Risk under Residential Land Contracts
Contracts for the purchase of a residential house or building unit contain provisions within the terms of contract stating when risk passes to the Buyer. The relevant provision for houses provides that the property is at the Buyer’s risk from 5:00pm on the first business day after the contract date. A business day is defined to mean a week day other than a public holiday in the place for settlement. For example, if property is purchased on a Friday or on the weekend, the risk will pass to the buyer at 5:00pm on the following Monday. This provision allows the Buyer time to arrange suitable insurance over the property. The consequences of a Buyer not obtaining adequate insurance cover could be extreme, if the property was to be damaged to some extent prior to completion. Accordingly, if the property was damaged then as it is at the risk of the Buyer, the Buyer would be forced to complete the sale without any adjustment for loss in value or repairs which may be necessary. Section 64 of the Property Law Act 1974 (“Section 64”) does however, allow a Buyer to rescind a contract where the dwelling house subject of the sale is destroyed or damaged so that it is unfit for occupation as a dwelling. The destruction must occur before completion or possession, whichever is the earlier. The Buyer must also rescind the contract in writing no later than the date of settlement or possession. Section 64 applies notwithstanding any contrary contractual stipulation. Section 64 extends to dwelling houses only and not to all buildings or improvements which may form part of the property. It also applies to building units. It is prudent for both the Seller and the Buyer to maintain insurance cover between the Contract Date and the Settlement Date. A Buyer should obtain legal advice prior to signing a contract to ensure that their rights and obligations are clearly established and understood so that they obtain the necessary insurance to cover their risk.