Our region’s weather can be challenging, especially during the winter. And it is not just snow and wind that can damage property. As we saw last week, large fires on Cole Street outside Lima and in the village of Continental’s downtown can be especially dangerous when the weather is cold.
With heightened risks of loss comes the question of who bears the risk of loss if real estate is “under contract” but not “closed.”
For example, let us presume that a buyer signs a purchase agreement with a seller for the purchase of a house and outbuildings. Once the purchase agreement is signed, the buyer finalizes the buyer’s loan application with the lender, may conduct various inspections of the property and empowers the lender to conduct appraisals and title examinations (searches) of the property.
That time period between when the purchase agreement is signed and the closing (when the seller gives the deed and the buyer gives the money) is called due diligence.
During due diligence, the buyer and seller have agreed to the terms of the deal and are only awaiting final, administrative matters to fall into place.
During due diligence, the seller has “legal title” to the property, and the buyer has “equitable title” also known as “fair title” to the property.
During due diligence, if the property is found to be worth more money or the property gets damaged, the purchase price does not change.
Thus, after a purchase contract is signed but before the closing, if the property burns down or fails structurally due to snow loads or wind, the buyer still must pay the full purchase price for the property at closing.
The logical outcome of this legal risk is that buyers try to purchase insurance for the property as soon as the purchase agreement is signed. This can be challenging, because many insurance companies will only insure property after the insurance company has at least visited or walked through the property.
To address this quirky circumstance of needing insurance but not necessarily being able to get insurance, purchase agreements will often either require the seller to keep the property insured during the due diligence period or allow the buyer to back out if there is a near-complete loss/damage of the property during the due diligence period. These adjustments in the purchase agreement can be quite effective in most circumstances.
However, a few years ago, a client of mine faced a loss when a building my client purchased on a sheriff’s sale collapsed before the closing. In sheriff’s sales, the seller of the property is the sheriff on behalf of an uninsured property owner. To add to the challenge, for sheriff’s sales, there is almost never a chance to inspect the property in advance or during due diligence.
Therefore, it is crucial in sheriff’s sales of property that the buyer works with the buyer’s insurance company to try to find some way to insure the property during due diligence until the closing.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at [email protected] or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.
