The Napa and Sonoma fires have caused widespread destruction. This post addresses what happens when property in contract is destroyed prior to close of escrow.
The default rule is found in Civil Code Section 1662. It provides that if title or possession have not passed, the seller cannot enforce the purchase agreement if a “material” portion of the purchase property has been destroyed. The buyer may, however, elect to enforce the contract and take the property in its damaged condition. Disputes may arise as to whether the property has been “materially” damaged. Under the same rule, if title or possession have passed, the risk of loss is transferred to the buyer who cannot escape or terminate the contract. Most residential purchase agreements do not address what occurs in the event of damage or destruction, and therefore, the default rules will apply. In commercial purchase agreements it is common (especially given the longer closing periods) for the agreements to expressly allocate what happens in the event of damage. Often the contract will distinguish between minor and major damage. For example damage under $100,000 may be considered minor and damage over $100,000 would be major. Often, in the case of minor damage, the buyer must close escrow without a purchase price adjustment, but frequently, the seller will be required to assign any insurance proceeds to the buyer. In the case of major damage, it is common for the buyer to have two options – to cancel the contract, or proceed with the contract without a purchase price adjustment. When the buyer proceeds with the contract, the seller typically assigns the insurance proceeds to the buyer. Some contracts give the seller the right to replace or repair the damaged property (typically within a given amount of time). If the seller makes the election, the buyer typically must purchase the property at the purchase price and close of escrow is generally extended for a reasonable time to make the repairs without any reduction in the purchase price. If you are a seller or buyer and the property has been destroyed prior to closing, it is imperative to review the purchase agreement. When the contract addresses damage and destruction, the buyer and seller typically have specific time periods in which to make their elections. Often, the failure to make an election will result in the choice being made for you. For example, sometimes, if the buyer does not elect to terminate within a certain number of days, the buyer is deemed to elect to proceed with the sale.
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blogHi. I'm Stephen Flynn. Attorney and founder of the Law Offices of Stephen M. Flynn. This is my blog. Enjoy! Archives
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