Settlements
If you think the house you are buying or selling has been damaged as a result of the September 4th earthquake then you will need to immediately deal with the other party to the contract. Your legal advisors, should be involved in that. Other parties including builders, engineers and insurers may also need to be involved.
The conditions in the contract have not yet been confirmed
Depending on the conditions contained in the contract it may be possible to cancel it. In particular if the contract is subject to a builder’s check, and there is damage found by the builder, you may be able to cancel the contract.
Likewise, if the contract is subject to obtaining finance and the bank will no longer fund the purchase you could use that as a reason to terminate the contract. Early indications are that the banks are in some cases requiring expert reports from structural engineers and other professionals before proceeding. ANZ and National Bank have advised us that in some circumstances it will be a requirement for them.
There may be other contractual conditions which do not give you the opportunity to terminate the contract. The solicitor’s title approval clause or LIM approval clause may fall into this category, although in some circumstances the LIM clause may provide an opportunity to cancel.
The contract is already unconditional
Once again communication with the other side at an early stage is essential for contracts which are already unconditional. If the property is damaged then clause 4 of the contract will come into play. The property remains at the risk of the seller until possession is handed over.
The important issue is whether the property is untenantable or not.
In some cases it will be easy to see whether the property is unfit for occupation. In other cases that may not be so clear. It may be necessary to have a report completed by a building professional or engineer. We are recommending that in all cases a pre-settlement check for damage should be carried out.
If the property is untenantable then a buyer can chose to cancel the contract and get a refund of the deposit paid, or proceed with the purchase at a reduced price, the price being reduced by the amount of insurance money to be received by or on behalf of the seller. If the seller’s insurance company has agreed to reinstate the property for the benefit of the buyer then the purchase will proceed at the full contract price if the buyer elects not to cancel.
The position is less clear if the property is not untenantable. If that is the case then the buyer must proceed at the contract price less an amount by which the value of the house has diminished due to the damage. Determining the reduction in purchase price may give rise to disagreement between the seller and the buyer. It is important that you contact your advisor as soon as possible to discuss the options available.
In particular if the house is untenantable but you elect to proceed with the purchase then great care will need to be taken to ensure that the sellers insurer has agreed to reinstate and that there is sufficient insurance cover to do that, or alternatively that the reduction in the purchase price is sufficient to enable the house to be rebuilt. You will also need to make sure that the council will give a building consent for the building work.
It will also be necessary to establish that the bank will still advance finance which has been approved. In particular the bank will require current insurance. At present many insurance companies have a twenty one day stand-down period for earthquake cover in Canterbury. It is unlikely that banks will advance mortgage money while that stand-down period remains in place. There may be ways around that. It may be possible to take an assignment of the seller’s insurance policy with the consent of their insurance company. That is something your advisor can help you with. As we have previously said the bank may also require expert reports before proceeding.
Sometimes sellers cancel insurance prior to the settlement date. The property is at the risk of the seller until possession has passed to the buyer. It is most important that sellers keep their insurance policy in place and current until that time.
Conclusion
This guide is general, giving you an overview of the things that need to be considered after the earthquake. Every case will be different and it is important that you contact your advisor for specific advice.
Contact any one of our Residential Property team if you have any further queries.
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