What happens to an offer if a property sustains damage prior to possession?
I extend my sympathies to everyone impacted by the flooding in Southern Alberta at the end of June 2013. I also congratulate the communities for the way they all pulled together to help each other.
The week following the flood was a challenging time – some law offices were closed for many days, and the Land Title Office in Calgary was shut down for a number of days. I commend my colleagues around the city for their cooperation in closing transactions during this difficult period.
Properties affected by the floods: I’m told at least 200 homes were sold in communities that were evacuated in Calgary, during the month of June, and one question that has come up a number of times is: what happens when an offer was made on a property affected by the flood, but the possession date is some time after the flood event?
Article 4.2 of the standard AREA Residential Real Estate Purchase Contract states that,
“When the buyer obtains possession, the Property will be in substantially the same condition as it was when the Contract was accepted”.
How is this defined?
- 1.Minor Damage: In some cases, where the damage was relatively minor, the Buyer should be expected to perform the contract. Typically the Seller will arrange to have the damage repaired, and the Seller’s lawyer will often hold-back a portion of the purchase price until the damage is rectified.
- 2.Significant Damage: In more serious cases, the damage may be so significant that the damage could not be easily repaired, or the property may not even be salvageable. The Buyer may rightfully terminate the contract where the damage is so severe, that there is a fundamental breach of the contract. They would be entitled to a return of the deposit (Article 3.5 (c) – deposit refunded where Seller fails to perform the Contract).
There are many reported cases in Canada that define what could constitute a “fundamental breach of the contract”. I remember reading about a case arising from the flood a few years ago around Brisbane, Australia. There, the Court of Appeal found that the buyer could rescind a contract to buy a property that was made uninhabitable.
In Southern Alberta, there are surely many properties that could fall between these two extremes. Every case would have to be determined on the unique facts of that situation. A lawyer should be consulted for advice in determining if a particular property can be delivered in “substantially the same condition”.