When Disaster Strikes Before Closing: Understanding Risk of Loss and Force Majeure in the FR/BAR Contracts

Florida weather can be unpredictable. Hurricanes, tropical storms, fires, floods, and other casualty events can create unexpected challenges during a real estate transaction. When disaster strikes between signing the contract and closing, two important questions arise: What happens if the property is damaged, and what happens if the transaction cannot close on time?

Who bears the risk?

The Risk of Loss provision, found in Section 18(M) of both FR/BAR contracts, addresses what happens when a property is damaged before closing. Many buyers assume that once they sign a contract, the property is essentially theirs; however, under both FR/BAR contracts, the seller bears the risk of loss until closing. If the property is damaged by fire, storm, or other casualty before closing, the seller remains responsible for addressing the issue and restoring the property to the condition that existed as of the effective date of the contract, unless otherwise provided by the contract.

Not all damage is treated the same

The extent of the damage matters because the contract distinguishes between minor damage and substantial damage. For example, imagine a home is under contract for $500,000. A few days before closing, a storm damages a section of the pool cage and blows several shingles off the roof. The estimated repair cost is $5,000. Because the damage falls below the contract's 1.5% threshold, the seller must repair the damage and proceed with closing. The buyer does not have the right to cancel simply because the damage occurred.

Of course, repairs cannot always be completed before closing. In that situation, the Risk of Loss provision provides that 125% of the estimated repair cost be held in escrow at closing. The transaction can move forward while ensuring funds are available to complete the repairs after closing.

Now consider a different scenario: A property is under contract for $800,000, and a hurricane causes extensive roof damage and water intrusion one week before closing. The estimated repair cost is $50,000, far exceeding 1.5% of the purchase price ($12,000). In this situation, the buyer has a choice: terminate the contract and receive a refund of all deposits or proceed with purchasing the property "as is" together with the 1.5%.

When a storm delays closing

Sometimes the biggest challenge is not the damage itself. It is the inability to close. Even if a property is largely unaffected, a hurricane can still disrupt a transaction by making it impossible for the parties to close on time.

This is where the Force Majeure provision in Section 18(G) comes into play. Force Majeure events may include hurricanes, floods, extreme weather, fires, governmental actions, government shutdowns, epidemics, pandemics, and certain other extraordinary events. The existence of one of these events alone, however, is not enough. The event must actually prevent a party from performing under the contract. If it does, the affected party is temporarily excused from performance and is not liable for damages caused by the delay.

For example, a hurricane may leave a property largely intact, but banks may be closed, insurance carriers may be unable to bind policies, and utilities may be unavailable. In those circumstances, the contract automatically extends contractual deadlines for a reasonable period, up to seven days after the event no longer prevents performance.

The extension is not indefinite, however. If the Force Majeure event continues to prevent performance for more than 30 days after the scheduled closing date, either party may terminate the contract. The buyer is then entitled to a return of all deposits.

When a storm impacts a transaction, clients look to their REALTOR® for answers. Understanding the Risk of Loss and Force Majeure provisions can help you explain what happens next, set realistic expectations, and guide your clients through an otherwise stressful situation.

Upcoming class

Ready to learn more? Join us on July 20 from 2:00–4:00 p.m. at RASM South for Weathering the Storm: Risk of Loss and Force Majeure in the FR/BAR Contract.

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This article is meant for educational purposes only. It is not intended to serve as legal advice and should not be used as a substitute for consultation with an attorney.