When lightning strikes a Mesa home for sale

Lightning strikes Mesa home Monday afternoon was the headline that caught my attention. On Monday, a home near Dobson and Guadalupe was hit by lightning, causing a small fire in the attic. Thankfully, no one was hurt while the Mesa home suffered relatively minor damage. But reading the headline really got me thinking…

(here’s the link to the article, by the way)

The standard Arizona Association of Realtors Residential Resale Real Estate Purchase Contract states:

Risk of Loss: If there is any loss or damage to the Premises between the date of Contract acceptance and COE or possession, whichever is earlier, by reason of fire, vandalism, flood, earthquake, or act of God, the risk of loss shall be on the Seller, provided, however, that if the cost of repairing such loss or damage would exceed ten percent (10%) of the purchase price, either Seller or Buyer may elect to cancel the Contract.

Super…so what does this mean?

First of all, the contract defines the time period for which the Risk of Loss clause applies; between the date of Contract acceptance and COE (close of escrow) or possession, whichever is earlier.

• The date of contract acceptance is when the last party signs the contract, then delivers notice to the other party.
• Close of escrow is (by contract definition) when the deed is recorded at the appropriate county recorder’s office
• Possession is when the buyer has physical and/or legal possession of the property. Possession might occur if the Buyer and Seller agree to allow the Buyer to move into the property prior to the Close of Escrow.

The next phrase discusses what type of damage is covered under the Risk of Loss clause: Fire, vandalism, flood, earthquake or act of God. The first few are fairly self-explanatory. Act of God is defined as:

A natural event, not preventable by any human agency, such as flood, storms, or lightning. Forces of nature that no one has control over, and therefore cannot be held accountable.

I do find it interesting that flood and earthquake are mentioned separately from act of God as they are covered under the definition. I also find it interesting that phrases that are prevalent in insurance contracts, such as Acts of Terrorism and Acts of War, are not included. It may be just a matter of time and revision.

Here comes the identification of who has to take care of the damage should something occur: The risk of loss shall be on the Seller. When items are being conveyed from one party to another through contract (or physical delivery, such as freight), there is a time when both parties have a legal interest in the item, in our case the house. The Risk of Loss clause is necessary to describe who is responsible for any repairs or replacements should damage occur. In the case of the AAR Residential Resale Real Estate Purchase Agreement, it is the Seller who carries the responsibility.

But note the “provided, however, …” continuation.

In order to protect both parties, the contract goes on to state that if the cost of repairing such loss or damage should exceed ten percent (10%) of the purchase price, either Seller or Buyer may elect to cancel the Contract.

Seller protection is offered so that the Seller is not obligated to make a significant repair should he not be able to do so within the contract period. For example, if our Mesa home with the lightning strike caused a major attic fire, the repair time for replacing trusses, roofing, electrical, plumbing, heating, ventilation, and air conditioning may extend far beyond the contracted close of escrow date. In order to protect the Seller from a pending breach of contract, the purchase agreement gives the Seller an “out.”

In a similar manner, the 10% rule protects the Buyer as well. Should extensive damage occur to the home, the Buyer may no longer want to purchase “damaged goods,” even though the promise to correct the damaged home is there. Additionally, the Buyer may not be able to wait the required time for all the corrections to be made. Therefore, the option to cancel the contract is available.

The AAR Residential Resale Real Estate Purchase Contract is a well-written document with the intention of covering most predictable, and some unpredictable, circumstances, such as Risk of Loss.

So had the home in Mesa with the lightning strike been contracted for sale, the purchase agreement would have already defined the options available to both the home buyer and home seller. Assuming the damage was relatively minor, as reported, and probably did not exceed the ten percent of the purchase price then the Seller (and subsequently the Seller’s home owner’s insurance) would be responsible for the repairs in a timely fashion so as to close on-time.