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2 Feb 11
Implications of recent flood disaster on contracts for the sale and purchase of real property

Introduction

It is inevitable that many parties to uncompleted contracts - whether for residential, commercial or industrial property - will seek to ascertain their rights and obligations in the wake of the flood disaster.

In many cases, buyers will seek to:

  • terminate the contract
  • suspend or delay the performance of obligations under the contract, or
  • seek compensation (under an insurance policy or, if insurance is unavailable, directly from the seller).

Rights to terminate as a result of flood related damage

Contractual rights

Building inspection - under a contract for residential property, it is standard for the buyer to have a right to terminate as a result of having obtained an adverse building inspection report (e.g. REIQ standard clause 4). If significant damage occurs before the nominated building inspection date, it is likely that the buyer will have a right to terminate the contract based on the adverse report.

General - the general law is primarily concerned with the transfer of good title on completion as opposed to the condition of a property. It is unlikely that a buyer will be able to terminate a contract based on flood damage in the absence of a specific clause enabling the buyer to do so (such as a building inspection clause as referred to above).

Statutory rights

Under section 64 of the Property Law Act 1974 (Qld) a buyer of a residential dwelling has a right to rescind a contract where the dwelling is so damaged as to be ‘unfit for occupation’. This section does not apply to anything other than residential property and will only be available to be relied upon in the most extreme circumstances (it is unlikely to extend to flood damage but circumstances must, of course, be assessed on a case by case basis).

Suspension or delay of performance of obligations

In most cases in Queensland time is of the essence in respect of performance of contractual obligations.

Standard contracts for residential property do not contain any provision which enables a party to unilaterally delay the performance of an obligation in the event of flood or other natural disaster.

Contracts for commercial or industrial property may contain ‘force majeure’ or similar clauses. Such clauses can generally be relied upon only where it is impossible to perform an obligation because of a natural disaster such as flood. For example, this would generally not apply to delay completion of a contract.

Compensation for flood related damage

Contractual issues

Generally speaking, a contract will include a provision under which risk in respect of the property passes from the seller to the buyer at a particular time. Of course, buyers may insure against this risk.

Some contracts impose an obligation on the seller to deliver the property on completion in the same condition as at the date of contract (fair wear and tear excepted). If there is damage to the property pre-completion, the buyer’s remedy will generally be to seek compensation from the seller for the costs of rectifying the damage. The seller may, of course, be in a position to rely upon a policy of insurance in those circumstances. In some instances the seller is contractually obliged to maintain a policy of insurance (for the buyer’s benefit) for as long as the seller remains in possession of the property.

Statutory issues

The Insurance Contracts Act 1984 (Cth) may offer some protection to a buyer. A buyer is deemed to be insured under the seller’s policy in many instances. This of course depends upon:

  • the seller having a valid policy of insurance in place, and
  • the policy actually responding in the given circumstances.

Conclusion

In each individual case it will be important to analyse:

  • the relevant terms of the contract
  • the applicability of any statutory provisions, and
  • possibly, the terms of a policy of insurance (whether held by the seller or the buyer

before providing clear advice to either a seller or buyer in respect of their rights and obligations.

Further information

For further assistance or enquiries please contact:

Projects and Property Group contacts

Ian Hazzard on 07 3233 8976
Brett Hawkins on 07 3233 8834

Finance Group contacts

Peter Kennedy on 07 3233 8537
Peter Stewart on 07 3233 8942

Planning and Environment Group contact

Stuart Macnaughton on 07 3233 8869.