What happens if a building is destroyed or damaged where contracts have been exchanged for the sale of that property, but completion has not yet taken place?
The Standard Commercial Property Conditions of Sale (Second Edition) are incorporated into the majority of commercial property sale contracts. These conditions state that unless the contract provides otherwise or the property is let under terms which the seller (as landlord or a tenant) is obliged to insure against loss or damage, the seller is under no obligation to insure the property.
Notwithstanding that there is no obligation on the seller to insure, sellers should keep their insurance in place until completion as they still have an insurable interest in the property.
Each of the seller and buyer should have insurance in place for their respective interests in the property and each should check its policy to ensure it does not contain any provisions that will reduce the amount payable in the event that the property is also insured by the other party (to avoid double insurance). If there are such provisions in the policy, the buyer or seller should negotiate with their insurers to get them removed.
So what happens if the property is destroyed or damaged between exchange and completion?
- First of all, the buyer is still contractually obliged to complete the purchase and cannot compel the seller to make a claim on its insurance policy (where the seller was not obliged to insure).
- If the buyer completes, then the seller will not be able to claim on its insurance policy (the seller has not sustained any loss).
- If the buyer refuses to complete, or cannot complete due to finance no longer being available following service of a notice to complete, the seller should be able to terminate the contract, claim on the insurance for the reinstatement cost and pursue a claim against the buyer for damages – as well as keep the deposit.
What if the property is let, the risk passes to the buyer on exchange and the buyer has no insurance?
If the property being sold is subject to a lease, it becomes more complicated if the buyer does not have insurance and the seller is not contractually obliged to the buyer to continue to insure – the terms of the lease also need to be considered. The seller Landlord may remain obliged to the Tenant to reinstate the property if the buyer does not. A Landlord may remain bound by the reinstatement obligations in the lease following the sale unless there is a differing provision in the lease or a release is obtained.
Even if they are not contractually obliged to the buyer to maintain insurance, sellers of properties subject to leases should maintain their own insurance between exchange and completion if the sellers remain bound by reinstatement obligations in the lease. Buyers of properties subject to leases should obtain their own insurance between exchange and completion. If not, they are at risk, particularly if the seller’s insurance does not also cover the buyer’s interest or if the seller is not contractually obliged to the buyer to continue the seller’s insurance and the seller does not continue it. Without the protection of insurance, the buyer still has an obligation to reinstate the property, but has no insurance proceeds and no income from the property, the suspension of rent clause having kicked in.