The law around flooding and property contracts
The recent unprecedented flooding has caused widespread havoc and damage throughout the North Island. Now that the rain and flooding has mostly settled, the damage is being assessed. For properties under contract either to sell or to buy, Vendors and Purchasers now find themselves wondering how to deal with the flooded property under their Sale and Purchase Agreements.
Most residential sale and purchase contracts are signed up using the REINZ/ADLS Sale and Purchase Agreement. In the absence of any unique further terms, clause 5 of the General Terms of Sale provides direction for Vendors and Purchasers.
Clause 5: Risk and Insurance – Damage
Clause 5(1) states that the property and chattels remain at the risk of the Vendor until possession is given and taken. This means the Vendor is responsible for insuring the property and is responsible for keeping the property in the same condition as it was from the date the Agreement has been entered into, until settlement.
Under clause 5.2(1), if the property is damaged to the extent that it is untenantable and has not been repaired/fixed by settlement, the Purchaser has to choose either to:
- Complete the purchase at the purchase price (listed in the Agreement), less a sum equal to the insurance funds received or to be received by the Vendor (unless the insurance company agrees to reinstate up to the insurance cover before settlement); or
- Cancel. The deposit will be refunded to the Purchaser with no further claims able to be raised between the Vendor or Purchaser.
Property still able to be occupied – tenantable?
Clause 5.2(2) provides that settlement is to take place on the settlement date at the purchase price, less a sum equal to the amount of the diminution in value of the property, which, to the extent that the destruction or damage can be made good is deemed to be equivalent to the reasonable cost of reinstatement or repair. This means the loss of value caused by the damage to the property is able to be deducted from the purchase price however, the amount must be equivalent to the reasonable cost of repair.
If the property is located in a rural zone, clause 5.2(3) states that damage to the property with a diminution in value of 20% or more of the purchase price, will classify the property as untenantable.
Dispute as to the Diminution in Value?
If the Vendor and Purchaser cannot agree on the value of diminution, clause 10.8 sets out the dispute resolution procedure.
Flooding in the Rental?
Section 59 of the Residential Tenancies Act 1986 applies when the rental property is damaged with two scenarios:
- Section 59(2) states if the rental property is destroyed or so seriously damaged as to be uninhabitable then rent abates are able to be arranged and either the landlord can cancel providing 7 days-notice or the tenant can cancel with 2 days-notice; or
- Section 59(4) states if the rental property is partially destroyed, or part of it is so seriously damaged as to be uninhabitable, then rent abates are able to be arranged and either landlord or tenant may apply to the Tenancy Tribunal for an order terminating the Tenancy. The Tribunal can order termination if they deem it unreasonable to require the landlord to reinstate the property or they can require the tenant to continue with the tenancy with a reduced rent.
If you have found yourself with a flooded property under contract Haigh Lyon can provide you the right property law advice to point you in the right direction. Contact Shaun McGivern on @email or 09 306 0623 or Jason Hendriks on @email or 09 09 306 0603