What Happens If There Is a Fire?

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Your client has a firm Agreement of Purchase and Sale.

Before closing, there's a fire at the property.

Now what?

In situations like this, everything starts with the Insurance clause in the APS.
(#14 on Form 100 / #18 on Form 101).

INSURANCE: All buildings on the property and all other things being purchased shall be and remain until completion at the risk of 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 there is "substantial damage" to the property before closing, the buyer has two options:

1. terminate the agreement and receive their deposit back, or
2. take the insurance proceeds and complete the purchase.

Now the next logical question is what is "substantial damage"?

After looking through case law, there's no clear legal test.

Courts have ruled that the cost of the repairs, quality, character, use and consequences of the damage must be considered.

They've found damage to be “substantial” when issues like major water penetration, removed flooring or drywall, or uncertainty about hidden problems make the home’s true condition unclear or significantly impaired.

I know... not very helpful.

There are also two implied rights that arise from the Insurance clause to allow the buyer to make their decision.

The first, is the buyer's right to inspect the property when there is a legitimate dispute about whether damage is "substantial".

The Second, is the buyer's right to obtain details of the insurance coverage, if any.

But while they do have a right to review insurance details, they do not have the right to wait indefinitely to see if the insurer will pay.

If the buyer is concerned about the sufficiency or certainty of the insurance payout, they have the option to terminate the agreement.

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Now, some of you may have heard about a recent case, McDonald v Lowrie where the buyer didn't get the insurance proceeds AND had to forfeit their deposit.

But that was because they tried to force the Seller to agree on a guaranteed amount, and then did not close. By making that demand and refusing to close on the original terms, the buyer repudiated the agreement.

You can read that case here.