The Property Law Section is aware that transactions are now being contemplated where properties affected by the severe weather events earlier this year are to be marketed for sale. In some cases, repairs have been completed by Toka Tū Ake EQC "EQC" and/or insurers, and in others there are EQC and/or private insurance claims outstanding. Vendors and Purchasers contemplating such transactions need to be very careful. Vendors need to consider what representations should be made to agents and purchasers, and they need to understand what rights they can and can’t assign. Purchasers need to consider the risk they are taking on, what they need to check during a due diligence phase, and what ongoing rights they should have assigned to them.

The PLS has produced templates for properties affected by the severe weather events:

- Further terms of sale for properties potentially affected

- Deed of assignment of EQC and insurance claims

The templates will need to be amended to suit your clients’ circumstances and are not intended to replace independent, tailored legal advice. Please read the following commentary, which serves as a warning around some of the uncertainty surrounding the use of deeds of assignment in agreements for the sale of land.

Assignment

If a client wants to sell their home before an insurance claim is settled, the New Zealand Insurance Council has advised they should speak with their case manager first to see if their claim can be settled quickly so that an assignment is not required.

The best approach is for vendors to repair the property before they sell. Following the severe weather events earlier this year, we acknowledge this is not always going to be possible due to the time it takes for insurers to fully assess properties, scope and cost projects, and then carry out the repairs with a scarcity of labour and materials.

EQC will accept the assignment of claims as of right, whereas private insurers often have clauses in their policies prohibiting the automatic assignment of claims, and they will instead make decisions on any requests for assignment on a case-by-case basis, and subject to the terms of the policy. It is easy for a claim to exceed the EQC cap (thus invoking private insurance) if, for example, foundation work is required to a property.

Agreement conditions

If a purchaser wishes to take over a vendor’s existing claims with EQC and/or a private insurer, then a clause will need to be inserted into the sale agreement making the agreement subject to the parties confirming such an assignment is possible within an agreed timeframe, and then agreeing to the terms of the assignment. In such cases, parties will have to consider and address any prior payments received by the vendor from the insurer and/or EQC which may not have been applied to the repair work that has been scoped.

There will be circumstances where properties are sold that have been repaired by vendors, and vendors may or may not have lodged claims and received proceeds. This may need to be addressed in the sale agreement. Even in the case of a repaired home, parties will need to consider whether

there should be an assignment of residual rights against EQC or insurers. This would give the ability for the new owner to re-open an existing claim with EQC if the original scope of works did not include all damage, or the repair work was incomplete.

Scenarios like this can create difficulties for a new owner if an EQC claim is re-opened, and the unscoped damage is accepted by EQC and leads to the claim exceeding the EQC cap. The new owner will receive a top-up payment from EQC to the level of the EQC cap, but will likely have no further recourse against the vendor’s insurer for the cost of damage above that amount unless they also happen to have an assignment of a claim with the insurer too. It is therefore imperative that purchasers of homes that have suffered damage get thorough prepurchase inspections from qualified building inspectors or surveyors , builders, drainlayers and/or engineers (as appropriate) to minimise their chances of suffering future loss.

Further on-sales

If a house is bought and then on-sold, it is important to ensure there is a continuous chain of any deeds of assignment so that any residual rights remain with the latest owner. A break in the chain of assignments when a home is on-sold will end the right of a later owner to make a claim if previously unscoped damage is later found.

The legacy issues from the Christchurch earthquakes show that such scenarios arise more commonly than one would expect, especially for potentially hidden damage to areas like foundations and drainage pipes.

These issues may well remain topical for some time. In Christchurch it is still common more than a decade later to be addressing these issues as previously damaged homes change hands. The subject matter dealt with in the PLS templates was discussed in more depth at our 5 April Property transactions in the aftermath of extreme weather webinar recording here.