What Happens When a Property is Damaged Before Closing?

 A property needs to be in the same condition on closing day as it was in when a Buyer contractually agreed to purchase it.

A simple & logical premise, right? But sometimes things get damaged before closing whether through negligence, accidents, Acts of God, you name it, it's probably happened, lol! So let's talk about it!

A few years ago my client purchased a condo, a condo that was tenanted & the tenants were moving out a couple of weeks before closing. When they moved out, they caused some damage to the flooring.

Luckily for my client, each time we did a walk-thru at the condo he was taking videos to send to his fiancee who was out of the country. If he hadn't been doing that it would have been difficult to prove that the huge gouges in the laminate & ripped up carpet at the doorway transition leading to that laminate, weren't there when he offered to purchase the condo!

There was a big black dresser in the bedroom at previous visits & the gouges had black paint transfer in them & there was a very clear visual path of the journey that dresser made from getting stuck in the doorway transition & ripping the carpet to then gouging the floor a few feet past the doorway...

We were able to negotiate repairs to be completed prior to closing & they lived there happily (with brand new floors, as it turned out) until it was time to move up to their next home a couple of years ago!

Ever since then I've kept a clear record of the condition of a home, especially when it's tenanted, from one walk-thru to another!

Another way this could have been dealt with is by way of  an "Abatement" where the seller gives an agreed-upon amount of money to the Buyer at closing, to deal with an issue themselves. Sometimes this is viewed as the preferred way to go, especially if there's a concern about the quality of materials used or workmanship, or both. This Abatement is added as an Amendment to the original Agreement of Purchase & Sale for full transparency, so as not to be perceived as some kind of mortgage fraud!

There could also be a "Holdback" on funds based on an estimate of what something will cost - especially if it can't be addressed before closing. An example of this that I've run into before, is a window getting replaced, where installation is scheduled after the closing date. Or a driveway getting paved is another common example. Once the work is completed to the buyer's satisfaction, the holdback of funds is released to the Seller. Sometimes this ends up as an Amendment, sometimes it's handled outside the Agreement, between the lawyers directly.

But what if something bigger happens? Like a burst pipe or a fire - something where an insurance claim is involved?

This issue is addressed in clause 14 of the Agreement of Purchase & Sale (or clause 18 of the Condo APS)

So in the case of larger issues, the Buyer has the choice as to whether they want to proceed with the Agreement or walk away. With the pace at which Insurance companies work, it could leave both the Buyer & Seller in limbo for longer than they'd like, potentially creating a domino effect of other issues...

Everything I've written so far falls under the Doctrine of Equitable Conversion. And the above clause is included in our OREA forms specifically because of this doctrine - otherwise the Buyer would be responsible for insurance prior to closing!

The following is an excerpt from a post that lawyer Mark Morris posted in our legal forum & which I must confess, I did not know, lol! I mean I understood the basic premise that I started this post with, that a property needs to be in the same condition at closing as at the time of offer, who needs to be responsible for insurance etc....but this part is new!

The Doctrine of Equitable Conversion is the concept that, as soon as the APS is signed by a Seller & a Buyer, the Buyer becomes the owner of the property in "equity" and the Seller becomes nothing more than a legal trustee of legal title for that same Buyer. The closing date is simply the time when we record the interest on the land registry and the consideration transfer takes place.             - Mark Morris, Real Estate Lawyer, www.legalclosing.ca


Essentially, once the Agreement becomes firm, the Seller is holding the property in trust for the Buyer & closing day is the date on which it has been agreed that payment will be made & title will be transferred.

Equitable Conversion is the rule of law in the province & applies to every agreement in Ontario.

So there you go! We both learned something new today, lol!

And finally, much better to have something happen & deal with it BEFORE closing than to discover it afterwards - like when you show up at your new home! Your options become much more limited & you've lost your leverage....another good topic to explore, but for another day!

Until next time,

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