2.1 Two aspects of the present law in New South Wales call for comment

• First, as between vendor and purchaser, who bears the loss if the property is damaged or destroyed between the time of entry into the contract for sale and the time of completion of the sale?
• Secondly, what are the rights and obligations in respect of insurance over the property, both as between vendor and purchaser and as between those parties and the insurer?

PASSING OF RISK

Absence of Agreement Between Vendor and Purchaser

2.2 The general principle, in the absence of express agreement between the vendor and purchaser, is that the vendor becomes a trustee of the property f or the purchaser once there is a valid and binding contract between the parties,¹ There is some dispute as to precisely when the vendor becomes a trustee² but it is clear that, before completion of the contract the purchaser is regarded, at least for certain purposes, as the beneficial owner of the property.³ One consequence of this is that, in the absence of want of reasonable care by the vendor in the use and management of the property, the purchaser bears any damage to, or diminution in the value of the property occurring prior to completion. For example, if a building on the land is, without fault on the part of the vendor, destroyed or damaged by fire prior to completion the purchaser, and not the vendor, is the person who ultimately bears the loss.⁴ In practical terms, the purchaser must pay the full contract price without any reduction to compensate for the damage.

2.3 Fire is the most commonly encountered example of damage which falls within this principle. But the reported cases provide many illustrations of other kinds of damage, with the consequential loss being held to fall upon the purchaser.⁵

Agreement Between Vendor and Purchaser

2.4 There appears to be nothing in principle preventing the vendor and purchaser from agreeing to abrogate or modify the rule concerning the passing of the risk to the purchaser.⁶ The parties could, for example, agree that the risk should remain with the vendor until completion or the prior taking of possession by the purchaser. Such an agreement could be express or implied. An express agreement is easier to prove, but an implied agreement may be equally effective. For example, in a recent case the contract provided for the sale of land with a building to be constructed by the vendor. Since the contract imposed an obligation upon the vendor to restore any part of the building damaged during the course of construction it was held that there was a clear implication that the building was to remain at the vendors risk until completion.⁷

2.5 An example of an express agreement altering the present rule concerning the passing of the risk is to be found in condition 14A(e) (i) of the 1982 edition of the joint Law Society of New South Wales and Real Estate Institute of New South Wales standard form contract for sale of land. This condition provides that in the case of property held (or intended to be held) under strata title, such as a residential unit in a block of units, the risk shall not pass to the purchaser until completion “notwithstanding ... any rule of law or equity to the contrary”. The condition has been included in the contract in the knowledge that the body corporate is obliged by the Strata Titles Act 1973 to maintain adequate insurance over the building⁸ and that the proceeds of any insurance claim in respect of damage to, or destruction of the building are to be applied in repairing or rebuilding the property.⁹ However, the contractual provision relates only to strata title properties. There is no provision in the same contract abrogating or modifying the general law principles concerning the passing of risk in respect of properties not under strata title.

2.6 There appears to be no Australian or English authority as to the effect of an agreement altering the general rule concerning the passing of the risk between vendor and purchaser. No doubt this is because it is rare to find agreements altering the incidence of the present rule.¹⁰ Traditionally, contracts for sale are prepared by vendors who are naturally reluctant to accept gratuitously the risk of damage to the property after the date of the contract By analogy with settled principles governing the right to compensation for errors and misdescriptions in the contract, the following would seem to be the position if the property is at the vendors risk and is damaged between contract and completion.

• Where the damage is so substantial that the property is materially different from that which the purchaser contracted to buy, or (amounting to the same thing) the damage is so substantial that it could not reasonably be assumed that the purchaser would have entered into the contract to purchase the property in its damaged condition the vendor cannot enforce the contract against the purchaser. In this case, the purchaser may rescind (terminate) the contract and recover all moneys paid under it,¹¹ or (at the purchaser s option and subject to considerations of hardship to the vendor) proceed with the contract subject to an appropriate abatement (reduction) of the purchase price for the damage.¹²
• Where the damage is not so substantial as to fall within the first category, the vendor can usually enforce the contract against the purchaser subject to an appropriate abatement of the purchase price to compensate for the damage. Similarly, the purchaser is usually entitled to insist upon the vendor completing the contract subject to an abatement of the purchase price for the damage.

In either case, where compensation is given or sought the court may determine the most appropriate means of measuring compensation according to the circumstances of the case.¹³

2.7 These conclusions accord generally with the position reached by courts in a number of American States where the law is that the risk does not pass until completion or earlier possession by the purchaser.¹⁴ They are also similar to the statutory regime introduced into other American States by the Uniform Vendor and Purchaser Risk Act (paragraphs 3.41-3.42),and which applies subject to contrary agreement between the parties.

2.8 We inject a note of caution here. Given the absence of Anglo-Australian authority on the matter, it cannot be assumed that courts in this country necessarily would reach the same conclusions as in the United States. Nor can the analogy with principles governing compensation for error or misdescription be pushed too far. There is an important distinction between compensation for an error or misdescription, and compensation for damage to the property in the circumstances under consideration. When there is an error or misdescription in the contract compensation is awarded for a deficiency in the property which existed at the time the contract was entered into. Moreover, many of the cases turn on the specific wording of clauses in contracts for the sale of land. The problem with which we are concerned involves compensation for damage to the property occurring between contract and completion and for which the vendor is not responsible. To avoid doubt we later suggest that the introduction in New South Wales of a provision deferring the passing of risk until completion or earlier possession by the purchaser should be accompanied by a more detailed statement of the respective rights and obligations of both the vendor and purchaser in the event of damage to the property.

INSURANCE

Where the Risk has Passed to the Purchaser

The Purchaser

2.9 For reasons already given in the absence of agreement between the vendor and purchaser altering the normal incidence of the risk the prudent purchaser will take out insurance against damage to or destruction of the property as from the date of the contract. The purchaser has an insurable interest from the time of entry into the contract¹⁵ and in practice, solicitors in New South Wales advise purchasers of the need to insure. Almost certainly, a solicitor who neglects adequately to explain the dangers in failing to insure is guilty of professional negligence and liable to the client for any loss sustained.¹⁶

2.10 A purchaser to whom the risk has passed may insure for the full value of the property and may recover the full amount of the damage to the property.¹⁷ If the property is damaged, the purchaser s insurer is not entitled Lo delay payment until completion.¹⁸ However, the insurer may delay payment until the purchaser has established that the vendor has a good title, or the purchaser has agreed to accept such title as the vendor has. If the insurer pays the purchaser in respect of the damage but the contract does not proceed and the purchaser recovers any deposit paid, the insurer would presumably be entitled to recover the payment from the purchaser.¹⁹

The Vendor

2.11 Notwithstandingthattheriskpassestothepurchaseruponexchangeofcontractsthe vendor also has an insurable interest in the property. This is because the vendor retains rights in the property (such as the right to the rents and profits pending completion) which he or she is entitled to protect.²⁰ The vendor also faces the possibility that the contract may not proceed for some reason (such as the purchaser s insolvency), with the result that he or she is left with a damaged property of reduced value.²¹ The vendor may, and in practice does, retain the pre-existing insurance for the full value of the property.

2.12 If the property is damaged between contract and completion the vendor may recover from his or her insurer the full amount of the damage.²² The insurer cannot delay payment to the vendor until it is known whether or not the purchaser will complete.²³ But a contract of insurance is a contract of indemnity.²⁴ This means that if the purchase price has been paid to the vendor at the time of the vendor’s claim against the insurer (whether or not a formal conveyance or transfer has been executed), the insurer is not liable to pay under the Policy.²⁵ Similarly, the insurer is entitled to be subrogated to the vendor’ s rights against the purchaser, to the extent of the amount paid by the insurer. Thus, if the purchase price has not been paid at the time of the vendors claim against the insurer, but is subsequently paid to the vendor, the insurer may recover from the vendor the amount paid under the policy (to the extent that this can be satisfied out of the amount paid by the purchaser to the vendor). If the vendor declines to enforce the contract against the purchaser the insurer may do so.²⁶

“Double” Insurance

2.13 Since both the vendor and purchaser have insurable interests in the property even though the risk may have passed to the purchaser, each may insure for the full value of the property. This regularly occurs in practice, at least where the parties to the contract for sale are legally advised. Upon exchange of contracts, the purchaser takes out insurance for the full value of the improvements, and the vendor retains (and, if necessary, renews) the existing insurance until completion. The result is that two policies are current and two premiums are paid for the period between contract and completion.²⁷

2.14 Technically speaking, there is no “double insurance” in this period of overlap, because the respective insurable interests of the vendor and purchaser are separate and distinct; each is insuring a different interest in the property.²⁸ But the fact is that two premiums are being paid in respect of the one property. More significantly, however, the vendor’s insurer, although receiving a premium from the vendor, ultimately escapes liability under its policy when the purchaser completes the contract (as in practice he or she is obliged to do). As a result of the indemnity principle, it could be argued that the vendor’s insurance reaps a legal windfall From the insurer’s point of view it might be suggested that the “windfall” is actually reflected in reduced premiums, the benefit of which is passed on to insured persons.

Assignment of Policy

2.15 It might be asked why the vendor and purchaser cannot avoid the overlap of insurance simply by agreeing that the purchaser shall have the benefit of the vendor’s policy between contract and completion (perhaps in return for the purchaser reimbursing the vendor for an appropriate proportion of the premium). The reason is that a contract of insurance is personal to the insurer and insured, and any ported assignment by the vendor to the purchaser will be ineffective without the insurer’s consent.²⁹ In practice, purchasers do not seek consent to assignment of the vendor s insurance policy. The Law Society of New South Wales has made the following comments on the question of assignment of the vendors policy.³⁰

The vendor and purchaser may not wish to insure with the same insurer or take out the same extent or range of cover.

• The purchaser runs the risk of the insurer having a right to avoid the policy because of a material non-disclosure or misrepresentation by the vendor.
• The purchaser would need to be satisfied that a full disclosure of the terms of the policy has been made by the vendor.
• The purchaser may not be acceptable to the insurer and a mortgagee would be reluctant to advance funds until an assignment of the policy has been endorsed.

Joint Policy

2.16 The law does offer a means of overcoming the problem of double insurance, namely, a single policy covering the interests of both parties to the contract for sale. A party to the contract who takes out or renews, a policy between contract and completion may cover the interest of the other party as well as his or her own³¹ This procedure is not adopted in practice in New South Wales. The Law Society of New South Wales has pointed out to us some of the difficulties of joint policies ³²

• Where a joint policy is issued by the insurer on the basis of a proposal completed by both parties, each is dependent on the accuracy of information supplied by the other.
• The considerable number of attendances required by solicitors to effect such a policy would not justify the saving on double premiums. The Law Society estimates that for an average residential transaction where completion takes between five and seven weeks from the date of exchange of contracts, the additional insurance cost would usually not exceed $25.
• If the vendor directs that insurance be taken out with one particular company, after completion the purchaser may wish to change insurers. While there would be a refund of premiums on the cancelled policy, there would be no refund of stamp duty.
• The vendor and the purchaser may not necessarily wish to insure with the same insurer or take out the same extent or range of cover.

2.17 In England it appears that the insurance industry has voluntarily extended the vendors insurance cover to protect the purchaser in the interval between contract and completion. by the insertion into policies of a provision that an otherwise uninsured purchaser may upon completion claim against the vendor’s policy.³³ The provision takes the following form:

“If at the time of destruction or damage to any building hereby insured the Insured shall have contracted to sell his interest in such building and the purchase shall not have been but shall be thereafter completed, the purchaser on completion of the purchase, if and so far as the property is not otherwise insured by or on behalf of the purchaser against such destruction or damage, shall be entitled to the benefit of this Policy so far as it relates to such destruction or damage without prejudice to the rights and liabilities of the Insured or the Company under this Policy up to the date of completion.”³⁴

A purchaser cannot be sure that he or she will be able to take advantage of the vendor’s policy. For example, the italicised words would allow the insurer to avoid the policy if the vendor had given grounds for doing so. Nonetheless, the clause offers protection in many cases to uninsured purchasers. In New Zealand, some (but not all) insurers include a similar provision in their policies, although usually restricted to residential properties.³⁵ There is no legal impediment to insurers in New South Wales following this precedent, but to date they have not done so.³⁶

Vendor not Trustee of Policy

2.18 As we have seen, the general principle is that between contract and completion the vendor is a trustee of the property for the purchaser. ³⁷ But this trusteeship is a modified or “qualified” ³⁸ one only. Although it obliges the vendor to take reasonable care of the property for the purchaser, in the event of damage to the property between contract and completion it does not oblige the vendor to hold the proceeds of any claim on the insurance policy in -trust for the purchaser. ³⁹

Where the Risk does not Pass to the Purchaser

2.19 Although there is almost no direct judicial authority upon the matter we consider briefly the insurance aspects of an agreement express or implied, between the vendor and purchaser that the risk shall not pass until completion.

The Purchaser

2.20 It would seem that even where the risk does not pass until complete if the purchaser has an insurable interest. This arises because of the possibility that the vendor may be able to require the purchaser to complete if the damage is minor, and purchase something which, because of the damage, is worth less than that which the purchaser had contracted to buy. ⁴⁰ In addition, it is possible that the vendor will be unable to discharge mortgages or other encumbrances over the land with the reduced purchase price which will be available on completion. ⁴¹ In this situation the purchaser may be forced either to rescind the contract or to accept title subject to the encumbrances which the vendor cannot discharge. Whether purchasers would choose in practice to insure against Such possibilities is not clear, but there is little doubt that they hive an insurable interest.

The Vendor

2.21 Where the risk does not pass until completion, the vendor , of course retains an insurable interest until completion. The vendor, may, and doubtless would, insure for the full vale of the property until completion of the sale.

The Prospect of “Double” Insurance

2.22 It follows that where the risk does not pass until completion of the sale, both the vendor and purchaser have insurable interests in the property and both may insure for its full value (although the amount actually payable under the policy will vary according to the circumstances). It is clear that a properly advised vendor will continue his or her insurance beyond the date of the contract. If the purchaser also elects to take out insurance there will be two policies current for the period between contract and completion In other words, there would be the same “overlap” of premium as exists in practice where the risk passes on exchange of contracts.

SUMMARY

2.23 In this chapter we have examined two aspects of the present law governing conveyancing transactions in New South Wales relevant to the period between entry into a contract and completion. These are, respectively, the passing of risk between vendor and purchaser and the rights and obligations concerning insurance over the property.

2.24 In the absence of a contrary agreement between the vendor and purchaser, the risk of damage to, or destruction of, the property passes to the purchaser at the date of the contract. This means that the purchaser must bear the cost of any damage to, or diminution in the value of, the property occurring after that date and before completion where the vendor has not been at fault. There is nothing in principle to prevent the vendor and purchaser specifically agreeing that the risk remain with the vendor until completion or earlier entitlement to possession. If the property is to remain at the vendor s risk pending completion and it is substantially damaged during that period, it would seem that the vendor is not entitled to enforce the contract against the purchaser. Where the damage is not substantial it would seem that the vendor can require the purchaser to complete the transaction subject to an appropriate abatement of the purchase price to compensate for the damage.

2.25 Both the vendor and the purchaser have an insurable interest in the property between contract and completion. In practice, the result is that there are usually two policies current and two premiums paid for this period, although the amounts involved are generally modest. Both the vendor and the purchaser would still have an insurable interest even where the risk remains with the vendor until completion. Whether there would be “double insurances” during this period would depend on the willingness of purchasers to accept a right to rescind the contract or to receive an abatement of the purchase price in the event of damage, as a substitute for a separate insurance policy.

1. Lysaght v. Edwards (1876) 2 Ch.D. 499; Shaw v. Foster (1872) LR 5 HL 321.

2. Lysaght v. Edwards (1876) 2 Ch.1). 499, at p.507: Chang v. Registrar of Titles (1976) 137 C.L.R. 177, at p. 184, per Mason J.

3. See generally, Davioyda Estates Pty. Ltd. v. National Insurance Co. of New Zealand Ltd. (1965) 69 S.R (N.S.W.) 38 1: R. Stonhan Vendor and Purchaser (1964), pp.582-583.

4. Paine v. Meller (1801) 6 Ves.jun. 349; 31 E.R. 1088; Rayner v. Preston (1881) 18 Ch.D. 1; Ziel Nominees Pty.Ltd. v. V.A.C.C. Insurance Co. Ltd. (1975) 7 A.L.R 667.

5. Robertson v. Skelton(1849) 12 Beav. 260; 50 E.R. 1061 (part of property collapsing); Smith v. Hayles(1877) 3 V.LR (L) 237 (third party removing fixtures without vendors knowledge); Fletcher v. Manton (1940) 64 C.LR 31 (demolition order): Davjoyda Estates Pty. Ltd. v. National Insurance Co. of New Zealand Ltd. (1965) 69 S.R (NSW.) 381 (fire); Stenner v. Sterling Homes Northside Pty. Ltd. (1973) 3 D.C.R. (NSW) 72 (third party stealing fixtures); Fagan v. The Canterbury Waste Lands Board (1882) 1 NZLR (S.C.) 242(flood); Cass v. Rudele (1692) 2 Vern 280; 23 E.R.781 (earthquake); Poole v. Adams(1864) 33 L.J. Ch 639 (fire), Re Sweeny’s Estate (1890) 25 L.R. lr. 252 (acts of vandalism by persons unknown); Meriton Apartments Pty. Ltd. v. McLaurin & Tait (Developments)Pty.Ltd. (1976) 133 C.L.R. 671 (union green ban).On the vendor’s liability for deterioration caused by his tenant, see Jensen v. Jeffery [1957] NZLR 159.

6. This is implicit in many of the decisions on the passing of the risk: see eg. Fletcher v. Manton(1940) 64C. LR 37, at p.45, per Starke v Davjoyda Estates Pty. Ltd. v. National Insurance Co. of New Zealand Ltd. (1965) 69 S.R (NSW) 381, at pp.399-400, 407.

7. Fox v. Everingham, 30 November 1982, Supreme Court of the Northern Territory O’Leary J., citing Hudson’s Building and Engineering Contracts(10th ed., 1970), p.307. See also Appleby v. Myers (1867) L.R. 2 C.P. 651, at p.660. The Full Federal Court has reversed the judgment of O’Leary J. on other grounds: Fox v. Everingham (1983) 50 A.LR 337.

8. Strata Titles Act 1973, Part IV, Division 5.

9. Id., s.87.

10. One exception is the 1982 general conditions for the sale of land of the Real Estate Institute of Western Australia and the Law Society of Western Australia, both of which provide that the property is at the risk of the vendor until completion or until the purchaser is entitled to or is given possession, whichever is the earliest These provisions are discussed in Chapter 3.

11. This is the rule in Flight v. Booth (1834) 1 Bing N.C. 370: 131 F.R. 1160.

12. Drummoyne Municipal Council v. Beard [1970] 1 N.S.W.R.432 Rutherford v. Acton-Adams [1915] A.C. 866, at p.870.

13. I.C.F Spry, Equitable Remedies (2nd ed., 180), pp, 291-292.

14. See M.R. Friedman Contracts and Conveyances of Real Property (3rd ed., 1975), pp. 376-386, O.L Browder, RA Cunningham and J.R. Julin, Basic Property Law (2nd ed., 1973), pp. 1068-1089. The American States which adopt the rule that the risk remains with the vendor include Connecticut Maine, Montana, New Hampshire, Massachusetts, Oregon, Rhode Island and Washington There are some differences of approach amongst these States in matters of detail.

15. Ziel Nominees Pty. Ltd. v. V.ACC. Insurance Co. Ltd. (1975) 7 A.L.R. 667, at 1).669: Davioyda Estates Pty. Ltd. v. National Insurance Co of New Zealand Ltd. (1965) 69 S.R. (NSW.) 381.

16. Carly v. Farrelly [1975] 1 N.Z.LR. 356.

17. Reid v. Fitzgerald (1926) 48 W.N. (NSW) 25, at 1).26.

18. Presumably the insurer can delay payment until the purchaser establishes that the contract is specifically enforceable, although this is by no means clear.

19. D.I. Cassidy, “The Insurance of Land and Buildings the Subject of a Contract of Sale” (1971) 45 Australian Law Journal 30, at p.31.

20. Shaw v. Foster (1872) LP 5 H.L 321, at p.338; Lysaght v. Edwards (1876) 2 Ch. D. 499, at p.506: Buchanan v. Oliver Plumbing & Heating Ltd. (1959) 18 D.L.R. (2d) 575, at p.581.

21. Collingridge v. The Royal Exchange Assurance Corporation (1877) 3 Q.B.D. 173.

22. Ibid.

23. Ibid.

24. See, eg, British Traders’ Insurance Co. Ltd. v. Monson (1964) 111 CLR- 86; Castellain v. Preston (1883) 11 Q.B.D. 380, at p.386; Hirst v. The New Zealand Insurance Co. Ltd. [1981] V.R. 571.

25. Bank of New South Wales v. The North British and Mercantile Insurance Co. (1881) 2 LR. (NSW.) 239.

26. Castellain v. Preston (1883) 11 Q.B.D. 380; Kennedy v. Boolarra Butter Factory Pty. Ltd. [1953] VLR, 548: Chief Justice’s Law Reform Committee (Victoria), Report on Insurance of Real Property (1979), Appendix B; Committee of Inquiry into Conveyancing (Victoria), Further and Final Report (1980), pp. 11- 12.

27. The Insurance Council of Australia Ltd. was unable to provide detailed information as to the average period for which premiums actually overlap. In response to an inquiry undertaken by the Insurance Council N.RM.A. Insurance Ltd. stated that “the average period of double insurance would be the length of the conveyancing transaction between exchange and settlement which is approximately 8 weeks” (letter from N.R.M.A. Insurance Ltd. addressed to Mr. C.D. Henri, Regional Manager (NSW), Insurance Council of Australia Ltd., 10 January 1984). The same company stated that in fixing premiums generally no regard is had to an overlap of premiums as this is considered to be a rating factor. The company did note however that if there were no overlap of premiums the total premium pool would diminish and this might affect premium rates.

28. See, eg., The Western Australian Bank v. The Royal Insurance Co. (1908) 5 C.L.R. 5 Davioyda Estates Pty. Ltd. v. National Insurance Co. of New Zealand Ltd. (1965) 69 S.R. (NSW) 181, it pp.410, 417.

29. Bank of New South Wales v. North British and Mercantile Insurance Co. (1882) 3 L.R. (NSW) 60.

30. Letter from Mr. R.H. McGeoch, President, Law Society of New South Wales, 23 January 1984.

31. British Traders’ Insurance Co. Ltd. v. Monson (1964) 111 C.L.R. 86: Davjoyda Estates Pty.Ltd. v. National Insurance Co. of New Zealand Ltd. (1965) 69 S.R (NSW) 381, at 1).396: Castellain v. Preston (1888;) 11 Q.B.D. 389, at pp. 398-399.

32. Note 30 above. N.R.M.A. Insurance Ltd. has advised that while it will assign policies and does not consider this to be too complex a procedure, it is opposed to the issue of single policies covering the interests of both parties “as this would involve short-term policies and consequently high administrative costs in issuing the policies and keeping records” (note 27 above, p.2).

33. See E.J. Peverett “Shifting the Insurance Burden: Another View” (I 975) 125 New Law journal 217.

34. Id., at p.218.

35. See Report by the New Zealand Contracts and Commercial Law Reform Committee, Aspects of Insurance Law (2) (1983), pp.25-27.

36. N.RM.A. Insurance Ltd. has advised that it is not aware of the reasons why this precedent has not been followed in New South Wales. The company does state however the that it believes “most insurers are reluctant to insure persons who are unknown” (note 27 above, p.2).

37. See the authorities cited in note 1 above.

38. Rayner v. Preston (1881) 18 Ch.D. 1, at p.6, per Cotton LJ. See also Re Hamilton-Snowball’s Conveyance [1959] Ch.D 308; Re Lyne-Stephens and Scott-Miller’s Contract [1920] 1 Ch. 472.

39. Rayner v Preston (1881) 18 Ch.D. 1 Royal Insurance Co. Ltd. v. Mylius (1926) 38 C.L.R. 477, at p.490; Knezovic v. Yagmich [1979] 1 S.R. (WA) 75

40. Voyda Estates Pty. Ltd. v. National Insurance Co. of New Zealand Ltd. (1965) 69 S.R. (NSW) 381, at p.407.

41. Cassidy, note 19 above, at p.31.