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Discussing the Wildfire Clause with Clients: Best Practices
When a real estate transaction is affected by a wildfire, buyers and sellers face significant risk and distress. BCFSA is helping address wildfire-related uncertainties with a new optional clause that buyers can include in the contract of purchase and sale (“CPS”).
The wildfire clause allows for one extension of the completion, adjustment, and possession dates in the CPS – up to a maximum of 30 days – if a wildfire prevents the buyer from obtaining property insurance with fire coverage (and by extension, mortgage financing).
This article covers best practices for real estate licensees when discussing the clause with buyer and seller clients.
Practice Tips for Real Estate Licensees
Below are considerations to discuss with your clients when including the wildfire clause in a CPS.
Acting for a Buyer
- Talk to your buyer client about the benefits and risks of a CPS subject to insurance clause.
- Recommend that your buyer client talk to their insurance broker before and during the offer process, and to try to obtain insurance as soon as possible once an offer is accepted. They should also talk to their insurance broker about the possibility of an insurer revoking a binding commitment if the property is threatened by a wildfire.
- Explore with your buyer client the option to request insurance information from the seller to take advantage of the “incumbent stay on risk” approach (i.e., the seller’s insurer may be willing to temporarily reissue a policy in the name of the buyer of the property when the closing date falls during an imminent threat). Exploring this option may form part of a buyer’s best efforts to obtain insurance.
- Talk to your buyer client about when their financing rate offer expires. Typically, interest rate holds are only valid for 90 days and may expire before an extended completion date. Advise the buyer to talk to their mortgage broker about the possibility of extending a rate hold.
- A seller who does not agree to the inclusion of the wildfire clause could be an indication to your buyer client about future negotiations (e.g., price negotiations if the house becomes damaged in a fire).
Acting for a Seller
- Advise your seller client not to cancel insurance on the property until they have the sale proceeds.
- Learn about what your client plans to do with the proceeds of sale, whether they plan to buy again and if so, whether they plan to buy in the same area or another area likely to be impacted by wildfires.
Acting for Either a Buyer or Seller
If a licensee learns, prior to completion, that a property has been damaged by fire, flood, or some other event, as the licensee you should immediately advise your client to seek legal advice. The standard CPS contains an “as viewed” clause. If there is an event that results in property damage, a buyer can insist on a reinspection and ask for a reduction in purchase price or potentially walk away from the contract, depending on impact to use of property, value of property, and legal rights.
All parties to a CPS have rights and obligations. Depending on what the parties want and what happened, a sale can complete with an extended closing date, and adjustments may be needed to determine the change in property value, relationship with insurance, etc.
Have the following conversations with your buyer and seller clients as well:
- Discuss what happens if the seller is under an evacuation order when the buyer can obtain fire insurance. For example, when and how will the seller be able to go and collect their belongings? Buyers and sellers should also consider what happens if a seller is under an evacuation order when the buyer is able to obtain fire insurance or as the 30-day extension is approaching.
Independent Professional Advice
B.C.’s real estate consumers rely on professional advice to help explain their exposure to natural catastrophe and climate-related (“NCCR”) events. There are several matters connected to wildfires and real estate transactions that are outside of a trading services licensee’s expertise. These matters can arise whether a licensee is acting for a seller or a buyer. In these cases, you should:
- Advise your buyer client to obtain a binding insurance commitment as soon as possible after the offer is accepted and talk to their insurance broker about the possibility of an insurer revoking a binding commitment if the property is threatened by a wildfire. Advise the client to seek independent professional advice on whether an insurance quote is “commercially reasonable”. A buyer client trying to determine whether an offer of insurance is “commercially reasonable” may need to consider the premium or rate differences between geographic areas and consult with both their insurance broker and legal professional;
- Ask your buyer client about their financing term and advise your client to talk to their financing representative about possibly extending an interest rate hold/financing offer if triggering the wildfire clause becomes necessary;
- Advise your seller client who is relying on the proceeds of sale to purchase another property to talk to their lender about the possibility of bridge financing to cover an extension;
- Advise your buyer or seller clients to immediately seek legal advice if, prior to completion, the property has been damaged by a fire or other NCCR event; and
- Advise your buyer or seller clients to seek legal advice regarding how triggering the wildfire clause may affect any related transactions that are closing on their original completion dates.
Find BCFSA’s wildfire clause in the Real Estate Knowledge Base. It is also available on the Canadian Real Estate Association (“CREA”) WEBForms.