When California real estate is bought or sold, there is always a period of time between signing the purchase and sale contract, and when the title is transferred. With commercial properties the period could last for months, as the buyer completes their due diligence. But what happens if the building burns down in the interim? Does the buyer still pay full price? Is the contract cancelled? When it comes to allocation of this risk, The more detailed the sale contract, the better. Residential purchase agreements rarely provide for this issue, and rely on the California Civil Code. Commercial Sale agreements often contain provisions that covers the topic, and some in great detail. parties concerned about this issue should consult with a Sacramento and El Dorado real estate attorney to ensure that they are protected, as there are can be some surprises for both buyers and sellers.
The Civil Code
California Civil Code §1662 (the Uniform Vendor and Purchaser Risk Act, or “UVPA”) provides that in sale contracts;
a) if neither title nor possession has been transferred, and a material part of the property is destroyed, the seller cannot enforce the contract, and the buyer gets a refund.
b) if either possession or title is transferred, the risk is on the buyer, and the contract is enforced to require full payment. The problem here is, what is material? That may become an area of dispute that prohibits easy resolution.
Many commercial purchase and sale contracts go the extra distance to define what “material” means. They do it in two ways:
1) Cost of Repair – this specifies that, if cost to repair exceeds a specified amount, than a material part of the property has been destroyed. If there are any aspects of the property that the buyer intends not to use or to demolish, such as an unattached garage or outbuilding, these should be excluded in calculating the cost to repair.
2) Diminution in Value -this is less desirable, as it would require appraisal, an expensive and time consuming affair.
Enforcement at a Reduced Price?
Civil Code §1662 subdivision (a), described above, does not state that the seller may terminate the contract; only that they cannot enforce it. It allows the Buyer to enforce it (“specific enforcement”). A 1983 court decision found that a buyer could not require enforcement of the contract with a reduction in the purchase price. In Dixon v. Salvation Army, Dixon was buying property with two buildings. Before possession or title passed to the Dixon, one of the buildings burned down. Dixon sued, seeking to enforce the contract at a reduced price to reflect that he was getting only one building.
The court noted that subdivision (a) of 1662 applied, and the seller had the risk of loss. The seller could not enforce the contract., and the buyer could rescind. However, the statute did not say whether the buyer could enforce the contract at a reduced purchase price.
The court found that the equitable approach would be “to place the parties in their original position, free to make a new bargain. A rule that denies a vendor the ability to specifically enforce the sales agreement where the material part of the consideration is lost or destroyed calls out for the converse also to be applied. It would be grossly unfair to require either party to accept consideration less than the whole of what was bargained for under these circumstances.”
Thus, the court ruled against the buyer, and did not order the sale at a reduced price. I think the court took the wrong approach to achieve the right result. The UVPA, by allowing the buyer to enforce, but being silent on a reduction, as a matter of statutory interpretation means that the buyer can enforce only the existing terms, without any change to the contract.