Bushfire Risk for New Property Purchases

With Eastern Australia experiencing one of the worst starts to bushfire season on record, property buyers need to be aware of how risk of fire damage is dealt with in contracts for property purchases in Queensland.

What’s the risk?

In Australia, the general legal position is that unless agreed otherwise, when acquiring property, the risk for loss or destruction of the property generally follows or changes with the change in ownership. This general position can be changed by agreement between the parties and can transfer with possession, with payment (settlement in the case of land) or at some other agreed time.

In NSW and Victoria, the standard form contracts do not change the general legal position regarding risk – that is risk transfers when the property is paid for.

The position in Queensland is very different to that in NSW and Victoria. By far the majority of house and land sales in Queensland use a standard form of contract approved by Real Estate Institute of Queensland Limited (REIQ) and the Queensland Law Society Incorporated (QLS). This Queensland standard form contract provides that the property being sold is at the Buyer’s risk from 5pm on the first business day after the contract is formed. The idea is that this gives the Buyer one business day to organise insurance cover for the property after the contract is formed.

Recently, when bushfires were raging uncontrolled up and down the Queensland east coast, buyers who had signed contracts to purchase in areas that were affected by bushfires were told that insurance companies had put embargoes on issuing new policies. In other words, the properties were un-insurable for new buyers until the crisis passed.

What can be done?

The best advice in a crisis is “don’t panic” and that applies in this situation as well.

‘Subject to Finance” is a lifeline

From a practical point of view, any contract that is still conditional on the buyer obtaining finance approval for the purchase has an emergency escape hatch. A bank is very unlikely to approve finance if the improvements have been destroyed – the property simply will not value up as security. If the property is damaged, as long as the contract is still subject to satisfactory finance approval to the seller, the buyer should advise the bank of the damage. Almost inevitably, the bank will decline finance for the purchase.

Unconditional contracts

Even if a contract is not subject to finance or other conditions that allow a buyer to terminate, there is still hope! The Queensland Property Law Act 1974 (PLA) has a provision (section 64) that provides that in contracts for the sale of a dwelling house, if the dwelling house is destroyed or damaged so that it is unfit for occupation as a dwelling house, the buyer has the option to end the contract as long as the buyer has not settled the purchase or taken possession. This section of the PLA was last given a work out by canny lawyers in the January 2011 floods in South-East Queensland.

While section 64 of the PLA gives comfort to house and unit buyers, what happens to buyers of commercial properties and farms? If a buyer is not able to exit a property purchase contract before completion, the buyer still has some help in the form of section 63 of the PLA. That section provides that:

  • if a property is damaged after a sale contract is signed; AND
  • the Seller has maintained an insurance policy for the property.

Then, even though risk in the property may be to the buyer, the insurance cover remains on foot until the settlement date AND the seller or insurance company must pay out the proceeds of the insurance policy (less any payout to mortgagees) to the buyer unless the contract says otherwise. There are some mechanics in section 63 for the buyer to pay a proportionate part of the insurance premium when this applies.

Helpful – but there are limits

Although section 63 of the PLA can be very helpful, it is only helpful if the Seller has maintained proper insurance for the property. A buyer would be very unwise to be relying solely on section 63 of the PLA as the buyer has no control over:

  • whether the seller has in fact insured the property (you would be surprised how many people do not insure);
  • how much the insurance cover is for – it may not cover the actual replacement cost; or
  • whether the seller cancels its insurance policy for the property after it enters into a sale contract.

Put simply, if the seller has not maintained proper insurance (and they don’t have to) there is nothing there to help the buyer.

There is a lot to think about when looking to buy property – one of the best things that a potential buyer can do is arrange insurance cover ahead of time, before making an offer for a property. In Queensland, it is still the case that “Buyer beware”!

At Smart Move Conveyancing our expert team can help you frame your offer for a property. We will review a purchase contract with you before you sign and help you ensure you understand the risks and your rights under a purchase contract.