What protection and rights do you have if a property you are purchasing is damaged or destroyed before settlement?

3 February, 2023 | Jonelle Lee

The fine print of the “standard” Agreement for Sale and Purchase (“Agreement”) outlines what legal rights both Vendors and Purchasers have in unforeseen circumstances.

The vendor remains responsible for property, chattels and fixtures until the purchaser takes possession on settlement day.

It is essential that vendors do not cancel their house insurance until the purchaser pays the balance of the purchase price owing on settlement day.

Clause 3.2 – Pre-settlement inspection

The pre settlement inspection clause allows the purchaser to enter the property once before settlement to check that the property and chattels are in the same condition as when the agreement was signed.

If the purchaser is unable to complete this inspection (e.g., living overseas, recovering from injury or illness), they can authorise a person to complete this in their place.

Should the purchaser identify any issues with the property that may give rise to a claim against the Vendor for compensation, they must give notice in writing BEFORE settlement day (e.g., no later than 4:59pm the day before settlement).

A dispute mechanism is set out in clause 10.

Clause 5 – Risk & Insurance

If there is an unconditional sale and purchase agreement in place, but the property transaction has not settled, and the property is destroyed or damaged either through circumstances beyond one’s control (e.g., natural disasters) or from someone (accidentally or intentional) then the vendor needs to inform the purchaser.

This disclosure is required to prevent a breach of agreement under the vendors warranties contained in the Agreement (clause 7).

The vendor should provide details of any insurance claim relating to the property (including landscaping) damage/destruction, especially if this could affect settlement.

If the property is untenantable on settlement date

If the property is untenantable (red and yellow stickered by the Council) then the purchaser has the following options:

1. Proceed with settlement (the purchaser should disclose all relevant information to their bank/insurance company first)

• • if the vendors insurance claim has decided to pay, then a reduction should be made to the final amount for the sum equal to any insurance money received/to be received by the vendor in respect of the damage or destruction.
  • No reduction will be given if the insurance company has agreed to reinstate for the benefit of the purchaser.

2.Cancel the agreement by serving written notice to the vendor. At which time the vendor must refund the deposit back to the purchaser in full. Neither party can claim against the other once cancelled.

The above does not include properties where the property is not untenantable

If the property is damaged but is still tenantable, the purchaser is required to complete settlement.

If there is damage (including landscaping and exterior damage) then a reduction can be given for reinstatement or repair being valued as what reasonable costs will be for the purchaser to do so after settlement.

If the parties cannot agree on the value for these costs then the dispute mechanism in clause 10 will apply.

Do you need advice on a sale or purchase of a property that has been damaged before settlement has been completed? Is the other side disputing how much the cost of remedies are? Contact NZ Property Law expert, Jonelle Lee on 09 837 6838 or email jonelle.lee@smithpartners.co.nz to set up a time to discuss your options.