John O’Rourke signed a contract in December 2012 for the sale of his company’s East Street Rockhampton site to Georgina and Karl Schamburg, for $1.38 mil, settlement due in April 2013.

In January, the property was damaged by a tropical storm.

As is customary, the contract put the property at the risk of the buyer from signing. But the parties discussed and documented a variation requiring the seller to make a claim under its insurance for the repairs and for part of the sale price to be held in the buyers’ solicitors’ trust account to meet the repair costs if necessary.

Settlement occurred with $80k held as agreed with it also to be available to subsidise a rent receipt shortfall from the tenant  – Pimp My Party – during the rent-abatement pending completion of repairs.

The seller’s insurer responded to the claim with a request for information from buyer – in particular whether they had a potential claim under their own insurance policy – before it would authorise repairs assessed at $48k.

For reasons unexplained in the judgment, the buyer declined to provide the information and the insurance claim went nowhere.

O’Rourke’s company sued to recover the $80k retention on the basis that the Schamburgs had breached implied terms that they would “do all such things as were necessary to enable the other party to have the benefit of the contract” and “would act with good faith with respect to the other party”.

The District Court at Rockhampton ruled in favour of buyer to the extent that it could access $8.8k of the retention sum for the tenants rent shortfall and that the seller’s claim should be struck out because it was insufficiently particularised.

O’Rourke will however be permitted to re-plead its company’s case and can be expected to take the argument further.

Buyers should note that standard REIQ and ADL residential sale contract terms provide that the property is at the buyer’s risk from the date of sale.

Even though, that the Insurance Contracts Act 1984 (Cth) deems the buyer to be insured under the seller’s home insurance policy in many cases, there is no contractual duty on a seller to maintain or renew any insurance up to settlement. The seller might not even have insurance. Even if the seller does have insurance, a buyer cannot be sure of the adequacy or validity of the policy.

It is therefore always prudent buyers to arrange insurance cover to take effect immediately.

In the absence of insurance, the buyer may, in the worst case, be left with a substantial repair bill for damage to the property occurring pending settlement, over and above the purchase price.

Dromahair Pty Ltd v K J and GL Schamburg Pty Ltd (as trustee of the Schamburg Property Trust [2014] QDC 087 Smith DCJ 17/04/2014


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