Did you agree to buy a property that was damaged by the flood?
Pre-Closing Property Damage: Who’s Responsible?
Many homes in Toronto were damaged during the flood that took place on July 8, 2013. Where property has been damaged between the signing of an Agreement of Purchase and Sale (“APS”) and the closing date, the Vendor and the Purchaser are faced with tough questions. Who is responsible to complete the repairs? Who is responsible to pay for the repairs? Do repairs need to be completed before closing? Can the purchaser refuse to close? Does the Vendor’s policy of insurance cover these damages? Is the Vendor obligated to inform the Purchaser of the damages?
Are the damages covered by insurance?
Whether specific damages are covered by a policy of insurance depends upon the specific policy that the Vendor has paid for. In Ontario, coverage for damage caused by flooding is often available as a separate add-on that must be purchased. If you are unsure whether your policy covers damage caused by flooding, you should contact your insurer directly. You should be aware that in a case of widespread emergency, institutional insurers may automatically decline coverage for such damages. In such cases the best course of action will be to contact your lawyer to review your policy and determine exactly what you are covered for.
Must the Vendor disclose the damages to the Purchaser?
Yes, the Vendor must inform the Purchaser of any substantial damages that occur to the property prior to closing.
Who is responsible for the damages?
The short answer is that liability for any damages occurring before closing depends upon the wording of the APS. The standard form APS that is used in most residential transactions in Ontario allocates the “risk” of pre-closing damages to the Vendor, including damages to furniture and other items that are being purchased. This should mean that the Vendor is liable for any damages that occur before closing. However, the law on pre-closing damages is not 100% clear on this point. There have been cases where Vendors were found to only be liable if the damages were caused by the Vendor’s own negligence, or a pre-existing defect in the home such as a cracked foundation, that was not disclosed to the Purchaser.
If the standard APS is not used, or if the parties have removed the provision that allocates liability to the Vendor (what we refer to as a “risk allocation clause”) then it is the purchaser who is responsible for any damages that occur, unless such damages are caused by negligence of the Vendor. If your APS does not include a risk allocation clause, or if you are not sure whether one is included, you should contact a lawyer immediately before proceeding.
Does the Vendor have to complete the repairs before closing?
If the Vendor is responsible for the damages, he or she must perform the repairs prior to closing or compensate the Purchaser for the cost of the damages from insurance funds if available, and the Vendor’s own pocket if not. If the Vendor does not complete the repairs prior to closing or compensate the Purchaser for the amount of damages that occurred, the Purchaser would then have a right to sue the Vendor for such losses following closing.
Can the Purchaser refuse to close?
Depending upon the extent of damage that has occurred, the purchaser has the following options if the standard APS has been used:
Where minimal or “non-substantial” damage has occurred to the property, the purchaser must close, but may sue the Vendor for the cost of repairing the damages relying upon the risk allocation clause. In such cases, the parties should attempt to negotiate an abatement of the purchase price to avoid a legal battle occurring after closing.
Where there has been substantial damage to the property, the purchaser has the choice of i) taking any insurance proceeds that may be available under the Vendor’s insurance policy, or ii) may terminate the APS. If the Purchaser terminates the APS he or she will be entitled to a full refund of his or her deposit.
What does the purchaser need to do if they learn that damage has, or may have occurred?
As soon as the Purchaser becomes aware that damage has occurred, he or she should:
Contact his or her lawyer to have their APS reviewed and their options explained to them.
Perform an inspection of the property to determine the full extent of damage if you have a pre-closing right to do so under the APS.
Obtain an estimate of the expected costs of repair.
If the Vendor is liable for the damages, the Purchaser should obtain from the Vendor a copy of his or her Insurance Policy and have a lawyer determine whether the damage is covered.
Depending upon the extent and cause of damage, the Purchaser may want to contact the Insurer directly to confirm that the full costs of repair will be covered.
What else is the Vendor responsible for?
Also of importance to the purchaser will be the length of time such repairs will take. Where the purchaser may have to arrange alternative accommodations, they should request from the vendor an agreement to pay for such accommodations, and any costs that may be associated with any moving delays such as storage fees. The agreement should, if possible, set out ahead of time what expenses the vendor has agreed to pay.
If you have any questions, or would like to arrange for a free consultation, contact Grechi & Carter LLP at 416-900-3865.