Under existing law, the effect of a contract for the sale of land, unless the parties expressly agree otherwise, is that the risk of physical damage passes immediately to the purchaser. Thus, where the premises are destroyed or damaged, for example by fire, between the date of the contract and settlement of the transaction the purchaser must bear the loss. The fact that the vendor may have insurance over the premises is not likely to assist the purchaser, since the latter is generally not entitled to take advantage of the vendor s insurance policy. Consequently, if the purchaser does not take out insurance, he or she may suffer severe financial loss. While the obvious practical remedy is for the purchaser of real property to take out insurance immediately upon entering the contract for sale, some legally unrepresented purchasers do not appreciate the need to do so and are therefore at risk of sustaining catastrophic financial loss.

In our view, reform of the current law is warranted in order to protect the uninsured purchaser. The most appropriate reform is to enact legislation providing that the risk of damage to, or destruction of, the premises should not pass from the vendor to the purchaser immediately upon entry into the contract for sale. Rather, the risk should pass when the transaction is completed or when the purchaser is entitled to possession or actually takes possession whichever first occurs.

We recommend that the legislation altering the time when the risk passes to the purchaser 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.

The legal consequences of damage which occurs to the property between the time of entry into the contract and completion or earlier possession should be as follows:

• Where the damage is substantial (by which we mean damage of a kind that renders the property materially different from that which the purchaser contracted to buy), the purchaser should be entitled to rescind the contract and recover the deposit and all moneys paid under the contract A purchaser electing to rescind the contract 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 vendor and purchaser. Upon rescission 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 damage is substantial a purchaser who elects not to rescind or who loses the right to rescind should be entitled to require the vendor to proceed to completion with 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 the sale where it would be inequitable or unjust to do so. In such a case the court should have power to order rescission of the contract and the power to make such other orders as the court considers appropriate in the circumstances.
• Where the damage is substantial 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.
• Where the property is damaged, but not substantially, the purchaser should have no right to rescind. However, the purchaser should be entitled to require the vendor to complete with 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.