THE LAW REFORM COMMISSION

AN COIMISIÚN UM ATHCHÓIRIÚ AN DLÍ

(LRC 39–1991)

REPORT

ON

LAND LAW AND CONVEYANCING LAW:

(3) THE PASSING OF RISK FROM VENDOR TO PURCHASER

IRELAND

The Law Reform Commission Ardilaun Centre, 111 St Stephen's Green, Dublin 2

© Copyright The Law Reform Commission 1991

First Published December 1991

THE LAW REFORM COMMISSION

The Law Reform Commission was established by section 3 of the Law Reform Commission Act, 1975 on 20th October, 1975. It is an independent body consisting of a President and four other members appointed by the Government.

The Commissioners at present are:

The Hon Mr. Justice Ronan Keane, Judge of the High Court, President;

John F. Buckley, Esq., B.A., LL.B., Solicitor;

William R. Duncan, Esq., M.A., F.T.C.D., Barrister-at-Law, Associate Professor of Law, University of Dublin;

Ms. Maureen Gaffney. B.A., M.A., (Univ. of Chicago), Senior Psychologist, Eastern Health Board; Research Associate, University of Dublin;

Simon P. O'Leary, Esq., B.A., Barrister-at-Law.

The Commission's programme of law reform, prepared in consultation with the Attorney General, was approved by the Government and copies were laid before both House of the Oireachtas on 4th January, 1977. The Commission has formulated and submitted to the Taoiseach or the Attorney General thirty-eight Reports containing proposals for the reform of the law. It has also published eleven Working Papers, five Consultation Papers and Annual Reports. Details will be found on pp 28–31.

William Binchy, Esq., B.A., B.C.L., LL.M., Barrister-at-law, is Research Counsellor to the Commission.

Ms. Suzanne Egan, B.C.L., LL.M., Barrister-at-Law, Ms. Clíona Kimber, LL.B., LL.M., Ms. Julianne O'Leary, B.A., LL.B., Barrister-at-Law and Mr. Oisín Quinn, B.C.L., LL.M., are Research Assistants.

Further information from:

The Secretary,

The Law Reform Commission,

Ardilaun Centre,

111 St. Stephen's Green,

Dublin 2.

Telephone: 715699.

Fax No: 715316.

This Report was submitted on 20th December 1991 to the Attorney General, Mr. Harold A. Whelehan, S.C., under section 4(2)(c) of the Law Reform Commission Act, 1975. It embodies the results of an examination of and research in relation to the law relating to The Passing of Risk from Vendor to Purchaser which was carried out by the Commission at the request of the former Attorney General, Mr John Rogers, S.C., together with the proposals for reform which the Commission were requested to formulate.

While these proposals are being considered in the relevant Government Departments the Attorney General has requested the Commission to make them available to the public, in the form of this Report, at this stage so as to enable informed comments or suggestions to be made by persons or bodies with special knowledge of the subject.

CHAPTER 1

Introduction

1.

On the 6th March, 1987, the then Attorney General, in pursuance of section 4(2)(c) of the Law Reform Commission Act, 1975, requested the Commission to formulate proposals for the reform of the law in a number of areas. Among the topics was:

2.

The Commission recognised that a comprehensive review of land law and conveyancing law was not feasible within the limited resources available to them at the time, and accordingly established a Working Group which was asked to identify a number of areas in which reform of land law or conveyancing law could be brought about more easily. The Working Group was asked to concentrate on areas where it could recommend changes in the law which would remove anomalies or redundant provisions.

3.

The members of the Working Group appointed were Mr John F. Buckley, Commissioner (Convener), Miss Justice Mella Carroll, Professor J.C. Brady, Mr George Brady, SC, Ms Mary Laffoy, SC, Mr Ernest B. Farrell, Mr Rory McEntee, Solicitors. Miss Justice Carroll resigned from the Working Group in November 1988 following her appointment as a judge of the Court of the International Labour Organisation.

4.

The Commission has already published two reports in the areas of the land law and conveyancing law. The first contained General Proposals – LRC 30–1989, and second dealt with Enduring Powers of Attorney – LRC 31–1989.

5.

Ms Mary Laffoy, SC and Mr Rory McEntee resigned from the Working Group following the publication of the first two Reports and Ms Mary Geraldine Miller and Ms Deborah Wheeler, Barristers-at-Law, and Mr Patrick Fagan and Mr Tom O'Connor, Solicitors, joined the Working Group.

The Working Group has continued to concentrate on matters which occur in a significant number of conveyancing transactions which give

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rise to unreasonable delays in the completion of those transactions and it has also identified a number of aspects of statute law which are in need of reform.

6.

The Commission would like to record its deep appreciation of the contribution which the members of the Working Group have made to the Commission's examination of this difficult and technical area of the law. Their knowledge and experience were invaluable in enabling the Commission to formulate practical proposals for alterations in the law. As usual, however, the Commission emphasises that it alone is responsible for the contents of this Report.

7.

The position of parties in the intermediate stage in the conveyancing process between contract and completion has given rise to considerable controversy in Ireland. This controversy not only manifests itself in the area of the passing of risk between contract and completion, but also, for example, in that of the registration of judgment mortgages against the vendor's estate during this period.

8.

In view of the considerable complexities in this area, together with the comparative materials which need to be referred to, the Commission decided to publish a separate Report on the area of the Passing of Risk from Vendor to Purchaser.

CHAPTER 2: THE PRESENT LAW

2.1

There is a general equitable principle that where there is a contract for the sale of land, the vendor is usually regarded as holding the property on trust for the purchaser.¹ The trust has sometimes been called a constructive trust, as it arises without any intention on the part of the parties.² The exact nature of the trust is, however, as yet unclear – both in this jurisdiction and in Britain.³ The issue which causes the greatest disagreement would appear to be the question of when the beneficial interest in the land is to be regarded as passing to the purchaser and from the vendor. One view is that the vendor becomes a trustee of the legal estate and the purchaser becomes the owner of the beneficial interest as soon as the contract for sale is entered into.⁴ This view is subject to the qualification that the contract must be one of which a court would grant specific performance.⁵ There is, however, also authority for the opinion that the crucial fact is not the signing of the contract, but rather the payment of the purchase money by the purchaser.⁶ Under the latter theory, the purchaser does not acquire the entire beneficial interest in the land until he has paid the whole of the purchase money to the vendor, and accordingly, the vendor is a trustee for him only to the extent to which he has paid part.

The Passing of Risk

2.2

The general rule is that the purchaser is entitled to any gains which accrue in relation to the property between contract and completion.⁷ If for example, the value of the property increases during this period, it is the

purchaser who benefits. The corollary of this rule is that he also suffers the losses,⁸ subject to the vendor's duty to maintain the property so long as he retains possession.⁹ It is the purchaser, therefore, who bears the loss or damage caused to the property by such things as fire, flood or storm and other elements which are beyond his control.

Standard Conditions of Sale attempt to ameliorate the purchaser's position. Condition 43 of the Incorporated Law Society's General Conditions of Sale (1988 Ed.) provides that the vendor shall be liable for any loss or damage howsoever occasioned to the subject property between the date of sale and the actual completion of the sale. The condition limits the amount of such liability to the sale price. Condition 44 introduces qualifications to the general principle, namely that the liability shall not apply to inconsequential damage from reasonable wear and tear in the course of normal occupation and use or to damage occasioned by operations reasonably undertaken by the vendor in vacating the property (provided the same are undertaken with reasonable care).¹⁰

Condition 45 provides that nothing in Conditions 43 and 44 shall affect, inter alia, the purchaser's right to specific performance, the operation of the doctrine of conversion, the rights and liabilities of parties other than the vendor and the purchaser, the rights and liabilities of the purchaser on foot of any lease subsisting at the date of sale, the purchaser's right to effect, on or after the date of sale, his own insurance in respect of the property, or the purchaser's right to gains accruing to the subject property after the date of sale.¹¹

While we applaud the general thrust of these provisions and the principle behind them, we realise that not all sales of land are governed by the Law Society's Contract and we would in any event question the efficacy of dealing with this problem by contractual provisions alone.

2.3

It is beyond doubt, therefore, that at common law the purchaser bears the loss or damage caused to the property from the date of the contract by such things as fire, flood, storm and tempest. Various commentators have suggested ways of getting around this doctrine¹² and a recent English decision suggests that the doctrine of frustration may apply to contracts for the sale of land, albeit in very limited circumstances.¹³ Frustration is where an act occurs which is the fault of neither party to a contract and the effect of that act is to deprive one of the parties of substantially the whole benefit which it was the intention of the parties that he should derive from the contract.

It would appear, however, that the principle that the purchaser bears the loss or damage still applies with undiluted force in Ireland.¹⁴ The result of this principle is that a purchaser must take out insurance to cover the property from the date of the contract,¹⁵ and must be advised to do so by his solicitor.¹⁶ Even when the purchaser does take out his own policy this is not free from problems; generally a purchaser can succeed in obtaining fire cover only for the premises.¹⁷

2.4

It is clear that it is inadvisable to rely on the existing insurance policy of the vendor, for a number of reasons:

It appears that in most cases a purchaser takes out his own insurance cover

from the date of the contract regardless of what existing cover the vendor has.²⁶ It has been pointed out above that the type of cover available is, however, extremely limited and usually extends to fire cover only.

2.5

Arranging for the vendor's policy to be endorsed in favour of the purchaser is also possible, but this causes obvious practical problems among which would be, for example, establishing the type of policy the vendor has,²⁷ with which company, together with the need for the consent of the company, etc. in most instances. There is also the question of the amount of premium that the purchaser would be required to pay upon such endorsement. We believe that endorsement is, in any event, rather unusual. Many insurance policies for buildings of a private dwelling house contain a clause along the following lines:

The Irish Insurance Federation says that a similar clause appears in some, but not all policies of insurance on commercial property. It is also clear that if the purchaser insures his interest himself (which, as has been mentioned, is usually the case) the extension of the vendor's policy will not operate to indemnify him. There is also the possibility that the vendor may allow the policy to lapse anyway, not to mention the difficulty of establishing if the policy contains such a clause at all.²⁹

2.6

As regards the purchaser taking out his own insurance, this does take time: if only from the point of view of valuations. If, for example, a purchaser brought a house at an auction at 2pm (the knocking down of a bid being the acceptance for contractual purposes³⁰) and the house was burnt down at 5pm before he had arranged appropriate cover, he would have to purchase the charred ruin and would receive no insurance money. We are aware that some firms of solicitors have a general policy which would cover this situation – i.e. where due to inadvertence the premises had not been insured immediately after the purchase.

CHAPTER 3: THE PROBLEM/THE CASE FOR REFORM

3.1

Many commentators regard the present law as highly unsatisfactory,³¹ as do several Law Reform Commissions and other Committees that have examined the area.³² A number of areas of difficulty have been identified:

CHAPTER 4: OTHER JURISDICTIONS AND THEIR PROPOSALS FOR REFORM

(i) Northern Ireland

A. The Law

4.1

The law in Northern Ireland is the same as that in the Republic.⁴¹

B. Proposals for Reform

4.2

The Survey of the Land Law of Northern Ireland recommended that where a vendor recovers money under an insurance policy maintained by him he should on completion of the contract account for it to the purchaser.⁴² Since insurers might argue that they are not liable because the risk had passed to the purchaser, they recommended that provision should be made that the money does not cease to become payable to the vendor merely because the risk has passed to the purchaser, so that if the purchaser had paid the vendor, and the vendor had not claimed from the insurers, the purchaser would be entitled by subrogation to sue the insurers. The vendor, if unwilling to sue, would be joined as defendant. This would be subject to any stipulation to the contrary in the contract of sale or policy of insurance.⁴³

(ii) England and Wales

A. The Law

4.3

The Common law rule that immediately the contract is binding the property is at the risk of the purchaser also applies in England and Wales. There are, however, two statutes which modify the rule.

1. Section 83 of the Fire Prevention (Metropolis) Act 1774⁴⁴ provides that

if a vendor has insured a building which is damaged or destroyed by fire before completion, the purchaser, as a person interested, can require the insurance company to lay out the insurance money towards reinstating the building in question. This possibility is generally considered to be “under a cloud”⁴⁵ by conveyancers and it has been suggested that reliance should not be placed on it.⁴⁶

2. Section 47 of the Law of Property Act 1925 enables the purchaser to take the benefit of the vendor's insurance even if there is no express assignment of it.

Section 47 states:

Some commentators have argued that under (c) payment by the purchaser is a condition precedent to taking the benefit of section 47.⁴⁸ In practice this would involve difficulties of calculation and would raise the unclear question of whether it is the vendor or his insurers who should receive payment. In addition, to obtain the benefit of section 47, the consent of the insurers is required, but most policies contain terms indicating the consent of the company. The same difficulties about ascertaining the requisite information about a vendor's policy would apply here.

4.4

It has been recommended practice in England for a purchaser to insure immediately on entering the contract.⁴⁹ Emmet on Title⁵⁰ states that most companies include in policies of fire insurance a term that if at the time of the damage the insured has contracted to sell his interest, the purchaser on completion shall be entitled to the benefit of the policy. This type of term could also be seen as a consent of the insurers for the purposes of section

47 above, and so the purchaser would obtain the benefit of any sums payable.

4.5

The publication of Standard Conditions of Sale in March 1990 has introduced a significant change in conveyancing practice regarding the passing of risk. This single set of conditions replaces the two pre-existing sets of conditions-the Law Society's General Conditions of Sale and the National Conditions of Sale. The general consensus is that in respect of these latter two sets of conditions the situation was not entirely satisfactory⁵¹ and the purchaser was always advised to arrange his own insurance.

On the issue of the passing of risk, the Standard Conditions of Sale provide:

The impact of this change should prove to be very significant, although clearly the situation at law remains in an unsatisfactory state. The Law Commission has expressed the following prediction:

B. Proposals for Reform

1. Second Report of the Conveyancing Committee⁵³

4.6

The Committee suggests that the solution to the problem lies in the alteration of the general rule so that the risk of damage to the property should not pass from the vendor to the purchaser until actual completion. The rule could be made subject to any contrary agreement between the parties for example when the purchaser is permitted to take possession before completion. This solution, the Committee argues, would certainly reduce the expenses arising out of domestic conveyancing.

2. The Law Commission

4.7

In August 1988, the Law Commission published a Working Paper⁵⁴ in which the rule regarding the passing of risk was examined and a provisional conclusion reached that the present state of the law is unsatisfactory. One solution that the Commission envisaged would be to allow the purchaser to benefit automatically from the vendor's insurance policy. The Working Paper acknowledges, however, that that would not be a comprehensive solution and considers four possible reforms:

4.8

In its Report on the subject, published in April 1990, the Law Commission reached the following conclusion:

In light of the recent publication of the Standard Conditions of Sale, the Commission is of the view that the practical effect of any legislation altering

the existing rule would be extremely limited and therefore does not consider it appropriate to recommend any legislative change at the present time.⁵⁶ Any such change would merely duplicate the Standard Conditions, use of which, the Commission anticipates, will be widespread. The continued application of the present rule and its defects will therefore be limited to a small minority of cases.

(iii) Scotland

A. The Law

4.9

Under the present law, the risk of damage to or destruction of land passes from the seller to the purchaser once the contract for sale is 'perfect'.⁵⁷ In certain cases, the risk does not pass to the purchaser on conclusion of a binding contract. These are (1) where the contract so provides and (2) where the damage or destruction is attributable to the seller's fault.⁵⁸ It also appears that the risk does not pass where the damage or destruction occurs at a time when the seller has wrongfully prevented the purchaser from taking entry.⁵⁹

B. Proposals for Reform

4.10

Following the publication of a Discussion Paper in March 1989,⁶⁰ the Scottish Law Commission issued a Report on the Passing of Risk in Contracts for the Sale of Heritable Property in October 1990.⁶¹ The basic recommendation of the Commission is to the effect that:

The Commission further recommends that risk should pass to the purchaser on the date of entry agreed under the contract in two special cases: (a) Where the purchaser is already in occupation of the property and (b) where the puchaser does not actually take possession (i.e. where the purchaser is without vacant possession).⁶³ Where there is no agreement as to such date, the risk should pass on the date of settlement of the transaction, unless it has

already passed to the purchaser by virtue of his taking possession without the seller's consent.⁶⁴ Finally, where the purchaser becomes owner of the property before the date when risk would pass under these recommended rules, the risk of damage to or destruction of that property should pass to the purchaser when he becomes owner of the property.⁶⁵

(iv) Australia – Reforms Effected and Proposed⁶⁶

– Queensland

4.11

The Property Law Act 1974 was enacted as a result of recommendations of the Queensland Law Reform Commission.⁶⁷ The legislation⁶⁸ in effect adopts section 47 of the English Act subject to providing specifically that the vendor's insurer will still be liable even though the risk has passed to the purchaser,⁶⁹ and further, that the consent of the vendor's insurer is not required. Section 64 of the Act gives the purchaser a right of rescission where a dwelling house is so destroyed or damaged between contract and completion or possession (which ever earlier occurs) as to be unfit for occupation as a dwelling house.

The Tasmanian Law Reform Commission recommends that a section similar to section 63 of the Queensland Act 1974 should be adopted there.⁷⁰

– Victoria

4.12

Following two slightly conflicting Reports⁷¹ the Sale of Land (Amendment) Act 1982 was passed. That Act introduces a right to rescind similar to that contained in the Queensland legislation. It also provides that where the vendor has an insurance policy the benefit of it shall enure for the benefit of the purchaser between contract and possession, and any money that becomes payable under the insurance policy shall on completion be held or recoverable by the vendor on behalf of the purchaser and paid by the vendor to the purchaser on completion or as soon as the money is received by the vendor (whichever is later). The legislation also gives the vendor the option of restoring the premises in which case the purchaser may not rely on the above provisions.

– New South Wales

4.13

The Conveyancing (Passing of Risk) Amendment Act 1986 was enacted

following the recommendations of the New South Wales Law Reform Commission.⁷² This Act is intended to ensure that the purchaser need not insure the property at the date of contract. It does so by preventing the passing of risk until completion or, if the parties agree, the time that possession is taken. Where the land is substantially damaged after contract and before the risk has passed to the purchaser, he may by notice rescind the contract and recover money already paid. Where the property is damaged, but not substantially damaged, the purchase money is to be reduced “by such amount as is just and equitable in the circumstances”. The Act cannot be excluded or limited by contract in the case of dwelling houses but can be in the case of other properties.

(v) United States of America

4.14

The courts in the majority of States have adopted the rule that the risk passes to the purchaser upon entry into a binding contract,⁷³ although the purchaser is usually able to claim the benefit of the vendor's insurance.

A number of States have adopted the Uniform Vendor and Purchaser Risk Act. Liability for loss under the Act is governed by the passing of title or possession. So long as legal title and possession remain with the vendor, the vendor cannot enforce the contract if all or a material part of the property is destroyed. Once legal title or possession has been transferred to the purchaser, the purchaser must pay the full price regardless of the extent of the damage. In practical terms, the Act reverses the common law rule about the passing of risk, though the presumption may be reversed by express agreement between the parties. The Act does not purport to interfere with or regulate the liability of insurers.

CHAPTER 5: THE COMMISSION'S PROPOSALS FOR REFORM

5.1

It can be seen that under the present law the person most likely to suffer is the purchaser of land. For the reasons outlined above,⁷⁴ the Commission has considered a number of possible reforms, the major ones being:

5.2

We are of the opinion that it is not sufficient to deal with this issue solely in the standard conditions of sale, as this gives rise to uncertainty and also allows parties to contract out of these provisions, particularly a vendor in auction or tender conditions.

We are conscious of the danger of tinkering with one aspect of the extremely complex relationship of vendor and purchaser between contract and completion as this may unwittingly cause undesirable consequences on other

aspects of the relationship.

We are not convinced that an insurance-linked solution will provide a solution that would be generally satisfactory. We are, however, encouraged by the fact that a number of common law Law Reform Commissions have thought it necessary to reform the law in this area.⁷⁶

5.3

Our principal conclusion is that the risk of damage should remain with the vendor until completion unless the purchaser has gone into possession of the property prior to completion.

5.4

Where damage occurs before the risk has passed to the purchaser, then if the damage is substantial, a purchaser should have the right either to rescind the contract or to require completion of the contract on the basis of an abatement of the purchase price to cover the reduction in value resulting from such damage.

When damage has occurred prior to the risk passing to the purchaser, the vendor should be obliged to serve a notice on the purchaser specifying the damage which has occurred and indicating that the vendor believes it to be substantial and requiring the purchaser to say whether the purchaser proposes to rescind the contract or to complete with abatement of the purchase price. The purchaser should be given 10 days to respond to this notice and if he does not respond the purchaser should be deemed to have lost his right to rescind.

If there is a dispute as to whether the damage is substantial or non-substantial this issue should be decided by arbitration which would be binding on both parties.

If the transaction proceeds to completion, the vendor should be entitled on completion to receive interest from the purchaser to cover the period from the completion date fixed by the contract or the date on which the damage has occurred (whichever should be the later) to the date of actual closing at a rate to be equivalent to the last long-dated Government security.

If the damage is not substantial, whether this is agreed by the purchaser or determined on arbitration, the vendor is entitled to enforce completion of the purchase, subject to the purchaser receiving damages to compensate for the reduction in value of the premises consequential on damage. An obligation should be placed on the purchaser to pay interest for the same period as stated above. The rate of interest to be paid by the purchaser should depend on whether the purchaser admits the damage to be non-substantial or contended that the damage was substantial. In the event that the purchaser contended that the damage was substantial and it was subsequently either agreed by the purchaser or determined on arbitration that it was not substantial, the interest to be paid by him shall be at a rate which shall be 4% per annum over the lower rate.

If there is disagreement on the level of compensation which the purchaser should receive, whether the damage is substantial or non-substantial, the amount of compensation should be determined by arbitration.

We do not anticipate any difficulties about the recommended procedure in

respect of substantial damage because of the purchasers entitlement to rescind which would significantly strengthen his negotiating position. But there does exist a problem which we have not been able to solve in relation to non-substantial damage. Ideally, the contract should proceed to completion in the case of non-substantial damage, but it may be unreasonable to require the parties to complete in the absence of agreement between them on the level of compensation for the damage. If the amount of the damages cannot be readily calculated, so that it could be deducted from the purchase money on completion, and has to be determined by arbitration, it would be unfair to one or other of the parties to make completion compulsory. If the purchaser were to be required to pay all of the purchase money on the basis that repayment would be made by the vendor the vendor might not be able to offer the purchaser any security for the repayment. Equally, even if a retention is agreed and the purchaser only pays the balance of the purchase money, the vendor may not have any satisfactory security for the payment of the balance. The vendor will, of course, have a lien for unpaid purchase money but in the great majority of cases purchasers will be borrowing money from a lending institution to complete the purchase and that lending institution will require a first legal mortgage over the property, thereby postponing any lien for unpaid purchase money to being at best a second charge. Accordingly, we are unable to do more than express the view that the parties should endeavour to arrange to complete the purchase on the basis of an estimate of the likely amount of the damage.

There is one special situation which we believe requires separate treatment and that is where a purchaser is in delay in completing and the vendor has already served a valid notice requiring the purchaser to complete before the damage occurred. In such circumstances where the damage is non substantial, we recommend that the vendor should be entitled to interest on the entire of the purchase money, 7 days from a date after the service of the completion notice to the date of actual completion, the purchaser continuing to be entitled to an abatement of the purchase money in respect of the damage. We do not make any special recommendation in respect of the situation where the damage caused is substantial and occurs after a valid completion notice has been served because the purchaser should still have a right to rescind and completion by the purchaser is likely to be based on terms negotiated between the parties.

5.5

The vendor should not be liable for nor the purchaser entitled to abatement for damages for inconsequential damage or insubstantial deterioration from reasonable wear and tear in the course of normal occupation and use of the premises or from operation to vacate the premises undertaken with reasonable care and not materially affecting value.

It is suggested that arbitrations should be conducted by an arbitrator, who, in default of agreement, would be appointed by the President of the Incorporated Law Society.

5.6

The parties should not be permitted to contract out of the proposed legislation in transactions concerning residential accommodation of which vacant possession is to be given.

Recommendation

5.7

We have considered all of the various possibilities for reform and recommended the following:

A. A statutory provision should be enacted to provide that: