When a Property is Damaged Prior to Closing

More than a million call 999 because of kitchen fires ...

What obligations do sellers and buyers have in a real estate transaction when the property has been accidentally damaged – such as by a fire – prior to closing? The Superior Court of Justice addressed this complicated issue in Pordell v. Crowther.

The seller, Paul Crowther entered into an Agreement of Purchase and Sale with the buyer, Sam Pordell, on March 7, 2017 and with a June 22, 2017 closing date. Between the agreement date and the closing date, a fire occurred on the property.

Crowther hired a restoration contractor, Servpro, to repair the property prior to the closing date. Despite Pordell’s repeated requests for documentation on the damage and repairs and requests to inspect the property, Crowther and his real estate agent were not forthcoming with the reports and repeatedly evaded Pordell’s requests. Crowther only allowed Pordell to inspect the property after the repairs were completed. Pordell decided not to close the transaction because of inadequate disclosure on the extent of the damages.

The presiding judge found that Crowther had breached the agreement by not fulfilling his insurance obligation (Clause 14 of the Agreement of Purchase and Sale) to provide meaningful inspection of any damage occurring on the property in order for Pordell to determine how to proceed with the closing. Pordell was thus entitled to a return of his $80,000 deposit on the property.

The Superior Court of Justice evaluated the evidence and arguments advanced and found the following:

Substantial damage:

At trial, Pordell’s expert noted there had been a large discrepancy between the quotes provided by Servpro and Service Master, the alternative restoration contractor that had provided a considerably steeper quote. Pordell’s expert testified that the amount proposed by Service Master was an indication the house likely required significant repair that was not entirely identified by Servpro.

Further, although the cost of repairs was small in comparison to the purchase price, this factor was not determinative in whether damage on the property was substantial or not. Fire may cause considerable inconspicuous damage and must also be assessed on quality, character and consequences. The totality of the evidence supported the conclusion that the fire damage was substantial, which triggered the obligations under Clause 14 of the agreement.

Insurance clause:

Clause 14 of the Agreement of Purchase and Sale states:

“INSURANCE: All buildings on the property and all other things being purchased shall be and remain until completion or the risk of the Seller. Pending completion, Seller shall hold all insurance policies, if any, and the proceeds thereof in trust for the parties as their interests may appear and in the event of substantial damage, Buyer may either terminate this Agreement and have all monies paid returned without interest or deduction or else take the proceeds of any insurance and complete the purchase. No insurance shall be transferred on completion. If Seller is taking back a Charge/ Mortgage, or Buyer is assuming a Charge/ Mortgage, Buyer shall supply Seller with reasonable evidence of adequate insurance to protect Seller’s or other mortgagee’s interest on completion.”

This is a common clause in purchase and sale agreements. This clause is intended to protect the buyers. An implied term under this clause is that the buyer will be given “timely notice and a meaningful opportunity to inspect the property” in order for him or her to make an informed decision with how they would like to proceed with the transaction.

Given that Pordell was only allowed to inspect the house after the repairs had been completed, he was denied his contractual right to determine if there was substantial damage and whether he would like to proceed by terminating the contract, or take a reduction in price reflecting the cost of repairs. Pordell was thus entitled to refuse to close the purchase and to have relief from forfeiture of their deposit.

Housing market dip:

New ownership regulations had been enacted during the time Pordell and Crowther made the agreement. These regulations resulted in a substantial dip in the housing market, which Crowther alleged was the reason Pordell did not close the transaction. Crowther did not advance any evidence to support this argument. To the contrary, Pordell’s actions supported a finding that:

  • he had been in the housing market for an extended amount of time and expected the housing market dip. Despite this awareness, Pordell still expressed great interest in buying Crowther’s property;
  • Pordell continually attempted to obtain adequate disclosure of the damage and repair work past the closing date; and
  • continually sought better mortgage rates in the month of the closing date

As such, the court found that Pordell’s actions were consistent with someone who intended to close the transaction.

Good faith:

In the performance of one’s contractual duties, there is an implied duty to take all reasonable steps to fulfill one’s obligations in good faith. Crowther demonstrated bad faith in the performance of his contractual duties by continually undermining Pordell’s legitimate contractual interests and rights under Clause 14 of the Agreement.

What does this mean for future sellers?

Agreements containing an insurance, or a similar clause, entitles the buyer to inspect damage that has occurred on the property prior to closing so that they may determine how they would like to proceed with the transaction. In performing this obligation and other contractual duties, sellers are expected to act in good faith by not undermining the buyer’s contractual interests and in the case of property damage, being transparent with the damage and any repair work that is undertaken.

In addition, where a transaction does not close and the seller makes claims for damages arising from the buyer’s violation of the purchase agreement, sellers have a duty to take reasonable steps to minimize their losses. Where they do not take such reasonable steps, they may be unsuccessful in claiming damages from the buyer.

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