Damage to commercial property between exchange and completion

Damage to commercial property between exchange and completion

You have just exchanged contracts and paid 10% deposit of the full purchase price for a commercial freehold property. The day after, you receive the news that the property has been damaged. Where do you stand legally from a buyer’s perspective?

Most people would assume that the sale would be gridlocked and the buyer could pull out of the transaction. However, this is most certainly not the case.

From exchange, a legally binding contract will exist between the parties. It will always be down to the specific terms of the contract; however, the Standard Commercial Property Condition 8.1 provides that the property is at the risk of the buyer from exchange of contracts.

This means that the risk of any damage to the property passes to the buyer from exchange of contracts rather than on completion and therefore, the buyer is obliged to complete as normal and the Seller wouldn’t have to reinstate or repair the property. If a wall fell down during a storm between exchange and completion, the buyer would have to purchase the property and face the costs of repair themselves.

What can you do to avoid being in the position of having full liability to pay for the damaged property?

The answer is insurance!

More often than not, the Standard Commercial Property Condition 8.1 will apply to the contract in its standard form and therefore, the buyer would usually want to insure the property as a precaution. This doesn’t mean the seller loses their insurable interest. For example, the buyer may fail to complete due to insufficient funds.

The parties can agree that the seller will maintain its insurance until completion. If the seller agrees to this, the seller must do everything to maintain the policy, increase the amount of cover if requested by the buyer (subject to the insurers approval) and the buyer paying for the additional premium, allow the buyer to inspect the insurance policy and return any moneys of additional premiums to which the buyer funded which has been returned by the insurance company.

Sometimes both parties will insure between exchange and completion. This won’t be of concern as long as neither party has any rights under the other’s policy – known as double insurance!

Double Insurance

Double insurance is where one party has more than one insurance policy regarding the same risk on the same property. For example, you as the purchaser obtain your own policy on exchange, however, the seller already has an insurance policy which is maintained through to completion which contains provisions for proposed purchasers. The claimant cannot recover the insurance monies twice as the claimant would profit likely resulting in unwanted delays and lengthy debate between the insurers.

Purchasing with the assistance of a mortgage

It is common for purchasers to acquire property with the assistance of a mortgage to cover the purchase price. This often involves the lender giving its own obligatory requirements to the buyer, on or before exchange of contracts. If they didn’t have requirements as mentioned below, you could end up liable for mortgage repayments for an unusable property. Their requirements can include amongst others:

• Insurance against natural disasters, theft, riot, explosion, professional fees, etc.
• Insurance to cover the full rebuild cost
• Insurance policy to be in the names of the purchaser and the lender
• For the Insurer to notify the lender if the purchaser does not renew the policy.

How we can help you

Legal documents can be confusing. It is imperative when purchasing commercial property that the contract is adequately negotiated and that you understand every clause so you are aware exactly what you are and are not liable for. At Rix & Kay Solicitors LLP we make law easy for you! Have the confidence that you won’t be affected by the above.

Contact Rix & Kay’s Commercial Property team, as we have detailed specialist knowledge of the commercial property transactions and the mechanics involved. We would be delighted to help.