When Natural Catastrophes Impact Real Estate Transactions

Wherever you are in the province, real estate buyers and sellers need to understand the unique challenges they can face when it comes to the possibility of natural catastrophes.

While wildfires and flooding are more likely in some parts of B.C. than others, the risk is dynamic, changing year over year and typically increasing due to climate change. All buyers, sellers, and real estate licensees should be aware of these risks and ensure everyone has the information and resources they need to make informed decisions when buying or selling real estate that might be impacted by climate change.

For Real Estate Sellers

If you are a seller in an area at an elevated risk for wildfires or flooding, your real estate licensee should advise you to seek professional advice from your insurance provider and legal representative. You should know whether you will have coverage if your property is damaged or destroyed by a natural disaster during the transaction, and what the ramifications are if that damage impacts the sale of the property.

The standard form purchase contract used by most real estate licensees stipulates that properties must be delivered to a buyer in substantially the same condition as when the buyer viewed it. This may mean that even if a buyer submits a condition-free offer, or waives conditions after satisfying them, the transaction may collapse if the property is damaged or destroyed, leaving the seller to deal with the consequences.

For Real Estate Buyers

If you are a buyer, your real estate licensee should advise you to speak to insurance providers to determine what type of property insurance is available. Mortgaged properties require fire insurance as a condition of the mortgage, but flood insurance is typically not required. In some cases, buyers with accepted offers who have removed financing subjects have found that insurance companies have withdrawn their approval to insure the property due to identified risk. See below, under Real Estate Licensees, for more information on what to do in this scenario.

Buyers should always consider the availability and price of property insurance before purchase. The Ministry of Public Safety and Solicitor General has said that residential flood insurance may be limited or unavailable in higher risk areas. Buyers considering a purchase in a higher risk area should also consider seeking legal advice on the purchase contract.

For Real Estate Licensees

Providing your client with advice that may not be accurate or complete just to appear more knowledgeable, or providing real estate services in relation to a property in a community or region that you’re not familiar with can put both you and your client at risk. The Real Estate Services Act and Rules outline that providing incompetent service could rise to a level of professional misconduct. Protect yourself and your client’s best interests by ensuring your clients receive the most accurate information around natural catastrophe risks. Where appropriate, this should come from a third party.

It is prudent to accurately document the conversations you have had with your client regarding wildfire, flooding, or other risks. Where the client has taken external expert advice (e.g., legal) and is asking you to proceed on the basis of that advice, you should seek their instruction in writing.

Real estate licensees may find that in some cases, buyers with an accepted offer who have removed financing subjects have found that insurance companies have withdrawn their approval to insure the property due to the risk of damage from fires. Depending on the insurance company, this can happen if buyers are purchasing property within 25 to 100 kilometers of a notable fire. If insurance cannot be obtained, the lenders may also withdraw their approval for funding of the mortgage. Buyers could be at risk of losing the property, their deposit, and face potential legal action against them.

If you have a buyer client in this situation, you should advise them to:

• Contact their insurance company and lender to determine any steps required for the property to be insured again;
• Consider contacting their insurance broker if the initial insurer refuses coverage, or if there are issues with coverage, to discuss their options;
• Consult their lender to ensure they have a complete understanding of all financing requirements, and the risks that could impact completion of the transaction;
• Consider requesting an extension on the completion of the sale; and
• Seek legal advice, especially if they want to re-open the contract.

If you have a client who is worried about losing insurance approval, you should advise them to:

• Check with their insurance broker to confirm whether the transaction will be jeopardized by an encroaching wildfire; and
• Consider contacting their insurance broker to discuss their options if the initial insurer refuses coverage or there are issues with coverage.

If you have a client who is facing insurance policy renewal in a potential wildfire zone, you should advise them to:

• Contact their insurance broker to discuss their options; and
• Consider shopping around and comparing policies from a variety of insurance providers.

For a Fire/Property Insurance clause, see the Knowledge Base.