land until:

(a)    The completion of the sale (settlement), or

(b)    The time stipulated by the parties to the contract, being a time after the purchaser enters into, or is entitled to enter into, possession of the land (see example referred to above).

However, some special conditions may alter the standard conditions, the wording in the standard conditions, or remove standard conditions entirely. It is also not uncommon for special conditions to attempt to remove statutory obligations.

What happens if the property is damaged after exchange, and before settlement?

It depends on the extent of the damage. The scope of this article is in relation to substantial damage which is defined in section 66J(2) of the Conveyancing Act as ‘damage that renders the land materially different from that which the purchaser contracted to buy’.

Australia is no stranger to the havoc Mother Nature can wreak. Many people have been effected by recent copious amounts of rain and floods. Coastal properties can be particularly prone to damage from storms and rain.

If you have exchanged contracts and, say, a series of storms caused a landslide within the property boundaries, which results in a portion of the land and house collapsing, you could argue that the land is materially different to what you contracted to buy.

Section 66L(1) provides a buyer with a right to rescind the contract with written notice if land is substantially damaged, prior to settlement occurring. This means the seller has to return any deposit paid to the seller, and the parties are no longer bound by the contract.

What if the seller does not agree the damage is substantial and does not agree to rescind the contract?

A buyer could seek equitable Orders from the Supreme Court of NSW to rescind the contract and for the seller to direct the deposit be refunded to the buyer. The court would need to make findings that damage to the property was substantial, to be satisfied that rescission is an appropriate equitable remedy.

Depending on what evidence is provided to the court, including a buyer’s intentions with a property; expert reports as to the extent of the damage; any repairs the seller carries out (and timeframe repairs are completed in); it can be open to the court to find that substantial damage did or did not occur.

If a seller rectifies damage prior to settlement, and that damage is not so significant to make the land materially different from what the buyer bought, it is more likely the court would decline to make orders for rescission.

This occurred in Bakhos v Fenner & Anor [2007]. The buyer obtained the seller’s permission to lodge development plans with the local council 7 days after contracts exchanged. Prior to settlement, fire damage occurred to a property. The seller’s insurer accepted liability for the fire damage and repairs were carried out to the property, completed one week before the settlement date.

The court found that the buyer’s intention to develop the property made it highly unlikely the condition of the house was material to the price he agreed to pay and his decision to enter into the contract to buy the property. The seller was entitled to retain the deposit.

*Disclaimer: This is intended as general information only and not to be construed as legal advice. The above information is subject to changes over time. You should always seek professional advice before taking any course of action.*