SHOULD THE LAW BE REFORMED?

4.1 The first question is whether the current law governing the passing of risk between vendor and purchaser of land in New South Wales should be changed. As has been seem the general principle, in the absence of express agreement between the parties to a contract for sale, is that the purchaser bears the risk of damage to, or destruction of, the property occurring after the date of the contract but before completion of the transaction. Consequently, if the property is damaged or destroyed during that period the purchaser must bear the loss and, generally speaking, cannot rely on the damage or destruction as a ground for rescinding the contract If the purchaser is fully insured against such loss from the date of the contract. he or she will be protected against the financial consequences of the damage or destruction. However, if the purchaser is uninsured, or inadequately insured, the financial loss which he or she will have to bear could prove catastrophic. The purchaser cannot avoid the loss by looking to the vendor’s insurer (if any) for indemnity, unless special arrangements have been made and the insurer’s consent obtained.

4.2 It follows that the person most likely to suffer under the existing law is the unrepresented purchaser of land. A purchaser represented by a solicitor will (or should) invariably be advised of the need to take out insurance from the time of entry into the contract. As mentioned in paragraph 2.9, a solicitor who neglects to advise his or her client of the need to insure upon entry into the contract is almost certainly professionally negligent and liable to compensate the client for any financial loss sustained thereby. A purchaser who is not legally represented may not appreciate the need to insure the property before the transaction is completed and possession taken Should the property be damaged or destroyed between contract and completion such a purchaser not only is without insurance, but has no right to claim damages against any other party for failing to provide proper advice.

4.3 The specific deficiency in the current law is that an unrepresented purchaser may well assume, incorrectly, that there is no need to take out insurance over the property until the purchase is completed. A purchaser making such an assumption is at risk of catastrophic loss should the property be damaged or destroyed after the date of the contract but before completion. There is no empirical evidence available in New South Wales as to the precise proportion of purchasers who are not represented in conveyancing transactions. While there is little doubt that a substantial majority of purchasers, including purchasers of houses and home units, are represented by solicitors, it is clear many are not Purchasers are not obliged to engage solicitors to act for them and encouragement has been given in recent years to have purchasers reduce expenses by acting for themselves. Clearly, an unrepresented purchaser should not necessarily be protected against every mistake he or she might make; the function of the law is not to guard against every conceivable act of folly. But we think there is a very strong case for protecting a purchaser against the consequences of a rule of law that does not accord with an assumption that lay people might reasonably make - that is, that the property is at the purchasers risk only after completion of the transaction or after the purchaser has taken possession of the property.

4.4 This conclusion accords with the approach taken in other Australian States, the United Kingdom and many jurisdictions in North America although, as has been explained in Chapter 3, the form of remedial legislation varies considerably. For example, the United Kingdom has legislation which allows the purchaser to take advantage of the vendor s insurance policy where the property is damaged or destroyed between the date of the contract and completion. Queensland, Victoria and the Northern Territory have comparable legislation while both the Australian Law Reform Commission and the New Zealand Contracts and Commercial Law Reform Committee have recently recommended that a similar approach should be taken. In addition, Queensland and Victoria grant the purchaser of a dwelling-house the right to rescind the contract if the premises are so destroyed or damaged as to be unfit for occupation. The right to rescind cannot be excluded or modified by agreement between the parties. The Uniform Vendor and Purchaser Risk Act in the United States applies a similar rule to all contracts for the sale of real property, but the provision may be excluded by agreement between the parties.

4.5 The submissions received by the Commission on this reference support the need for reform. The Real Estate Institute of New South Wales, which represents 1,765 member agency firms, stated that it:

“supports the concept that substantial alteration is required by way of legislative enactment to bring about change in the common law pertaining to the passing of risk in conveyancing transactions and the concomitant onus to insure.” ¹

The Institute submitted that legislation should be enacted to ensure that the risk attached to property which is the subject of a contract for sale should not pass between the vendor and purchaser until completion or earlier possession by the purchaser. The Institute further submitted that legislation should set out the circumstances in which a purchaser can rescind the contract for damage to the property occurring prior to completion. The Institute suggested rescission should be available if the damage is sufficient “to render the property untenantable”. Contracting out of these provisions would be prohibited. The Institute contended as follows:

“The proposed changes are in accord with common sense and moral principles as to who should bear or suffer any severe loss occurring prior to settlement especially as the Purchaser is hardly ever let into possession prior to settlement.

It is more equitable that risk should pass on the taking of possession by the Purchaser and there is no reason why a Purchaser should have the burden of risk thrust upon him under current law when he is not in possession of the property.” ²

4.6 The law Society of New South Wales reported the view of the Conveyancing Review Committee that the present:

“situation could only be effectively and satisfactorily altered by legislation [A] change in the law would provide some protection to those purchasers who, through oversight or ignorance, fail to take out insurance at the time of exchange of contracts.” ³

The New South Wales Bar Association observed that the current law:

“maybe a source of surprise to laymen and hardship may have been caused where such persons are uninsured through their own ignorance, their legal advisees failure to warn them, or their lack of any legal advises”. ⁴

The Insurance Council of Australia Ltd expressed support for legislative action in the form of a statutory provision that in a contract for the sale of land, the risk should not pass until completion of the transaction and the purchaser should be able to rescind the contract in the event of destruction or damage to the property. ⁵

4.7 Accordingly, we conclude that the current law is in need of reform. This, of course, leaves open the question of what changes should be proposed. We now turn to the options for reform, noting that they are not necessarily mutually exclusive. The major options are as follows:

• granting the purchaser a right to claim upon the vendor’s insurance policy where the property is damaged or destroyed after the date of the contract but before the transaction is completed or the purchaser enters into possession;
• granting the purchaser the right to rescind the contract for sale in the event of substantial damage to, or destruction of, the property after the date of the contract but before the transaction is completed or the purchaser enters into possession; and
• providing that the risk of damage to, or destruction of, the property shall not pass to the purchaser until the transaction is completed or the purchaser enters into possession.

THE VENDOR’S INSURANCE

4.8 The first option is to permit the purchaser, at least in certain circumstances, to take advantage of the vendor’s insurance over the property where the property is damaged or destroyed after exchange of contracts but before completion or entry into possession by the purchaser. It may be that there is little point considering this option in depth since the Insurance Contracts Bill 1983 (Cth.), if it is enacted, will introduce this principle into federal law. Despite the proposed federal legislation, the terms of which have been discussed earlier (paragraphs 3.24- 3.27), we think it useful to consider, as a matter of principle, whether this is the most appropriate solution to the defect we have identified in the current law.

4.9 There is also a practical reason for considering this option. Clause 50(1) of the Insurance Contracts Bill 1983 (Cth) applies only where “the risk in respect of loss of or damage to the building has passed to the purchases”. It for example, we were to recommend that the risk of damage to property should not pass to the purchaser until completion or earlier possession, the effect would be to exclude the operation of the Commonwealth provision. Thus, our recommendations could have important practical consequences as far as Commonwealth law is concerned.

4.10 Provisions entitling an uninsured purchaser to gain access to the vendor’s insurance have been adopted in three Australian jurisdictions, apart from the Commonwealth. While the legislation has respectable antecedents, deriving from English legislation of 1925, in many respects it constitutes a far- reaching reform. The legislation interferes with the insures s usual right to assess the risk before extending cover, and compels the insurer to provide cover in circumstances where it might otherwise decline to do so. ⁶ Nonetheless, the objective is quite clear to give an uninsured purchaser the protection of the vendors insurance cover on the property, even though there has been no contractual relationship between the insurer and the purchaser.

4.11 There are two principal difficulties with provisions of this kind as a solution to the problems facing uninsured purchasers. The first is that a right to gain access to the vendors insurance can only be as effective as that insurance. Vendors can hardly be compelled to insure and if they do, they cannot be compelled to insure for the full value of the property. If the vendor is uninsured, or has inadequate coverage, the purchaser will either be unprotected or insufficiently protected, despite having a statutory right to claim under the vendor s insurance. Moreover, if the vendor s insurer is entitled to avoid liability as against the vendor, for example, because of a material misrepresentation or a failure to abide by a term of the policy, the purchaser may be deprived of protection under the legislation. The Victorian legislation specifically prevents the insurer raising certain defences against the vendor. However, in other jurisdictions, the purchaser cannot claim under the policy if the insurer has a defence against the vendor and there is no completely reliable method of ascertaining that the insurer has no such defence. ⁷

4.12 The second difficulty is that legislation of this kind imposes liability on an insurer for a risk which the insurer may not have been prepared to accept voluntarily. This creates a dilemma: if the insurer is deprived of defences which ordinarily would be available, the legislation might be regarded as excessively harsh on insurers. On the other hand, if the defences are preserved, the legislation falls short of providing maximum protection to uninsured purchasers. Australian legislators have resolved the dilemma in different ways. Neither the Queensland Act nor the Commonwealth Bill, for example, allow the insurer to escape liability on the ground that the purchaser could reasonably have been regarded as an unacceptable risk In addition, the Queensland Act, and possibly the Commonwealth Bill deem the insurance policy to continue beyond the date on which it would ordinarily lapse, even though the insurer has received no premiums in respect of the extension. In Victoria, by contrast the insurer has a defence to a claim by the purchaser if it establishes that “a prudent insurer would not have insured the purchaser against the risk covered by the policy”. ⁸ Moreover, the legislation does not extend the term of an insurance policy which has expired.

4.13 Submissions to the Commission did not favour granting the purchaser a right to gain access to the vendor s insurance. The Law Society of New South Wales emphasised the inadequate protection afforded to a purchaser:

“because of the difficulties attached to ascertaining what if any, insurance the vendor has, and the adequacy of this insurance.” ⁹

The Law Society also pointed out that this approach would not avoid double insurance, because the prudent purchaser would still take out his or her own insurance while “the imprudent purchaser might place undue reliance on an unknown policy.” ¹⁰ The Insurance Council of Australia Ltd said that the Queensland and Victorian legislation presented problems because of “the assessment of the moral hazard of the purchases”, ¹¹ although the submission failed to take account of the important differences in the drafting of the two Acts. The Real Estate Institute of New South Wales supported a provision which prevented the risk of damage to the property passing until completion of the transaction or earlier possession by the purchaser, but gave no reasons for rejecting the insurance approach to reform. ¹²

4.14 We have concluded that to allow the purchaser of land access to the vendor’s insurance is not an entirely satisfactory means of overcoming the deficiency in the existing law, namely the inadequate protection accorded to the uninsured purchaser against damage to, or destruction of, property after the date of the contract but before completion of the transaction. Our principal reason is that such a reform even if the insurer is denied defences that would be available against the vendor, does not guarantee that the purchaser is protected against loss. In Particular, if the vendor is uninsured or under-insured, the uninsured purchaser will sustain the whole or part of the loss caused by damage to, or destruction of, the property. It is, in our opinion, no answer to say that the purchaser should inquire as to the nature and extent of the vendors insurance. Even assuming that the purchaser could rely on the reply as accurate, the suggestion requires the purchaser to be sufficiently well-informed to make the inquiry in the first place. A well-informed purchaser is presumably able to arrange his or her own insurance and thus avoid the problems associated with the current law without the need for special statutory protection. Accordingly, we think it would be better to look to another solution to provide more complete protection to the uninsured purchaser.

4.15 We have noted the further argument that legislation granting the uninsured purchaser access to the vendor’s insurance policy is unfair to insurers, since they are required to provide coverage to purchasers who might otherwise be considered to constitute unacceptable risks. We do not think, however, that this argument would be sufficient in itself to reject such legislation. The reason is that once insurers are aware that they are required to bear the additional burden of providing coverage to a purchaser when property is sold, at least for a limited period, it is fair to assume that premiums generally will rise to reflect the increased risk in other words, the additional burden will not simply fall on individual insurers, but will be incorporated into the premium structure and ultimately met by policy holders as a class. The real question is whether the increased insurance costs can be justified in terms of the additional protection provided to uninsured purchasers. For reasons we have explained, we do not think the additional protection is adequate.

4.16 There are two other factors which although not decisive, tend to support our conclusion. First a provision granting the purchaser access to the vendor’s insurance would be unlikely to decrease the incidence of double insurance. As the Law Society’s submission pointed out, a prudent purchaser would be bound to take out insurance as from the date of the contract, even though there would be a statutory right to claim under the vendor’s insurance. We doubt that any solution will eliminate double insurance, but other approaches are more likely to reduce its incidence. Secondly, as the Queensland, Victorian and Commonwealth legislative models show, provisions allowing the purchaser access to the vendor’s insurance almost inevitably produce problems of interpretation that are difficult to justify if the legislative solution is, in any event, imperfect.

RIGHT OF RESCISSION

4.17 A second approach to reform is to confer on the purchaser a statutory right to rescind the contract for sale if the property is substantially damaged or destroyed after the date of the contract but before the transaction is completed (or before the purchaser takes possession). As we have seer this approach has been adopted in both Queensland and Victoria, but in combination with provisions allowing the purchaser access to the vendors insurance (paragraphs 3.8 and 3.16). In each State the purchaser’s right to rescind is confined to a contract for the sale of a dwelling-house, presumably on the ground that purchasers of such premises need special protection. The right to rescind arises where the house is so “destroyed or damaged as to be unfit for occupation as a dwelling-house”. A purchaser exercising the right of rescission is entitled to a refund of moneys paid under the contract but not to compensation for other expenses incurred such as conveyancing costs. Any documents of title are to be returned to the vendor. The statutory right of rescission cannot be excluded by agreement between the parties.

4.18 Leaving aside the fact that the Queensland and Victorian legislation is confined to contracts for the sale of dwelling-houses, it falls short of providing complete protection to an uninsured purchaser. The principle that the risk passes to the purchaser as from the date of the contract remains the starting point for analysis. The legislation in effect, alters that principle only where the premises are rendered unfit for occupation as a dwelling-house. Clearly, it is possible for premises to be quite severely damaged without necessarily being rendered unfit for occupation. For example, part of a dwelling-house may be damaged by fire or even destroyed, yet the remainder of the house may be untouched and the premises as a whole capable of being occupied in such a case even though the cost of restoration maybe many thousands of dollars, the legislation provides the purchaser with no remedy. In particular, the purchaser is not entitled to claim a reduction in the purchase price equivalent to the reduction in the value of the premises or the cost of restoring the premises. In other words, unless the premises are so badly damaged as to allow the purchaser to rescind the contract, he or she is obliged to proceed to completion and pay the full purchase price.

4.19 It follows that if the objective of the law is to protect the uninsured purchaser a right to rescind only where the property is rendered unfit for occupation does not completely achieve that objective. This remains true even if the right to rescind is coupled with a provision permitting the purchaser to claim upon the vendor s insurance since, as we have seer the vendor may be uninsured or under-insured. Thus, while the combination of remedies is more effective from the purchaser s point of view than a single remedy, the combination is still not an entirely satisfactory solution to the defect we have identified in the current law. Accordingly, we do not consider that a right to rescind, modeled on the Queensland and Victorian provisions, should be introduced in New South Wales unless it is not feasible to provide more complete protection for the uninsured purchaser. However, as we shall see, a right to rescind would be a component of a broader approach to reform.

RISK REMAINING WITH THE VENDOR

4.20 The simplest option for reform although it has not yet found favour with legislatures in Australia, is to provide that, in the case of a contract for the sale of land, the risk of damage to, or destruction of the property does not pass to the purchaser until completion or until the purchaser enters into, or is entitled to enter into, possession of the property. A statutory provision postponing the passing of risk would bring the law broadly into line with the practice in New South Wales relating to the sale of properties under the Strata Titles Act, 1973. As discussed earlier, the standard contract in use in New South Wales for such sales provides that the risk does not pass to the purchaser until completion notwithstanding any rule of law or equity to the contrary (paragraph 2.5). We also observed in Chapter 3 that the general conditions for the sale of land of both the Law Society of Western Australia and the Real Estate Institute of Western Australia contain a provision that the property is at the risk of the vendor until completion or earlier possession by the purchaser (paragraphs 3.28-3.33).

4.21 We referred earlier to the absence of authority on the precise effect of a provision of this kind, whether in a contract or in legislation We suggested that the likely (but not certain) result in brief, is that where the property is substantially damaged the purchaser has the option of rescinding the contract or of proceeding to completion subject to an appropriate abatement of the purchase price. Where the damage is not substantial the principle would seem to be that the purchaser must complete the transaction subject to an appropriate abatement of the purchase price.

4.22 If this accurately describes the consequences in the event of damage to property of a provision postponing the passing of risk, it confers on a purchaser virtually complete protection against loss caused by damage to, or destruction of, the property after the date of the contract for sale but before completion In effect the purchaser is entitled either to rescind the contract and recover the deposit paid, or complete the transaction subject to an abatement of the purchase price. There may be circumstances in which an uninsured purchaser is not totally restored to the position he or she would have enjoyed had the transaction proceeded and the property not been damaged. For example, where the damaged buildings did not add materially to the value of the land, a court might abate the purchase price only by the difference between the value of the land before and after the damage. Nonetheless, a provision postponing the passing of the risk of physical damage to the property would avoid significant losses being sustained by uninsured purchasers.

4.23 It follows that, to the extent that the major deficiency in the current law is its failure to protect uninsured purchasers, a provision postponing the passing of risk of physical damage would largely overcome that deficiency. Moreover, such a provision would remove the need for the complex and inadequate reforms of the kind discussed earlier in this chapter. Since the provision would protect the uninsured purchaser against loss, he or she would not require access to the vendor s insurance. Similarly, a statutory right of rescission such as that in force in Queensland and Victoria, may not be necessary (except for additional certainty) because a provision postponing the passing of risk may create, among other things, a right in a purchaser to rescind in the event of substantial damage to the property. ¹³

4.24 The effect of a provision postponing the passing of risk is to impose on the uninsured vendor, rather than the uninsured purchaser, the burden of bearing loss caused by damage which occurs after the date of the contract but before completion or earlier possession by the purchaser. It could be argued that this is unfair, since the vendor in these circumstances may suffer very considerable hardship. If the purchaser rescinds the contract f or sale, not only does the vendor suffer the reduction in value of the property, but he or she may sustain consequential losses. For example, a vendor who is relying on the proceeds of the sale to finance the purchase of another property faces the prospect of not being able to proceed with that purchase and perhaps thereby breaching that contract.

4.25 In the absence of insurance no solution can protect all parties: someone must bear the loss resulting from physical damage to the property. In our view, an uninsured vendor, unlike an uninsured purchaser, will rarely be prejudiced by entering into a contract for the sale of property. By that we mean that entering the contract for sale would rarely, if ever, render the vendor more vulnerable to the risk of serious loss than was the case before the contract. If at the time of the contract the vendor is already insured against loss caused by damage to the property, the contract will not reduce the protection afforded by the policy. If at the time the vendor is not insured the contract will not increase his or her vulnerability to loss. In other words, where property is damaged after the date of the contract for sale but before completion the vendor’s difficulties stem from the pre- existing failure to take out insurance, and not from the contract itself. We have not heard it suggested that an insured vendor is likely to cancel insurance in the mistaken belief that insurance is no longer required after a contract for sale has been entered into. On the other hand, as submissions to us have confirmed, it is clear that some unrepresented purchasers do not appreciate the need under the existing law, to take out insurance as from the date of the contract for sale. They assume, incorrectly, that insurance is necessary only when they complete the purchase or enter into possession. Accordingly, if one of the parties must bear the loss, we think there are sounder reasons for protecting an uninsured purchaser, than for protecting an uninsured vendor. Whether this approach should be pursued in all circumstances is a matter to which we return shortly (paragraphs 4.32-4.41).

4.26 We referred earlier to double insurance (paragraphs 2.22 and 2.25). A provision postponing the passing of risk is unlikely to eliminate completely the practice of both the vendor and purchaser having insurance over the property pending completion of the transaction. Some purchasers may prefer the security of their own insurance, even though the insurance is not necessary in the light of the statutory provision. However, if it is clear that the risk of the property being damaged or destroyed remains with the vendor, many purchasers may decide that the right to rescind the contract or to claim compensation from the purchaser affords substantially complete protection against financial loss and that insurance is unnecessary. On the other hand, merely allowing the purchaser access to the vendor s insurance, or permitting rescission in the event of substantial damage, would not justify a purchaser foregoing his or her own insurance. Thus, while double insurance is not perhaps a major problem we note that a provision postponing the passing of risk is more likely than other approaches to decrease the incidence of double insurance.

4.27 A proposal that the risk of damage to the property should not pass to the purchaser until completion was considered, but rejected by the New Zealand Contracts and Commercial Law Reform Committee in 1983. As we have noted (paragraph 3.34), the Committee took the view that such a reform would constitute too radical a change to the principles currently governing the passing of risk. The obvious answer to this criticism is that the other options for reform which we have already discussed, would also constitute a radical departure from the existing law in New South Wales. Indeed, the other proposals concern not only the rights and duties of the vendor and purchaser, but also the relationship between those parties and their respective insurers. Furthermore, subject to what we say in paragraphs 4.42 and 4.43, the proposal that the risk not pass to the purchaser upon exchange of contracts would bring the general law broadly into line with the practice already adopted in contracts for the sale of properties under the Strata Titles Act, 1973. Thus, the proposal has already been adopted in an important area of conveyancing practice in New South Wales.

4.28 The New Zealand Committee also criticised the suggestion that the passing of the risk of damage should be postponed until completion on the ground that it would lead to uncertainty, for example, in determining whether property is sufficiently damaged to permit rescission by the purchaser or in assessing the extent to which the purchase price should be abated to take account of damage to the property. However, as we have explained, any proposal for reform in this area necessarily introduces an element of uncertainty. For example, legislation providing for the purchaser to claim upon the vendor’s insurance is often complex and difficult to interpret. Moreover, at least since the land mark case of Flight v. Booth in 1834, ¹⁴ the courts have dealt with questions relating to the abatement of purchase price in the analogous area of compensation for errors or misdescriptions without undue difficulty. We accept that any legislative reforms should minimise the scope for uncertainty, for this reason we recommend that the legislation should go beyond a simple declaration concerning the passing of risk and specify in more detail the legal consequences of such a declaration. Nonetheless, we recognise that uncertainty cannot be avoided completely. This, however, is the necessary price for preventing the hardship and injustice that would otherwise occur.

4.29 For these reasons, we conclude that the most satisfactory approach to reform is to enact legislation which specifically postpones the passing of risk of damage to, or destruction of the property until the transaction has been completed or the purchaser has entered into possession or is entitled to enter into possession, whichever is the earliest. In most cases, entitlement to possession will coincide with completion of the transaction but there may be cases where, by agreement between the parties, the purchaser is given the benefit of possession prior to completion. Entitlement to possession or actual possession of the property by the purchaser is the appropriate time when the risk should pass to the purchaser as he or she is then in a position to maintain the property and can fairly be expected to appreciate the need for insurance. The vendor should be relieved of the risk of damage to the property at this time as he or she is no longer entitled to possession. The Real Estate Institute of New South Wales stated in its submission that this proposal is “in accord with common sense and moral principles as to who should bear or suffer any severe loss occurring prior to settlement”. ¹⁵

4.30 It maybe that in exceptional circumstances the contract will provide for the purchaser to be entitled to possession immediately upon exchange of contracts so that the risk thereupon passes to the purchaser. This may occur in connection with the sale of vacant land where there are no improvements and hence the question of the passing of risk and the need to insure is of less significance. In other circumstances, there would be little advantage for the vendor to specify in the contract that the purchaser is entitled to possession upon exchange of contracts solely to ensure that the risk of damage to the property is upon the purchaser because the vendor would consequently lose possession of the property.

4.31 Before formulating precise recommendations it is necessary to consider two further issues.

• The first concerns the scope of the legislation Should it apply subject to, or notwithstanding, any contrary agreement between the parties? A related question is whether the provision should apply to all contracts for the sale of land, or only those for a limited class of premises such as dwellings.
• The second issue relates to the form of the legislation. In particular, should the legislation simply state that the risk of physical damage not pass to the purchaser until completion or earlier possession or should it specify the consequences of damage to, or destruction of the property in more detail? If the latter, what consequences should be specified?

SCOPE OF THE LEGISLATION

4.32 We have pointed out that the major defect in the current law is that an uninsured purchaser is liable to sustain serious loss where property is damaged or destroyed after entry into the contract, but before completion. It is the legally unrepresented purchaser who is most likely to suffer a purchaser entering into a contract with the benefit of legal advice will be, or ought to be, advised of the need to insure.

4.33 While there is no reliable empirical evidence on the extent to which purchasers enter into conveyancing transactions without legal advice, there is little doubt that this occurs most frequently where the purchase relates to a dwelling. Moreover, it is fair to assume that an unrepresented purchaser of a dwelling is likely to be less knowledgeable about the need for insurance than an unrepresented purchaser of other kinds of property. This suggests that reform is most urgently required in relation to contracts for the sale of a dwelling, and less urgent where the property is, for example, commercial or industrial in character. On the other hand, at least some purchasers of commercial or industrial property will not have legal advice when entering the contract and may be ignorant of the need under the current law to take out insurance. For such persons, the consequences of damage to the property after the date of the contract may be as disastrous as for the purchaser of a dwelling. Again, some purchasers of dwellings are investors who presumably need no more protection than purchasers of other kinds of investment properties.

4.34 A further factor to consider is the principle generally, but by no means universally, applied, that people should be free to enter contracts on such terms as they wish. On this principle, if the parties to a transaction agree that property should be at the purchases s risk as soon as contracts are exchanged, the law should give effect to the agreement But again there are countervailing arguments. The use of standard form contracts, particularly where one party is unrepresented, often renders illusory the assumption that terms have been freely negotiated. Moreover, Parliament has often interfered with the principle of freedom of contract. There are now many examples of legislation imposing restrictions on the parties to a contract or conferring rights on one party, notwithstanding any contrary agreement. ¹⁶

4.35 We have suggested that the most appropriate means of protecting the uninsured purchaser is a provision postponing the passing of risk until the transaction is completed or the purchaser enters into, or is entitled to enter into, possession of the property. In determining the scope of this legislation at least four major options should be considered. The legislation could apply.

• to all contracts for the sale of land subject to any contrary agreement between the parties;
• to all contracts for the sale of land notwithstanding any contrary agreement between the parties;
• to all contracts for the sale of land notwithstanding any contrary agreement between the parties, except where the purchaser is legally represented in which case a contrary agreement would be effective; or
• to contracts for the sale of dwellings notwithstanding any contrary agreement between the parties, and to contracts for the sale of other real property subject to any contrary agreement between the parties.

4.36 The choice among these options is by no means clear cut but on balance we prefer the last. In general the parties to a contract should not be deprived of the freedom to agree upon their own terms unless there are good reasons for doing so. We are persuaded that those reasons exist in the case of a contract for the sale of a dwelling, and consequently, that the parties should not be free to agree that the risk of damage should pass to the purchaser immediately contracts are exchanged unless the purchaser is entitled to enter into possession of the dwelling upon exchange of contracts (paragraph 4.30). As we have explained, purchasers of dwellings are more likely than other classes of purchasers to be unrepresented by a solicitor and uninsured. They are particularly Vulnerable to the risk of catastrophic loss created by the existing law, and statutory protection can be afforded without serious prejudice to the vendor (paragraph 4.25). Unless protection is provided to the purchaser notwithstanding any contrary agreement the danger is that standard form agreements will be used to ensure that the risk does pass to the purchaser on exchange of contracts. Other Australian States have accepted, in a slightly different form the need to provide special protection to the purchaser of a dwelling and to make that protection incapable of variation by agreement (paragraphs 3.8 and 3.16). It is true that protection of this kind may be over-inclusive, in the sense that some unrepresented purchasers of dwellings do not require any special protection. However, we do not think that this is a substantial price to pay to extend protection to home buyers who otherwise might experience great hardship.

4.37 We think that the justification for protecting uninsured purchasers by an unalterable statutory provision relating to the passing of risk, is less compelling where the contract concerns property other than a dwelling. For example, there is more reason to emphasise the freedom of the parties to negotiate their own contractual terms where the sale involves retail commercial or industrial property, as opposed to a dwelling. Similarly, the purchasers of such property are generally (although not invariably) better equipped than home buyers to protect their own interests and thus less likely to accept unquestioningly the terms of standard form agreements. A further factor is that, if the risk of damage is to pass to a purchaser from the date of the contract, the agreement will need to contain an express provision to this effect. Such a provision may increase the likelihood that an unrepresented purchaser will be alerted to the need to take out insurance. Again, assuming the Insurance Contracts Bill 1983 (Cth) is enacted (paragraphs 3.24-3.27), the uninsured purchaser to whom the risk of damage has passed may be able to take advantage of the vendor s insurance and claim under the policy for any loss sustained.

4.38 The third option identified in paragraph 4.35 (permitting the statutory provision relating to the passing of risk to be displaced only where the purchaser is legally represented) has some attractions, but also has drawbacks. If, like the Land Sales Act, 1964, the legislation requires the purchases s solicitor to certify that he or she has explained the effect of the contractual term governing the passing of risk, inconvenience and expense would be added to many conveyancing transactions. In addition, an unrepresented purchaser of say, commercial property may be experienced in business affairs and require no protection on the question of passing of risk. Yet such a person would be unable, without securing the services of a solicitor, to enter into an agreement providing that the risk of damage should pass as from the date of the contract. This might be regarded as an unnecessary intrusion by the legislation into commercial transactions.

4.39 We therefore conclude that legislation postponing the passing of risk to the purchaser until completion of the transaction or until the purchaser enters into, or is entitled to enter into, possession (whichever is the earliest) should apply to:

• contracts for the sale of a single dwelling notwithstanding any contrary agreement between the parties; and
• contracts for the sale of other real property subject to any contrary agreement between the parties.

4.40 This conclusion makes it necessary to define the term “dwelling” in any legislation. In our view, the term should mean premises used, or designed for use, principally as a place of residence. Premises used principally for retail commercial or industrial purposes should be excluded. ¹⁷ This would mean that if a single dwelling-house has a study or other room used for professional purposes, provided that the dwelling is still used principally as a place of residence, the parties would not be free to contract out of the provision that postpones the passing of the risk to the purchaser until completion or until the purchaser enters into, or is entitled to enter into, possession.

4.41 For the purpose of our recommendations, the definition of dwelling should include residential home units, including those under the Strata Titles Act, 1973, and also any outbuildings and other appurtenances to a dwelling. This would include, for example, a garage or storage space sold with a residential strata unit We use the expression “used or designed for use” to include dwellings that have, for example, been recently constructed but have not at the date of the contract been “used” for any purpose. We also recommend that “ dwelling” should be defined to include a dwelling that is in the course of construction. In our view, the unrepresented purchaser of a partly constructed dwelling is in a similar position to the unrepresented purchaser of a completed dwelling and may not appreciate the need to insure from the time of entry into the contract. In these circumstances, we conclude that in the case of the sale of a single dwelling which is in the course of construction the risk should not pass to the purchaser until completion or until the purchaser enters into, or is entitled to enter into possession whichever first occurs.

4.42 We mentioned earlier that the proposal that the risk not pass to the purchaser upon exchange of contracts would bring the general law broadly into line with the practice in New South Wales concerning the sale of properties under the Strata Titles Act 1973 (paragraph 4.27). There is one difference however. In contracts for the sale of property under the Strata Titles Act, 1973, clause 14A(e) (i) of the standard form contract provides that the risk does not pass to the purchaser until completion of the transaction. Our recommendation is that the risk should not pass to the purchaser until completion or until the purchaser has entered into possession or is entitled to enter into possession whichever is the earliest.

4.43 The implementation of our recommendations would mean that the risk would pass to the purchaser of a single residential unit under the Strata Titles Act, 1973, when he or she enters into, or is entitled to enter into, possession. The risk would pass to the purchaser notwithstanding any contrary agreement between the parties, including clause 14A(e) (i) of the standard form contract in its present form. However, this does not mean that the purchaser of a residential strata title unit who enters into possession prior to completion of the transaction is offered less protection under our recommendations. Clause 14A(e)(i) was inserted in the standard form contract in the knowledge that the body corporate is required to maintain adequate insurance over the building and apply any insurance moneys received in respect of damage to, or destruction of, the building to rebuilding or repair of the building. ¹⁸ Under our recommendations, these provisions of the Strata Titles Act, 1973 would still apply even where the risk has passed to the purchaser prior to completion. It would therefore not be necessary for the purchaser to take out his or her own insurance to protect against damage to, or destruction of the building. Moreover, implementation of our recommendations would have the advantage of introducing complete uniformity between the sale of residential units under the Strata Titles Act, 1973 and the sale of other dwellings in respect of the passing of risk.

SPECIFYING THE CONSEQUENCES OF DAMAGE TO THE PROPERTY

4.44 We have explained that there is no Anglo-Australian authority precisely in point as to the effect of a provision simply stating that the risk of damage or destruction should not pass to the purchaser until completion or earlier entitlement to, or actual entry into, possession by the purchaser. In the absence of such authority, the courts could be expected to reason by analogy with other areas of law and we have stated the conclusions we think they would be likely to reach (paragraph 2.6). It would be possible to leave the courts free to work out the effect of a simple legislative provision stating that the risk shall not pass to the purchaser until completion or earlier possession. On balance, however, we think it better to reduce the scope for uncertainty and disputation by supplementing such a provision with a more detailed statement of the legal consequences that flow from it.

4.45 In our view, the principles embodied in legislation should include the following.

• Where the damage to the property between contract and completion (or earlier entitlement to, or actual entry into, possession by the purchaser) is substantial the purchaser should be entitled to rescind the contract and recover the deposit and all moneys paid under the contract. ¹⁹ By “substantial” damage, we mean damage of a kind that renders the property materially different from that which the purchaser contracted to buy. A purchaser electing to rescind on this ground should be required to notify the vendor of the election within 28 days of becoming aware of the damage to the property or within such longer period as may be agreed upon between the parties. If the purchaser fails to notify the vendor of the election to rescind within the specified period, he or she should lose that right. Where the purchaser does rescind the contract, the parties should be relieved of all liability under the contract except liability resulting from a breach of any express or implied condition in the contract which occurs before the date of rescission.
• Where the property is substantially damaged, a purchaser who elects not to rescind should be entitled to require the vendor to proceed to completion and to allow an appropriate abatement of the purchase price to compensate for the damage to the property. However, the court should have a discretion to refuse to require the vendor to complete where it would be unjust or inequitable to do so. ²⁰ In such a case, the court should have power to order rescission of the contract, with the consequences already specified. The court should also have the power to make such other orders as it considers appropriate in the circumstances.
• Where the property is substantially damaged and the purchaser elects not to rescind or loses the right to rescind the vendor should be entitled to require the purchaser to complete, subject to allowing an appropriate abatement of the purchase price. We have considered whether the court should have a discretion to refuse to require the purchaser to complete where the purchaser loses the right to rescind (perhaps because he or she is ignorant of the need to rescind within the specified period) but would suffer hardship if forced to complete the sale. Our conclusion is that the court should not have such a discretion. Even if the right to rescind is lost, the purchaser is still entitled to an abatement of the purchase price. More importantly, to allow rescission of the contract beyond the specified period may greatly disadvantage the vendor who should be entitled to certainty in his or her dealings with the purchaser. The vendor may have entered into another contract in good faith to purchase a property with the proceeds of the sale on the basis that the specified period for rescission has expired.
• Where the property is damaged, but not substantially, the purchaser should have no right to rescind. However, in these circumstances the purchaser should be entitled to require the vendor to complete and to allow an appropriate abatement of the purchase price. Similarly, the vendor should be entitled to require the purchaser to complete, subject to allowing an appropriate abatement of the purchase price.
• A purchaser should not be entitled to rescind the contract or receive an abatement of the purchase price (in the latter case whether the property is substantially damaged or not) where the damage is caused by a wilful or negligent act or omission on the part of the purchaser.

4.46 We do not think it is desirable or appropriate to attempt to specify in legislation a formula for assessing the abatement of the purchase price. The courts are familiar with this problem in relation to compensation for errors and misdescriptions. ²¹ As one commentator has observed, the “method of assessment which is appropriate ... varies with the particular circumstances”. ²² In some cases, the abatement will reflect the difference between the market value of the property at the date of the contract and the market value after the property has been damaged. In others the appropriate figure may be the cost of reinstatement of the property or indeed some other measure. ²³ If the vendor and purchaser cannot agree on the appropriate abatement the choice as to the method of assessment should be left to the courts.

1. Submission of the Real Estate Institute of New South Wales, 30 August 1983, p.1.

2. Id., p.3.

3. Submission of the Law Society of New South Wales, 27 September 1983, p.l.

4. Submission of the New South Wales Bar Association, 18 October 1983, p.l.

5. Submission of the Insurance Council of Australia Ltd., 11 October 1983.

6. Depending on the form of the legislation the insurer may have the option of giving the purchaser notice cancelling the policy: cf. Sale of Land Act 1962 (Vic.), s.35(4).

7. As noted earlier, the Commonwealth Bill is open to the interpretation that the vendor’s insurer can rely, as against the purchaser, on any defences open against the vendor: see para.3.27.

8. Sale of Land Act 1962 (Vic.), s.35(3).

9. Note 3 above, p.2.

10. Ibid.

11. Note 5 above, p.2. We note that the Australian Law Reform Commission reports the Insurance Council of Australia Ltd. as accepting what is now cl.50 of the insurance Contracts Bill 1983 (Cth): Australian Law Reform Commission, Insurance Contracts, Report No.20 (1982), para.132.

12. Note 1 above.

13. A provision postponing the passing of risk would not result in a windfall to an insured purchaser, where the property is damaged after the date of the contract insurance is a contract of indemnity and the insurer’s liability would be limited to the loss actually sustained by the purchaser.

14. (1834) 1 Bing NC 370; 131 ER 1160.

15. Note 1 above, p.3.

16 See eg. Land Sales Act 1964, s.1 C, Part III: cf. Contracts Review Act, 1980, s.17.

17. Cf. Landlord and Tenant (Amendment) Act, 1948, s.8(l B).

18. Strata Titles Act 1973, Part IV, Division 5: see para.2.5.

19. In the normal course of events the purchaser should not be entitled to recover his or her conveyancing costs or expenses in the event of rescission of the contract. However, it may be that the damage to the property is caused by some wilful or negligent act on the part of the vendor and that therefore any conveyancing costs incurred by the purchaser should be recoverable from the vendor. It is clear that under our recommendations the vendor would have a duty to care for the property until the risk has passed to the purchaser. In these circumstances it may be possible for the purchaser to institute legal proceedings for negligence or breach of contract on the part of the vendor. Damages may include the conveyancing costs and expenses incurred by the purchaser in the transaction.

20. It may be inequitable, for example, where a requirement to complete would inflict hardship on the vendor. cf. ICF Spry, Equitable Remedies (2nd ed., 1980), pp.287-289.

21. Id, pp.291-292; P. Butt, “Compensation for Errors or Misdescriptions in Contracts for the Sale of Land: A New Approach in New South Wales” (1983) 57 Australian Law Journal 93, at pp.102-103.

22. ICF Spry, note 20 above, p.291.

23. One special case may be where the premises are being purchased for demolition An abatement of the purchase price equal to the difference between the market value of the premises at the date of the contract and the market value after the premises have been damaged may result in a windfall for the purchaser.