INTRODUCTION

1.1 This is the fifth report in the Community Law Reform Program. The Program was established by the then Attorney General, the Hon F J Walker, QC, MP, by letter dated 24 May 1982 addressed to the Chairman of the Commission. The letter included the following statement:

“This letter may therefore be taken as an authority to the Commission in its discretion to give preliminary consideration to proposals for law reform made to it by members of the legal profession and the community at large. The purpose of preliminary consideration will be to bring to my attention matters that warrant my making a reference to the Commission under s.10 of the Law Reform Commission Act, 1967.”

The background of the Community Law Reform Program is described in greater detail in the Commission's Annual Reports for 1982 and 1983.

1.2 In early 1983 the Commission gave preliminary consideration to the subject matter of this report following the enactment of the Sale of Land (Amendment) Act 1982 (Vic.) which dealt with important issues in relation to conveyancing transactions that were also applicable to New South Wales. The Victorian legislation is discussed in Chapter 3. After due consideration the Commission sought a reference by letter of 5 May 1983. By letter of reply dated 20 June 1983 the Attorney General the Hon D P Landa, LLB, MLC, made the following reference to the Commission:

“To inquire into and report on:

(i) The law and practice relating to insurance or compensation in respect of damage to or destruction of improvements and other property on land the subject of a contract for sale, and as part of such inquiry to consider the following:

(i) how the risk of such damage or destruction should be borne as between vendor and purchaser;

(ii) whether the benefit of an insurance policy held by the vendor should ensure for the purchaser;

(iii) the manner in which the proceeds of any insurance policy held by the vendor or the purchaser, or any compensation received by either party, should be applied.

(ii) Any incidental matter.”

LAW REGULATING PASSING OF RISK

1.3 The present law in New South Wales regulating the passing of risk between vendor and purchaser in conveyancing transactions is described in detail in Chapter 2. Under the present law, in the absence of any agreement to the contrary, a purchaser under a valid contract for the sale of land is obliged to pay the full contract price if buildings on the land are destroyed or damaged, for example by fire, without fault on the part of the vendor, where such damage occurs after the contract has been entered into but prior to completion of the sale. The purchaser is not entitled to a reduction in the purchase price for the damage sustained, nor is the purchaser entitled to rescind (terminate) the contract In other words, the “risk” that the property ¹ might be damaged or destroyed is deemed to pass from the vendor to the purchaser from the time the contract is entered into. An example of an agreement to the contrary occurs in the case of sales of strata title property in New South Wales. The 1982 standard form contract specifically provides that the risk shall not pass to the purchaser until completion of the sale. ²

THE NEED FOR REFORM

1.4 Clearly the present law can operate to the detriment of the purchaser who must bear the loss for any damage to buildings on the property occurring prior to completion. Accordingly, purchasers need to take out insurance to protect against such damage and, in practice, solicitors in New South Wales advise their purchaser clients of the need to insure. One obvious shortcoming with the present law is that purchasers who enter into conveyancing transactions without legal advice may be unaware of the need to take out insurance to protect their interest in the absence of insurance cover, they will personally bear the cost of any damage to the property sustained prior to completion of the transaction.

1.5 A further problem under the existing law is double insurance. Regardless of whether the purchaser takes out insurance, the vendor has an “insurable interest” in the property until completion of the transaction - that is, the vendor is entitled to maintain his or her own insurance over the property. In practice the vendor will usually retain insurance cover for the full value of the property until completion Protection of this kind is necessary because the transaction may not proceed to completion for example because the contract permits the purchaser to rescind in certain circumstances, The result is that there are usually two insurance policies covering the same property for the period between entry into the contract and completion - the vendor s and the purchaser’s.

1.6 It might be thought that the difficulties experienced by an uninsured purchaser could be overcome, where the vendor has insurance, by the purchaser claiming under the vendors policy. In practice this solution is not available. Even if the vendor is willing to assign the benefit of the policy to the purchaser, the assignment is not effective without the insurer’s consent. Nor can the problem be resolved by the vendor claiming under the policy and then paying the proceeds to the purchaser. This is because an insurance policy is “a contract of indemnity”, under which the insured person is entitled to be paid only for the loss sustained. if the vendor claims under the insurance policy, after having received the full purchase price, the insurer is entitled to recover the claim The reason is that the vendor has suffered no financial loss by reason of the damage to the property. Where the vendor claims under the policy before the sale is completed and the claim is met, the insurer is entitled to recover the amount paid out of the proceeds of the sale once the transaction is completed. if the vendor, having received the insurance moneys, is reluctant to force the purchaser to complete the transaction the insurer can force the purchaser to complete.

1.7 These principles were demonstrated in Ziel Nominees Pty Ltd. v. VACC Insurance Co. Ltd. ³ In that case, the purchaser of property did not take out insurance, relying on the fact that the vendor already had insurance cover. During the period between contract and completion the property was substantially damaged by fire. The vendor signed an authority addressed to the insurance company, authorising it to pay any moneys due under the policy to the purchaser. The purchaser completed the purchase. However, the insurer refused to make any payment under the policy. The High Court accepted the insurers argument that it was not liable to the purchaser.

“It is settled law that upon the signature of an enforceable contract of sale of land the purchaser is bound to complete, irrespective of the destruction of the improvements on the land in the meantime ... The purchaser... has an insurable interest which he can immediately protect by cover note or policy of insurance.

On the other hand, the vendor having an enforceable contract of sale is entitled to the price, notwithstanding the destruction of the improvements on the land... Thus a vendor who receives the price which he has agreed to accept for the land suffers no loss by the destruction of the improvements on the land meanwhile. The absence of any loss by reason of that destruction is clearly demonstrated by the vendor s receipt of the agreed price.

It follows in my opinion that at the time the [authority addressed to the insurer] became effective i.e. on settlement of the contract of sale, the vendor was not and could not at that time have become entitled to any moneys under the policy. and this for the simple and direct reason that he had not and could not suffer any loss by reason of the destruction or damage of the improvements on the land which he had sold in other words he had nothing to assign” ⁴

1.8 The Ziel Nominees case highlights the precarious situation of an uninsured purchaser, when the property is damaged between the date of contract and completion The case is a dramatic illustration of the problems associated with the current law, because the difficulties were foreseen by the parties and yet their efforts to overcome them failed. However, a much more straightforward illustration is the case of an uninsured purchaser who sustains catastrophic loss simply because he or she is unaware that the risk of damage to the property has passed under the contract.

1.9 It follows that under the present law a uninsured purchaser is at risk of serious financial loss where the property is damaged between the date of contract and completion. That risk is not overcome by the fact that the vendor has insurance, since in practice the purchaser cannot take advantage of the vendors policy.

PROPOSALS FOR REFORM

1.10 In order to deal with the difficulties associated with the present law governing the passing of risk between vendor and purchaser, a variety of reforms have been adopted in other jurisdictions. These are examined in Chapter 3, but in summary include the following,

• A provision allowing the purchaser a right to claim on the vendors insurance when damage to the property occurs between the date of contract and completion. Such a provision must be drafted in a manner that avoids the problem identified in the Ziel Nominees case (paragraph 1.7).
• A provision granting the purchaser the right to rescind the contract in the event of substantial damage occurring to the property between the date of contract and completion.
• A provision that the risk of damage to the property shall not pass from the vendor to the purchaser until completion of the contract or the time when the purchaser acquires the right to possession.

SUBMISSIONS

1.11 Following the receipt of the reference from the Attorney General the Commission wrote to interested organisations stating the terms of the reference and inviting submissions on a background paper which discussed the above proposals for reform. The submissions received are noted in Appendix B. All submissions acknowledged that the present law is deficient. We discuss the views expressed in the submissions in Chapter 4.

CONSULTANT TO THE COMMISSION AND PARLIAMENTARY COUNSEL

1.12 We wish to express our appreciation to Mr .Peter Butt, Senior Lecturer in Law University of Sydney, for his valuable contribution to the preparation of this report in his capacity as consultant to the commission for this reference. We also wish to record our thanks to Mr D R Murphy, QC, Parliamentary Counsel and to Mr D Colagiuri, Assistant Parliamentary Counsel for the preparation of the draft legislation appended to this report and for their advice and assistance.

1. In this report the term 11 property” is taken to mean “real property”: see B.A. Helmore, The Law of Real Property in New South Wales (2nd ed., 1966), pp10-11: R.E. Megarry and H.W.R. Wade, The Law of Real Property (4th ed., 1975), pp.10-12.

2. Clause 14A (Strata Title) of the 1982 standard form contract states:

“(e) until completion:

(i) notwithstanding anything elsewhere contained in this agreement or any rule of law or equity to the contrary the risk of the property sold shall not pass to the Purchaser.”

3. (1975) 7 ALR, 667.

4. Id., at p.669.