As you know if you have ever purchased property, the purchase does not happen automatically. There is typically a period of time between when the contracts are signed and when the property changes ownership. That can be just a couple of weeks, or it may drag on for months. In unusual situations, something catastrophic could happen to the property during that period. The home could burn down, become flooded, get destroyed in an earthquake, or be subject to a number of other catastrophic events.
If that happens, in order to determine what happens with the sale, you will first look at the sales contract. The contract may provide for what happens in the event of an unforeseen catastrophic loss. In that case, the parties will simply follow what the contract says. Most commercial sale agreements have provisions covering catastrophic loss. In most residential purchase agreements, however, this issue is not covered, and the parties rely on the California Civil Code to provide guidance on the issue.
The California Civil Code says that if neither title nor possession has been transferred, and a material part of the property has been destroyed, the seller cannot enforce the contract, and the buyer gets a refund. Therefore, if the property burns down before the buyer takes possession or title, the sale is cancelled and the buyer’s money must be refunded. If either title or possession has been transferred, the buyer takes the risk, and the contract will be enforced, and payment in full is required.
In many cases, part of the property may have been damaged or destroyed, but it’s not clear if it’s a “material” part of the property. In most contracts for the sale and purchase of property, “material” is defined, usually in one of two ways. First, if the cost to repair the property exceeds a certain amount, then a material part of the property has been destroyed. However, if the part of the property that has been destroyed is property that the buyer did not intend to use anyway, that is excluded in calculating the cost to repair. The other way of defining what “material” is involves looking at the diminution in value. This involves getting the property appraised, which could be time-consuming and expensive.
In some cases, there may be damage to a property, but it may not be severe. In that case, if the damage is not material, the contract for sale may still be enforced. However, under the terms of the purchase agreement, the seller will probably still be obligated to repair the damage at his or her expense. Most sales contracts require that the property be maintained in substantially the same condition it was in on the day of acceptance of the contract. For example, if you are in the process of selling your property and your back porch catches on fire and is damaged, you will be obligated to repair that back porch so that it is in the same condition it was in when you agreed to the sale.
If you are a renter, you may also be curious about your obligations if your rental unit is destroyed. Under California law, the lease is terminated automatically if the entire premises are destroyed, unless the parties have agreed to something different. If the premises are only partially destroyed, the lease can be terminated by the tenant by giving notice to the landlord if the landlord has reason to believe at the beginning of the lease that the portion of the property destroyed was a “material inducement” to the tenant to enter into the lease.
For example, if a tenant’s specific unit was seriously damaged, obviously the lease can be cancelled unless the parties agree otherwise. However, if a property’s tennis courts were destroyed by fire, the lease can only be canceled by the tenant if the tennis courts were a “material inducement” to the tenant to enter into the lease. Once the lease is terminated, the landlord cannot collect further rent. A tenant is still responsible for any back rent that is owed.
The law in California may be difficult to navigate when it comes to catastrophic damage, such as fire, an earthquake, a landslide, or flooding, to a property while the property is under contract. If you find yourself in that situation, you may wish to speak to a real estate attorney. If you are in the Oakland-Walnut Creek area, call Robert Levy at 510-465-0025. He works with clients to help them navigate real estate issues, and he can help you with your issue. Call him to schedule a consultation.