Impact of Fires & Floods on Transactions in Escrow

by Sage Dillon on August 10, 2010


Firefighters in Smoke

Image courtesy of Flickr user Calc-tufa

AAR General Counsel Michelle Lind and Risk Management Specialist Jan Steward have put together an article on the impact of wildfires and floods on transactions in which AAR’s residential resale purchase contract has been executed, but escrow has not closed. Here’s an excerpt for your reading pleasure:

Can either party cancel the Contract if the property is completely destroyed by fire or flood?
Yes.  If the property is completely destroyed by fire or flood, either the seller or buyer may elect to cancel the Contract by written notice delivered to the escrow company. (See Contract, Section 8b, lines 316-319).

What happens if the property is only partially damaged by fire or flood?
Pursuant to the Contract, the seller “warrants that . . . at the earlier of possession or close of escrow, the Premises will be in substantially the same condition as on the date of Contract Acceptance.” (See Contract, Section 5a, lines 163-168). The Risk of Loss provision in the Contract allows for cancellation only if the cost to repair exceeds ten percent (10%) of the purchase price. Therefore, if the cost to repair is less than ten percent (10%) of the purchase price, the Seller is obligated to repair the damage.

What happens if the property is undamaged by the fire or flood but the surrounding area has been destroyed?
After expiration of the inspection period, if the property is undamaged by the fire or flood and is in substantially the same condition, the buyer is obligated to close escrow despite the damage to the surrounding area. However, if the damage to the surrounding area is adversely affected, the buyer may not be able to obtain financing resulting in a failed financing contingency.

If you have not checked out the collection of legal articles on AAROnline.com, you really should. (Note: Most legal articles are password protected and available only to members of the Arizona Association of REALTORS®.)

{ 3 comments… read them below or add one }

Linda Leebove August 10, 2010 at 5:30 pm

regarding the second question, if the property is under the 10%, however, cannot be completed prior to the agreed upon date of
possession or close of escrow~may the buyer cancel the sale?

Sage Dillon August 11, 2010 at 3:26 pm

We will add your inquiry to a list of general questions for a follow-up article. In the meantime, we suggest that you contact your manager or broker, who can contact the AAR Legal Hotline for guidance. Designated Brokers have access to the lawyers on the AAR Legal Hotline for these types of issues. The Hotline number is 1-800-533-9294 and the ID number is the NRDS Member number. (The Hotline is available Monday through Friday 9:30 to Noon – 2:00-4:30) For information regarding access to the AAR Legal Hotline, go to: http://www.aaronline.com/documents/hotline_access.pdf

Sage Dillon August 25, 2010 at 9:55 am

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