In NSW, Vendors are responsible for keeping the property that they are selling in the same condition as at the time of exchange (with the exception of reasonable fair wear and tear). The risk of damage to land does not pass from the vendor to the purchaser under an executed Contract for the Sale and Purchase of Land (Contract) until:
a. Completion; or
b. From the date a purchaser enters into early possession of the property.
Section 66K of the Conveyancing Act 1919 (NSW) ( the Act) is a legal mechanism which operates to protect purchasers from financial loss as a result of damage to the land prior to settlement. For the purposes of Division 7 of the Act, “damage” is categorised in two components:
1. Minor damage; and
2. Substantial damage.
Minor damage encompasses things such as vandalism, broken windows and damaged fences (not exhaustive). Substantial damage is where the damage renders the land materially different from that which the purchaser contracted to buy. “Land” for the purpose of this section includes buildings and fixtures, and for properties in a strata scheme, the purchaser’s share of the common property in accordance with the unit entitlement of the lot(s) being purchased.
RIGHTS AND REMEDIES
Section 66L
Under Section 66L of the Act, a purchaser is entitled to rescind the Contract where land has been “substantially damaged”. A rescission has the effect of ‘un-doing’ the Contract and returning the parties to the position they were in prior to exchange. In other words, the purchaser is entitled to a refund of the full deposit and any other money paid under the Contract. This option must be exercised with 28 days of the purchaser first becoming aware of the damage.
The metes and bounds of “substantial damage” have been long contested by the Courts, however the premise boils down to one key consideration: the damage must render the land materially different from that which the purchaser contracted to buy. In interpreting this, the Courts have considered various factors when determining the threshold of what constitutes substantial damage. In Bakhos v Fenner & Anor [2007] NSWSC 641, the purchasers sought to rescind the Contract when the house was damaged by fire. The Court in this case found there to be no valid right of rescission as the damage done to the house was ‘minor’ (being that the ceilings were in good condition and evidence from a structural engineer determined that the house was still habitable). However, it is important to note that Courts will typically assess and determine each matter on its individual circumstances and what may be the case in once instance, may not be the same in another.
Alternatively, if the purchaser does not want to rescind the Contract or are not entitled to rescission, as was the case in Bakhos v Fenner & Anor, they are entitled to abatement of the purchase price under Section 66M of the Act.
Section 66M
Section 66M provides for an appropriate reduction in the purchase price of land damaged after the Contracts are exchanged and before the risk in respect of the damage passes to the purchaser. This applies to either where the land is not substantially damaged or the land is substantially damaged but the purchaser decides not to rescind the contract.
If the purchase price is not reduced at settlement, the amount by which the purchase price should have been reduced may be recovered by the purchaser from the vendor as a debt.
Statutory rights and remedies cannot be contracted out or modified by provisions to the contrary in a Contract. However, it’s important to note that if the damage was caused by a wilful or negligent act or omission on the part of the purchaser, the purchaser is not entitled to exercise the rights and remedies conferred by Sections 66L and 66M.
SUMMARY
The law provides certain protections to ensure that bona fide purchasers are not unduly subjected to financial loss as a result of damage to property they are purchasing.
For purchasers, it is essential that you conduct your final inspection prior to settlement to ensure that you are satisfied with the condition of the property before completion takes place.
For vendors, it is important you retain all your insurances until completion has taken place and legal title to the property has transferred to the purchaser.
If you are purchasing or selling a property, it is essential to obtain legal advice. The Property and Commercial team at Willis and Bowring can help you navigate through your conveyance while ensuring you feel legally and emotionally supported throughout the process.