By Kay Wilson-Bolton
December 28, 2006
With some help from the California Association of REALTORS® legal experts, this column deals with the consequences of buying a home that has been damaged by fire.
The seasonal firestorms we experience in California raise several legal questions for REALTORS® and their clients. The following questions and answers may be helpful for property owners who have suffered a loss, or for buyers who are in escrow to purchase property involved in the disaster.
Question: What are the general rules concerning who bears the risk of loss in a real estate transaction where an “Act of God” or other disaster, such as fire, affects the property?
Answer: If the purchase contract between the parties does not specify who is to bear the risk of damage or loss to the premises during the time between the execution of the contract and the transfer of title, the liability of the parties is governed by the California Uniform Vendor and Purchaser Risk Act (Cal. Civ. Code § 1662).
Under the provisions of this statute (assuming no fault on the part of the buyer), the risk of loss or damage to the premises is carried by the seller until the buyer receives either title or possession. (Note: C.A.R.’s Residential Purchase Agreement and Joint Escrow Instructions, does not dictate how risk of loss is allocated between a buyer and a seller.)
If all or a material part of the premises are damaged before title or possession is given to the buyer, the buyer can cancel the contract and recover any portion of the purchase price paid. It is not clear whether the buyer can alternatively elect to enforce the contract with a reduction in the purchase price equal to the loss of value or cost of repair. (Cal. Civ. Code § 1662.)
After the buyer has taken possession or has received title, the buyer bears the risk of loss or damage to the premises (assuming no fault on the part of the seller). Therefore, if the premises are damaged, the buyer must still complete the contract and pay the balance of the purchase price. (Cal. Civ. Code § 1662.)
If the purchase contract does contain a risk of loss provision, that provision will govern to the extent it is different from or more specific than the Uniform Vendor and Purchaser Risk Act (Uniform Act). (Cal. Civ. Code § 1662.)
Question: May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is minor?
Answer: Probably not. The Uniform Act implies that the seller may still enforce the contract if the damage is not material. However, a purchase agreement may require the seller to repair such damage. CAR’s Residential Purchase Agreement requires the property to be maintained in substantially the same condition it was in on the date of acceptance. Under this language, a seller could be obligated to repair fire-related damage to his or her property.
Question: May a buyer get out of a purchase contract under the Uniform Act if the damage or loss caused by fires to the property is major?
Answer: Yes. To repeat, if (1) neither legal title nor possession has transferred from the seller to the buyer, and all or a material part of the real property is destroyed by fire, and (2) no express contract provision to the contrary exists, then, under the Uniform Act the seller cannot enforce the purchase contract and the buyer may cancel and recover any portion of the purchase price already paid. (Cal. Civ. Code § 1662.)
Question: If the damage is not severe, does the timing of the fires (whether they occur before or after an inspection) affect the right to cancel?
Answer: Yes. If the damage occurs before the buyer has removed an inspection contingency in his or her purchase contract, the buyer can, of course, exercise any inspection, disapproval, and cancellation rights provided by the contract.
If the damage occurs after the buyer has removed his or her inspection contingency, the buyer generally does not have an automatic right to re-inspect the property and approve or disapprove of its condition under most purchase contracts (including C.A.R.’s Residential Purchase Agreement). However, the seller may be obligated to repair the property.
For specific answers to specific questions, readers are urged to contact their own legal counsel.
Kay Wilson-Bolton is the owner of CENTURY 21 Buena Vista and can be reached at 805.340.5025. Her website is http://www.readysetkay.com