Where risk passes to the buyer on exchange of contracts, he would be well advised to insure the property from exchange, since otherwise he will have to fund any accidental damage to the property out of his own pocket, subject to:

• Section 47 of the Law of Property Act 1925, which states that where, after exchange, money becomes payable under any policy of insurance maintained by the seller in respect of damage to the property which he has contracted to sell, that money shall be paid to the buyer at completion (or on receipt of the same by the seller, if later) – note that both the Standard Conditions of Sale (Condition 5.1.4) and the Standard Commercial Property Conditions (Condition 7.1.5) exclude Section 47, and that it is subject to any consent of the insurers which may be required and also subject to payment by the buyer of the proportionate part of the insurance premium from exchange;
• the seller’s duty to take reasonable care of the property between exchange and completion .

However, the seller would also be well advised to maintain his insurance of the property between exchange and completion, in case the buyer defaults on his purchase, and the seller is left with a damaged property and no buyer. Accordingly, it is not unusual for both parties to insure the property between exchange and completion, which may give rise to difficulties if the property is damaged or destroyed by an insured risk between exchange and completion, since each insurer will only pay out to each party half the amount insured.

The Standard Conditions of Sale

The Standard Conditions of Sale provide for the seller to retain the risk until completion, imposing an obligation on the seller to transfer the property in the same physical state as it was in at exchange of contracts. If at any time before completion, however, the physical state of the property makes it unusable for its purpose at the date of the contract, the buyer has the right to rescind the contract. The seller may also rescind the contract where the damage is caused by a risk against which he was reasonably unable to insure or where he is not legally able to make good the damage. The seller is not, however, obliged to insure the property (although clearly he will be in considerable difficulties if he fails to insure, the property is damaged and the buyer does not choose to exercise his right of rescission).

The Standard Commercial Property Conditions

The Standard Commercial Property Conditions provide for two alternatives (Condition 7):

• the first alternative (Conditions 7.1.1, 7.1.2 and 7.1.3) deals with the situation where the seller is under an obligation (under a lease of the property or pursuant to the contract) to insure the property. In that case, the seller must do everything required to maintain the insurance, increasing the cover at the buyer’s cost if the buyer so requests (and the insurers agree), permitting the buyer to inspect the policy, noting the buyer’s interest on the policy if so requested and repaying to the buyer any part of an additional premium which the buyer paid and is returned by the insurers. If the property is damaged between exchange and completion, the seller must pay to the buyer on completion any insurance proceeds not already used to reinstate the property (or assign the right to claim under the policy, if the proceeds have not yet been received). On completion, the seller must cancel the insurance policy and pay any refund to the buyer where that refund relates to a part of the premium paid by the buyer or a tenant or third party (in which case the buyer will hold that money subject to the rights of that tenant or third party). The buyer must pay a proportionate part of the premium for the period between exchange and completion, except where the seller can recover this from a tenant. Although the first alternative seeks to avoid the problems of double insurance, the buyer may still have difficulties if the seller is in breach of his obligation to insure, or if the insurance is avoided due to non-disclosure or for some other reason. Also, there is no mention of loss of rent insurance, which will obviously be crucial to the buyer if the property burns down between exchange and completion and the tenant’s rent payments are suspended pending reinstatement of the demise. There is also no mention of damage by uninsured risks.
• the second alternative (Condition 7.1.4) is where there is no such obligation, in which case the seller is not obliged to insure the property but where the buyer’s insurance proceeds are reduced because the seller has in fact insured the property, the price is also reduced to the same extent. The presumption, in the case of the second alternative, is that the buyer will himself have insured the property. It is also presumed that the property is either empty, or occupied only by the seller, and is unmortgaged, since the landlord will normally be obliged to insure the property where that property is tenanted, and a mortgage will normally require the mortgagor to insure the property.

There is no buyer’s (nor seller’s) right to rescind under the Standard Commercial Property Conditions if the property burns down between exchange and completion – in other words, risk passes to the buyer on exchange, as used to be standard practice under the old National Conditions of Sale.

Damage before exchange

Where damage occurs before exchange, the buyer cannot insure against this because he will have no insurable interest in the property at that stage. Clearly there will be no difficulty if the period before exchange takes place is sufficiently long to allow the seller to claim on his insurance and reinstate the damage. If, however, contracts are exchanged at the pre-damage price, the seller will suffer no loss and accordingly will be unable to claim on his insurance policy. Either the seller must reduce the purchase price to take into account the cost of reinstatement (together with any rent suspension), so as to be able to claim against the insurers for diminution in value, or the parties must enter into a contract in which the seller agrees to reinstate and the buyer only completes the purchase, at the full price, when this has been done.

The seller should involve his insurers before agreeing to either alternative, as the policy may contain a condition that no such agreement is entered into.