With bushfires continuing to burn on an unprecedented scale in NSW, it is topical to discuss what happens in a situation where a home has been destroyed by fire and the owner of that home has exchanged contracts to sell it.
In NSW, the general rule is that the risk to the property remains with the vendor. The risk in the property does not pass to the buyer until completion. (Contrast this with the position in QLD where the risk passes to the buyer following exchange). The exception to this rule is if the purchaser has already taken possession of the property prior to completion.
A buyer can rescind the contract where the land is substantially damaged after the making of the contract for the sale of land. All money paid by the purchaser under the contract must be repaid to the purchaser and both the vendor and purchaser are relieved from liability. This is a right that the purchaser only can exercise pursuant to section 66L of the Conveyancing Act 1919 (Act).
The Act defines land as “substantially damaged” if the damage renders the land materially different from that which the purchaser contracted to buy.
In Bakhos v Fenner & Anor  NSWSC 641, a house was damaged by fire after the making of a contract for sale and prior to completion. The purchasers sought to rescind the contract under section 66L of the Act. The vendor treated the purported rescission of the contract as repudiation of the contract and terminated the contract. The Court found that the damage was minor. There was smoke damage to the walls and the ceiling in the lounge room and sunroom had sagged as a result of water from the fire department putting the fire out. The ceilings were otherwise in good condition. The carpets were burnt, and the windows had shattered. However, expert evidence from a structural and civil engineer illustrated that the property was still habitable; the mortar in the internal and external walls was still intact, the walls were upright and showed no signs of distress and the roof was in good condition. The Court made a declaration that the Contract was validly terminated by the vendors and were entitled to retain the deposit.
But what happens if they don’t rescind? The Act provides that there must be an abatement of the purchase price which may be adjusted on settlement. The price reduction should be “just and equitable in the circumstances” pursuant to section 66M of the Act.