PLEASE NOTE: We are OPEN. However, due to the COVID-19 situation, our attorneys are working remotely. Please contact our office via phone or email to discuss your options.
Trust | Innovation | Results
We are devoted to helping individuals and businesses with all real estate and business matters in California.
Rossi, Hamerslough, Reischl & Chuck - real estate
Call our Bay Area Office408-780-0358
PLEASE NOTE: We are OPEN. However, due to the COVID-19 situation, our attorneys are working remotely. Please contact our office via phone or email to discuss your options.
Trust | Innovation | Results
We are devoted to helping individuals and businesses with all real estate and business matters in California.
  1. Home
  2.  ▶ Fires, Floods, Earthquakes, And Other Calamities: What Happens When They Occur During An Escrow?

FIRES, FLOODS, EARTHQUAKES, AND OTHER CALAMITIES: WHAT HAPPENS WHEN THEY OCCUR DURING AN ESCROW?

The fires burning in our area prompted a number of questions regarding the rights and duties of a buyer and seller when the real property and structures are damaged before title has been transferred. The pending transactions at issue all involved C.A.R. purchase contracts.

The C.A.R. purchase contract does not contain a risk-of-loss clause. This is a clause that allocates who will bear the risk of a casualty loss. In the absence of a risk-of-loss provision in the contract, the Uniform Vendor And Purchaser Risk Act (Civil Code § 1662) governs the risk of a casualty loss to the property after the contract is executed. Under the Act, where either title or possession of the property has not been transferred to the buyer and all or a material part of the property is destroyed without fault on the part of the buyer, the seller bears the risk of loss, and the buyer can recover any portion of the price that has been paid.

If either title or possession has transferred to the buyer and all or any part of the property is destroyed without fault on the part of the seller, the buyer is not relieved from the obligation to complete the purchase and is not entitled to recover any portion of the price that has been paid, and the risk associated with the loss falls on the buyer. The statute also does not define what constitutes “possession” on the part of the buyer. Does it mean physical possession or the storage of personal property pre-close?

C.A.R. has two forms that address these issues (in different ways). The Buyer Early Occupancy Addendum does not warn the buyer that by taking possession of the property, the risk of any casualty loss that materially destroys the property shifts to the buyer under the statute. The paragraph on insurance in this form also does not advise the buyer of the need to obtain insurance to address that risk of loss. In contrast, the Buyer Pre-Occupancy Storage Addendum affirmatively states that the storage of buyer’s personal property shall not constitute the buyer taking possession under the statute.

The issue of who bears the risk of loss also exists where the seller retains possession after close of escrow. In this situation, the buyer bears the risk of loss unless the casualty was due to the fault of the seller. This often leads to disputes between insurance companies over who is responsible for the loss. These disputes often illustrate another ambiguity in the statute; if a party is partially at fault for the loss, does that shift the risk of loss completely, or do concepts of comparative fault apply?

The statute also suffers from a lack of clarity in that it does not define the term “material” as that term is applied to this type of property loss and does not address what occurs if an “immaterial” loss occurs. The issue of materiality will be determined on a case-by-case basis, taking into consideration the type of property, its use, any intended use that is expressed in the contract, and other factors.

In the case of a non-material loss, where title or possession has not yet transferred to the buyer, the statute implies that the contract can still be enforced by the seller. The statute does not address who is responsible for paying for the damage, whether available insurance proceeds will be used to repair or reconstruct the property, and/or whether the buyer is entitled to a price reduction equal to the extent of the loss.

Other issues that arise where title or possession is transferred to the buyer before the casualty occurs include whether the buyer has obtained any insurance to address the risk the buyer has assumed, whether any insurance the seller had in place was suspended because of the transfer of title or possession, and, assuming that such coverage remained in effect, who would be entitled to the insurance proceeds and under what circumstances.

The recent inquiries I received involved two homes that were completely destroyed before title or possession had been transferred to the buyer. Those transactions were mutually cancelled, and any funds on deposit were returned to the buyer. Other inquiries concerned homes that were not destroyed, but the lenders and insurers who had previously committed to fund or insure the transaction retracted those commitments based on concerns about fire risk or the impact on the use or value of the property because of damage to the surrounding area or infrastructure. Unfortunately, the lender and insurer chose to do so after the buyers had removed their contingencies on these subjects. Some of these escrows closed after the lender and insurer revisited the properties and confirmed that they were still intact and the properties were no longer in an evacuation zone. In other instances, the water supply lines were damaged and contaminated, and the lender and insurer reinstated their commitments based upon the delivery of water to the properties pending replacement of the water supply systems.

My experiences with the latter type of issues underscores the importance of investigating the terms and conditions of any loan commitment and/or insurability of the property before removing any contingency on these subjects as well as having the buyer reconfirm in writing any discussions and representations made by the lender and/or insurer on these subjects prior to removing any such contingencies. Another option for a buyer would be to request that any contingency on these subjects be extended through close of escrow or otherwise reach an agreement with the seller at the time that contingencies are removed that in the event that the lender and/or insurer retracts any commitment through no fault of the buyer, the buyer is relieved of any obligation to close escrow in the event they cannot obtain funding and insurance within a fixed period of time.