Damage by Fire Prior to closing (Ontario)

Question:

If you bought a house today, closing in September, but it burnt down in August… Do you still have to close the deal?

Answer:

There are several issues which are significant. This has to be “substantial” damage. The loss of a building may or may not be. In fact, it might even improve the land value. There may or may not be an actual insurance policy. Next step is that there really must be a “payout”. The reference to “substantial” is in the context of the payment of the insurance proceeds. There may not be any payment at all. That’s an insurance issue. Clause 14 deals with Insurance not the Changing Condition of the Premises. The clauses in other jurisdictions on this point usually add clarity. The Buyer can’t collect and must close if he caused or contributed to the fire or the damage. This is often the case with a Tenant and contamination.

The Mortgage on the property likely provides that the insurance proceeds must be paid to the Mortgagee to reduce the principal of the mortgage, should the Mortgagee choose to exercise that right.

Here’s the provision in the standard agreement for review:

“14. INSURANCE:

All buildings on the property and all other things being purchased shall be and remain until completion at the risk of Seller.

Pending completion, Seller shall hold all insurance policies, if any, and the proceeds thereof in trust for the parties as their interests may appear and in the event of substantial damage,

Buyer may either terminate this Agreement and have all monies paid returned without interest or deduction or else take the proceeds of any insurance and complete the purchase.

No insurance shall be transferred on completion. If Seller is taking back a Charge/ Mortgage, or Buyer is assuming a Charge/Mortgage, Buyer shall supply Seller with reasonable evidence of adequate insurance to protect Seller’s or other mortgagee’s interest on completion.”

Brian Madigan LL.B., Broker

www.OnmtarioRealEstateSource.com

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