Section 18.1 Insurance Termination: What to Do When a Property Suffers Damage Before Closing
Are you a buyer or seller in Colorado who has executed a Contract to Buy or Sell Real Estate? It’s an exciting time for either party and the sale may feel like a done deal at signing, but unfortunately issues can arise between signing the Contract and closing on the property. This Blog discusses Section 18.1 of the Contract, which outlines specific steps that must be taken by both buyer and seller in the event of damage to the property and a consequent insurance claim.
What happens if there has been damage to the property before closing?
Damage can occur to a property in a number of ways, including fire, flood, and numerous other causes of loss. If you are a seller that has made an insurance claim on this damage, Section 18.1 of the Contract describes steps that you then must take to ensure adequate repairs. If the damage to the property is less than or equal to ten percent of the purchase price, you as the seller will be held responsible for making reasonable steps to repair the damage using insurance proceeds. It does not matter if the damage occurred after the Contract signing. If the damage occurs before the closing, it will be your responsibility.
What type of damage does not fall under Section 18.1?
As the Contract states itself, damage from normal, ordinary wear and tear is explicitly excluded from Section 18.1. In other words, the condition must be something that affects the property in a way that makes it unfit or unsafe to reside in. If no significant, claimable, or extreme damage has occurred before closing, then the seller has no duty to disclose, nor do they have to make an insurance claim.
What if the seller fails to make reasonable repairs to the property?
If you’re a buyer and the seller has not made “reasonable” repairs to the property, you have the right to terminate the Contract per Section 18.1. You can also terminate the Contract if the cost of repairs is greater than ten percent of the property’s purchase price. To terminate, you must provide written notice to the seller within the timeframes specified by the Contract. If you do not provide proper notification, you cannot terminate the Contract.
Sellers do not have any right to terminate under Section 18.1.
What if the damage is greater than ten percent of the purchase price but I want to proceed anyway?
If the cost of repairs is greater than ten percent of the purchase price, the buyer has the option to terminate the Contract as mentioned previously. If the damage is greater than ten percent of the purchase price or the seller does not make reasonable repairs to the property, you may still elect to keep the contract and not terminate. Even though there may be damage, some buyers may still not want to terminate the Contract. If it’s your dream home, maybe you’re willing to make it work. If that’s that case, you do have options here. The seller is required to give the buyer a credit at closing for the insurance claim to repair the damages, plus the deductible provided for in the insurance policy. If the insurance does not pay for the total cost of repair, that is the buyer’s risk, and you will be responsible for paying the remaining amount out-of-pocket.
What if repairs cannot be made in time for closing?
Sometimes it is impossible for the seller to make the appropriate repairs in time for closing. Have no fear sellers! Section 18.1 provides for circumstances that may be out of your control. One example is if you do not receive the insurance proceeds before the closing date. In that case, you can get together with the buyer and agree to extend the closing date to ensure that the property is repaired prior to closing.
If you’re a buyer, you may have specific deadlines and need to be in the home as soon as possible, or you just want to get into your new home! In that case, you can elect to keep the closing date the same and pursue other options to ensure repairs. First, you can have the seller assign the right to the insurance proceeds to you at closing, so long as it is acceptable to the seller’s insurance company and your lender. Second, you can work with the seller and attorneys to enter into a written agreement requiring the seller to escrow at closing from the seller’s sale proceeds the amount the seller has received and will receive due to the damage, plus the amount of any deductible that applies to the insurance claim. This amount is not to exceed the property’s purchase price.
Regardless of what your issues regarding property damage and insurance claims may be, GLO has extensive experience working with both buyers and sellers in the event of a Section 18.1 issue. If you do find yourself dealing with property damage leading up to closing, please fill out an interest form here if you are interested in a consultation.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.