Property Law
House fire

So, after successfully entering into an Agreement for Sale and Purchase for the property of your dreams and having completed your due diligence, you rightfully decide to enjoy a celebratory tipple of having reached unconditional status. The phone then rings, it’s the Real Estate agent advising you of the catastrophically bad news the property has burnt to the ground. As purchaser what are your options in this dreadful situation?

Assuming the form of the Agreement for Sale and Purchase is the Auckland District Law Society Tenth Edition 2019(2), the relevant provision is clause 5.2.

The first enquiry is whether the damage to the property renders it untenantable and that it shall remain so at settlement. Here the property has burnt to the ground, this requirement is met. Your options now become two fold. The first (“Option One”) enables you to complete the purchase with a reduction to the purchase price equal to any insurance monies received by the vendor. Note however, if the vendor’s insurance company decides to reinstate the property for the benefit of you as purchaser, there will be no reduction to the purchase price. On the other hand your second option (“Option Two”) provides that you may cancel the agreement by written notice and receive your deposit back.

Whist Option One may sound appealing in that you will get a brand new house on that fabulous location, the practicalities of the waiting for confirmation that the vendor's insurance company will pay out, together with the inability to move into your property until the new dwelling is completed (especially now so with Covid impacts on the building industry).

Option Two is undoubtedly a quicker and more certain road to resolution. Not ideal but at least you can move forward and find the second best house of your dreams.

The above discussion helps to illustrate your options on a “clear cut” factual scenario. In reality if you are ever faced with the above scenario, there may be further legal and practical considerations to be taken into account. If, for example, the damage was not as extreme, then the dwelling may be tenantable and different rules would apply and you may be forced to settle with a discount to the purchase price as the right to cancel only applies if the property is untenantable.

Please do not hesitate to contact us as to your options in these situations.

Dan works primarily out of Holland Beckett Law's Whakatane and Opotiki offices.