Risk of Loss and Dealing with Property Damage After a Hurricane

QUESTION: I have several listings under contract that did not close before Hurricane Florence came through. Can you tell me what to do if any of my clients’ properties are damaged or destroyed?

ANSWER: This is an excellent question, and a good time to remind brokers that if a transaction has not yet closed, and the property is destroyed or materially damaged, paragraph 12 of the Offer to Purchase and Contract (Standard Form 2-T) states that the buyer may either: (1) terminate the contract and receive a refund of their earnest money, or (2) continue with the transaction and receive any insurance proceeds payable to the seller.

It is important to remember that “Closing” is not the same thing as “Settlement.” Form 2-T defines these terms in detail. The primary difference is that Settlement is only the signing of the paperwork necessary to complete the transaction, while Closing is the completion of the legal requirements to actually transfer title. Since the risk of loss for damage to the property remains with the seller up until Closing instead of Settlement, this means that even if the parties have gone to the closing attorney’s office and signed the Settlement paperwork, the seller is still responsible for any damage to the property until title is transferred. This is why sellers are strongly encouraged to maintain insurance until the deed is recorded.

As soon as you are able, you should speak with your clients and inspect any damage to their property. Even if your seller believes the damage is not significant, we would strongly encourage you to disclose any damage to the buyer anyway so they can make their own determination. If closing has not occurred and a property has been destroyed or materially damaged, simply refund the earnest money to the buyer if the buyer elects to terminate the transaction. We do not believe the seller’s inability to deliver the property in “substantially the same or better condition” due to storm damage would constitute a breach of contract triggering the buyer’s remedies under paragraph 8(n) of Form 2-T.

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