Keys to Risk of Loss, Delivery of Possession

When should a prudent seller of real property deliver possession of real property to the buyer? The answer is simple if the agreement for purchase and sale is prepared on the standard forms residential and commercial purchase and sale agreements jointly approved by the NC Association of REALTORS® (NCAR) and the N.C. Bar Association (N.C. Bar). A seller should not deliver the keys to or possession of the real property until the deed has been recorded and the seller’s proceeds are available for disbursement from the closing attorney or settlement agent

The standard form residential contract, Offer to Purchase and Contract (NCAR/NCBar Standard Form 2T), adopted Jan. 1, 2011, and revised July 1, 2011, adopts the new definition “settlement” in Section 1(k) and redefines “closing” in Section 1 (m). Previous versions of the form defined “closing” as the date and time of recording of the Deed. By adopting the new definition “settlement,” the residential form now recognizes that the final step of “closing” does not take place in the closing attorney’s office, and that there is a gap between “settlement” and “closing” during which intervening events can seriously impact the rights of the parties. As with the older versions, “closing” has not been completed until the deed is recorded and the funds are available for disbursement to the seller. Section 12 of the residential form provides:

RISK OF LOSS: The risk of loss or damage by fire or other casualty prior to closing shall be upon seller. If the improvements on the property are destroyed or materially damaged prior to closing, buyer may terminate this contract by written notice delivered to seller or seller’s agent and the Earnest Money Deposit and any Due Diligence Fee shall be refunded to Buyer. In the event buyer does NOT elect to terminate this contract, buyer shall be entitled to receive, in addition to the property, any of seller’s insurance proceeds payable on account of the damage or destruction applicable to the property being purchased. Seller is advised not to cancel existing insurance on the property until after confirming recordation of the deed.

In the case of a casualty loss prior to closing, i.e. before the recording of the deed and the distribution of seller’s closing proceeds, the buyer has the right to terminate the contract and rescind the transaction altogether. The buyer is also given the option, but not the obligation, to proceed with the closing in which case any of seller’s insurance proceeds are to be remitted by seller to buyer.

The standard form commercial contract, Agreement for Purchase and Sale of Real Property (Commercial) (NCAR Standard Form 580-T/NC Bar Form No. 13), defines “closing” in Section 1 (c) as “the date and time of recording the deed.” Section 9 provides: Until closing, the risk of loss or damage to the property, except as otherwise provided herein, shall be borne by seller. Section 11 provides: Possession shall be delivered at closing, unless otherwise agreed herein. Although Section 11 also provides: The closing shall be held at the office of the buyer’s attorney or at such other place as the parties hereto may mutually agree, it is clear from the definition of “closing” in Section 1 (c) that “closing” has not been completed until the deed is recorded.

It should be noted that North Carolina has enacted its version of the Uniform Vendor and Purchaser Act in Chapter 39 of the North Carolina Statutes. NCGS § 3939 provides that unless the contract expressly provides otherwise the risk of loss passes to the purchaser either upon transfer of legal title or transfer of possession of the property to the purchaser. Since, as mentioned above, both the commercial and residential contracts promulgated by NCAR/NCBar do, in fact, provide otherwise, the Act is not applicable to transactions closed pursuant to contracts on those forms. The risk of loss provisions are not altered even though most buyers come to settlement with an insurance policy made effective as of 12:01 a.m. the date of settlement.

Given the provisions in both the commercial and residential forms, it is foolhardy for a seller, or a seller’s agent, to cancel a seller’s insurance policy, or transfer the keys and possession to the buyer, until the deed is recorded and the seller receives the closing proceeds from the closing attorney. If a casualty loss occurs between what is defined in the residential form as “settlement” and the “closing” (i.e. before the deed is recorded), the seller, who has surrendered possession of the property to the buyer, runs the risk that the buyer may rescind the transaction. The longer the gap between settlement and closing, the greater the risk the seller faces by delivering possession and the keys at the settlement table. Real estate educators have been encouraged to stress the importance of these issues, and are reportedly doing so. Nevertheless, it is still a fairly common occurrence in many parts of this state, particularly in residential transactions, for sellers to deliver the keys to, and possession of, the property at the closing/settlement table before the deed is recorded and the funds are disbursed. The closing attorney represents the buyer, and is generally not going to give legal advice to a seller.

If the seller allows the buyer to move in prior to closing, and the parties enter into a Buyer Possession Before Closing Agreement (NCAR Form 2A-7-T/NCBar Form 2A-7), it is important to remember that paragraph 8 of that form continues to place the risk of loss on the seller until closing. Sellers executing a Buyer Possession Before Closing Agreement should be especially careful to maintain insurance in place until closing is completed. Both paragraph 8 and the second warning at the top of the form caution the seller to check with an insurance professional to determine what type of insurance coverage is necessary. Homeowners’ insurance policies are designed for the owner occupant. The seller’s insurance professional may advise replacing homeowners’ coverage with a dwelling fire policy. If closing does not occur as scheduled, and the prospective buyer remains in possession for a prolonged period of time, or the property becomes vacant, it is especially important to obtain and maintain the correct type of coverage.

A buyer expecting possession at the settlement should realize that the seller is entitled, and is well advised, to withhold possession and delivery of the keys until the deed is recorded and the closing proceeds are distributed. Therefore, if a buyer needs possession on a date certain, it is wise for the buyer and the buyer’s agent to schedule the settlement for a date and time (preferably not Friday afternoon) that should allow enough time for the deed to be recorded in order to meet the buyer’s needs.