Flooded property under contract – what are your rights?

Many Queenslanders will once again have to deal with the tragic outcomes of the floods and many will be wondering what to do when they’re in the process of buying or selling their homes.

The standard REIQ residential contract provides that risk in the property (and by inference any included chattels) passes to the buyer at 5pm on the first business day after the contract date. The intention here is to allow the buyer some time to obtain insurance. Risk includes the risk of flooding.

Conditional contracts
Buyers who have the benefit of a cooling off period (usually 5 business days from receiving the signed contract unless sold at auction or waived by the buyer) may be able to terminate a contract for any reason with only a small cooling off penalty of 0.25% of the price.

If the contract is still subject to a building inspection and the inspection occurs after the flood and the buyer is not satisfied with the report then the buyer has the right to terminate the contract.

Unconditional contracts
If the contract is unconditional then the buyer may have no right to terminate the contract unless they can rely on section 64 of the Property Law Act 1974 (Qld) which allows a buyer to terminate the contract if a “dwelling house” (defined to include a unit) is damaged or destroyed to such an extent that it is unfit for occupation as a dwelling.
Whether a dwelling is unfit for occupation will depend on the facts and will therefore vary from case to case. It would be prudent for sellers seeking to enforce a contract to obtain an independent building inspection report that addresses this issue and concludes that the dwelling is fit to be occupied.

There will be other cases where flood damage has occurred but does not render the property unfit for occupation.
Another matter of concern for buyers who have already satisfied a finance condition and are relying on finance to settle is whether their lender will require a fresh valuation for a flood affected property and if the new valuation doesn't stack up whether the lender will withdraw their offer of finance putting the buyer in a position where they cannot settle.

Insurance
If as recommended by their lawyers buyers have arranged insurance after signing a contract then they should check with their insurance brokers to ascertain whether they are covered for loss through flooding.

Many properties damaged by the flooding will not be covered for damages caused by flooding as it has been the practice of most insurance companies not to offer flood insurance for dwellings in known flood areas.

For those that are covered but where the buyer has not effected insurance then the buyer may have some protection if they can rely on section 50 of the Insurance Contracts Act 1984 (Cth) which deems that the buyer is insured under the sellers insurance policy until the earlier of possession or settlement. However this is limited to whatever current insurance the seller has which may be insufficient or ineffective.

Buyers may find themselves in a situation where (if they have to proceed with the contract) they will have a substantial repair bill for the damage to the dwelling.

Richie Muir

Legal Director

Richie is an experienced and commercially astute lawyer specialising in property law. He leads lawlab’s team of legal advisors and is the go-to problem solver for complex or unusual matters.  Having spent many years living and studying in Europe he now calls Brisbane home. Outside of work he juggles his time helping bring up his 2 young daughters, playing football and developing property.