The property was damaged after it went under contract. Now what?

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One hand from left side of photo holding a paper cut out of a home and another hand from right side of the photo holding a paper cutout of an umbrella protecting the home on a green background

02/18/2016 | Author: Editorial Staff

Last year, Texans experienced severe weather events including flooding and tornadoes that caused damage to their properties. These and other perils can also affect real estate transactions that haven’t closed.

The Casualty Loss Paragraph (Paragraph 14 of the One to Four Family Residential Contract (Resale)) requires the seller to restore the property to its previous condition by closing. If the seller can’t, the buyer has three options:

  1. Terminate the contract and get her earnest money back.
  2. Extend the time for the seller to complete the repairs up to 15 days, with the closing date extended accordingly.
  3. Accept the property in its damaged state with an assignment of insurance proceeds, if permitted by the seller’s insurance carrier. The seller also credits the buyer the amount of the insurance deductible at closing.

However, the buyer cannot cancel the contract without giving the seller the opportunity to remedy the situation. If she attempts to do so, she would likely forfeit her earnest money and could be subject to the specific-performance provision of the contract.

The contract does not address situations in which the parties disagree whether the property has been restored to its prior condition. If a dispute arises, that determination could be made through mediation or in court.

Many of the sales contracts have a casualty loss paragraph, though the specific provisions contained in them may vary.

Categories: Legal
Tags: legal, forms, trec contracts


Doris Snipp on 02/21/2016

I have received many questions about this issue, there are 2 issues I would like to re-iterate my concerns. Number 1 the statement in the contract that says the seller will bring the property back to its original condition is subjective.  The buyer should be able to decide if he still wants the property after a casualty and if the buyer agrees that it has been brought back to its original condition. There could be defects that show up after closing,  that were not discovered in the course of repairs. This paragraph is biased in favor of the seller. The second issue is that agents may feel the buyer may terminate the contract, receive their Earnest Money and walk away. That is not true. The buyer may not terminate the contract over the casualty. The actions available to the buyer is very limited and clearly spelled out in the paragraph.  There are agents who have suggested they write in special provisions,  that the repairs must meet with buyers approval. An agent must understand the future impact this may have in the event the buyer closes the home and has defects or dissatisfaction with the repairs showing up later. I would strongly suggest the agent insist an attorney guide the buyers through this pitfall. A Realtor sold them a house that now has changed. An attorney, in my opinion needs to step in to guide the buyer.  Mediation can be extremely costly and it may well have the cost shared by all involved. It can take months to get resolved, meantime the buyer has closed and in my opinion may find he is paying attorney fees, etc. for a casualty he did not cause nor would the buyers have bought the home under the circumstances.  I believe the issue should be unbiased and the buyer given the option to not close and receive his Earnest Money. Just as an example: how many people would purchase a home that flooded from water overflow or an electrical short causing a fire?  Would one not wonder if there were not further pipes leaking or wiring defects present inside the walls that were not found at the time? Buyer should be able to say yes or no to the purchase.

Kyle Ranne on 02/20/2016

In the event of a casualty loss, paragraph 14 is clear:  Buyer has several options if seller does not restore the property to its previous condition.  One of those options is to terminate the contract and receive their earnest money back.
You state that this could not or may not be an option.  Why wouldn’t it be?

Doris Snipp on 02/19/2016

Kyle you may not have a problem with the way the contract reads but your buyer may well have a problem. I would suggest that every Realtor go over this paragraph carefully, with their buyer,  in the event a casualty does occur. A Realtor wants the answer to be yes if the client is asked if the Realtor explained the contract throughly.  There are many buyers who would not want to continue with the sale of a house that undergoes a casualty.  As it reads now that could not or may not be an option.  One of the biggest problems, I agree, is that if the seller does not do the repairs to the satisfaction of the buyer, what’s the recourse for the buyer.  Everyone speaks of mediation as being the end-all be-all.  The mediation can be very expensive.  Many times the parties may want to mediate a solution that involves thousands of dollars. They then can sue if no agreement reached.  You could become a party in the mediation and the suit.

Stephen Williams on 02/19/2016

To Kyle, no my point is not what if the seller doesn’t want to return the property back to prior condition.  My point is, what if there is a disagreement as to if that has happened or not?  Then mediation is the only option.  Why not give the buyer the same out they had during option period?  To Shea,  I think your approach works assuming said amendment is executed (with “buyer’s satisfaction” language) before work starts, while there is still the option of buyer terminating contract at that point.  But amendment would also have to address what happens if buyer’s satisfaction isn’t achieved, and now we’re back to practicing law I guess.  I’d still prefer to see the contract form changed. 

Shea Reeves on 02/19/2016

I have no problem with the way the contract reads.  If I am representing the buyer and the property incurs damage I would just put an amendment together referencing paragraph 14 and elaborate that the repairs must meet the buyers satisfaction.  If that is too broad of a request for the seller, require a contractor choose by the buyer.  If insurance proceeds are going to be assigned, let the buyer choose the contractor, get the bids upfront and make sure the insurance proceeds and deductible would cover the contractor costs.

Kirk Rutherford on 02/19/2016

I too completely agree with Doris! A home that has incurred damage may not have even been considered by the buyer if it were placed on the market in the damaged condition even with the promise of repairs. The damage could require more expense of the buyer, such as another inspection post repairs. Depending on the type and extent of damage and how the repairs were completed, the buyer could end up with chronic issues down the line. Specifically, but not solely due to our new weather patterns, which have shown an increase in the power of most storms, I believe a change is needed in the 1 to 4 where post contract / pre closing damage is concerned. Post contract property damage can be heartbreaking, but keep in mind that the buyer does not own the property yet and should be able to reconsider their investment if the property is damaged after a contract has been agreed upon without the threat of taking a loss. Good article!

Kyle Ranne on 02/19/2016

I assume the point being made if a Seller has a ACV policy or no policy at all or has shoddy work done, is that the owner doesn’t want to be out the expense of returning the property back to it’s condition at the time of contract.
If that is the case, the Buyer has a voidable contract, among other options.  I still see no problem with the promulgated form.

Stephen Williams on 02/19/2016

Interesting that more of you prefer to address the scenario where there’s a replacement cost insurance policy (for instance) and the seller will be out little if anything to replace a 15 year old roof (for instance) with a new one, and point out the the buyer gains, which is correct.  But not the concern.  The concern would be (for instance), what if the seller has an actual cash value policy, or no policy, or frankly is just trying to cut corners, and has inadequate work done?  In my opinion, it’s “lazy form” to simply dismiss that to mediation.  Why not have TREC add language that says a casualty loss opens a new option period (or extends existing one) for those particular damages only?  Or something along those lines?

Michael Russell on 02/19/2016

Irene, contracts are not designed to provide for “mutual comfort”  - social workers do that.  Contracts Bind both parties.  The buyer has an equitable interest in the property from execution.  If a casualty occurs, a buyer may actually profit if a home is insured at replacement but the actual value (market) is significantly lower.  It is a matter of law of contracts - not comfort once the contract is signed.

Kyle Ranne on 02/19/2016

The TAR promulgated salesOne to Four Family Residential Contract covers “casualty loss” in paragraph 7.E.  The paragraph is specific to “lender required repairs”, but of course, if there’s a lender involved, any casualty loss would be required to be remedied by the lender. 
If the casualty loss exceeds 5% of the sales price, the Buyer may exercise his right to void the contract and receive their earnest money back.
From my extensive experience in water/smoke mitigation claims, it does not take much of a “casualty” to exceed $12,500.  For this reason alone, I believe buyers have ample protections built into the contract.

Irene Pence on 02/18/2016

I have to agree with Doris on this one.  In the even of a casualty loss, there are just way too many variables relating to extent or quality of repair for us to expect that any contract can legislate a resolution.  In the event of a casualty loss, the Buyer should have the absolute right to terminate and receive their EM back.  It doesn’t mean they will, only that they have that option based upon the actual loss and concern for restorative condition.  For me, and to be equitible, this is a case of the Buyer and Seller having comfort with each other in negotiating to proceed with repairs and go on to closing.  Absent that mutual comfort on each side, each side should have the right to terminate and the EM returned to the Buyer for this unforeseened circumstance.

Kyle Ranne on 02/18/2016

Regarding smoke and water mitigation, I have worked on hundreds of insurance claims that involved water and/or smoke damage.  Mitigation companies remove damaged sheet rock, insulation, flooring, sub-flooring if needed and do whatever it takes to not minimize, but completely eliminate mold, spores, smoke smell, etc.  It’s not cheap, but it is definitely possible and is done all the time.  If something were to happen that creates that type of loss during or after an Option Period has expired, I feel the Buyer actually benefits due to everything being new.

Mariangel wilkinson on 02/18/2016

There are some issues in the case of catastrophic loss. Another idea might be to reopen the buyers right to inspection by a licensed inspector, who then clears the house per the repairs, ...or not. If not, buyer may bail and get earnest money back. Contract now says “to prior condition” but the fact remains in some instances no one can restore to previous condition. ie, water=mold,  fire (just try getting rid of smoke smell) and others.

Stephen Williams on 02/18/2016

I would think that, if it occurs during the option period, buyer could simply require an extension of the option period (if necessary) until repairs are done, or terminate the contract absent that.

I would further think that TREC should consider adding “to buyer’s satisfaction” to the repair language.  Buyer’s only gain from abusing that discretion would be to gain another “out”,  that could only be exercised within a very limited set of parameters. No?

Kyle Ranne on 02/18/2016

That is what Mediation is for.  In cases such as hail damage to a roof, it’s possible the roof covering is a 30 year, dimensional(architectural) shingle that is 15 years old, or half of it’s expected life.
Now, the Buyer is getting a brand new 30 year roof covering that can easily cost 10k-$15k.  The Buyer is a substantial beneficiary in this situation.
Our contracts cannot cover everything, but, by and large, I think they are very fair legal documents.

Doris Snupp on 02/18/2016

I have always felt this issue as written, shows bias to the seller. A buyer is purchasing a home knowing the facts of the home per inspections and disclosures. A home that suffers a casualty is not the home the buyer purchased.  The buyer should have the right to terminate the contract. The buyer might well have not purchased the home if he knew of such a casualty prior to purchasing.  Water damage for an example,  is an area where the repair remedy may not be done as the buyer expected.  Mold issues or undetected damage could result.  The seller disclosure details what has happened to a home. Example if a fire occurred, the buyer may choose not to buy the home knowing that fact. However if a fire occurs after the effective date, the buyer may not have the choice of not buying the home, if the seller make repairs. Why does the rule of thumb that states, the buyer should be made aware of anything that if the buyer had known, would cause the buyer not to buy, go out the window once there is a contract.  The paragraph discriminates against the buyer, in my opinion.

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