What happens when real estate is purchased and the property is damaged before settlement?

Jan 14, 2025 | Publication

When a property purchase contract is exchanged, as a general rule the risk of damage to the property typically passes to the purchaser. This means that if the property is damaged after the exchange of contracts but before settlement, the purchaser is generally responsible for the damage. However, there are several important potential exceptions.

The contract may provide that the property is at the purchaser’s risk from the date of exchange. However, parties can negotiate different terms, so it is crucial to review the specific contract.

Purchasers are advised to take out insurance on the property from the date of exchange to cover any potential damage. This is because the purchaser bears the risk of damage, and having insurance can mitigate financial loss.

Despite the risk passing to the buyer, the vendor is still obligated to maintain the property in the condition it was in at the time of exchange until settlement. If the vendor fails to do so, the purchaser may have a claim for breach of contract.

In rare cases, if the property is so severely damaged that it cannot be used for its intended purpose, the contract may be frustrated. This would discharge both parties from their obligations under the contract.

If there is a dispute over damage to the property, the purchaser may seek legal remedies such as specific performance, damages, or rescission of the contract, depending on the circumstances and the terms of the contract.

It is advisable for both purchaser and vendors to seek legal advice to understand their rights and obligations in the event of property damage after the exchange of contracts.

The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this publication is accurate at the date it is received or that it will continue to be accurate in the future. We are not responsible for the information of any source to which a link is provided or reference is made and exclude all liability in connection with use of these sources. If you do not wish to receive newsletters from us, please let us know.nd exclude all liability in connection with use of these sources. If you do not wish to receive newsletters from us, please let us know.

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