Q: I’m about to close on a home purchase on the Big Island of Hawaii.
Because of recent volcanic activity, I am concerned about the value, and even the continued existence, of the house we are about to buy. Our contractual contingencies have all been met. We are just waiting for the final approval from our lender, which is expected any day. As volcanoes are unpredictable, who knows if Kilauea will settle down shortly or spew gases for the next 50 years?
[River of lava destroys hundreds of homes in Hawaii, including one owned by mayor, officials say]
I am wondering if anything in my purchase agreement is renegotiable this late in the process, and what do buyers do when they are about to close on a property, and say a natural disaster were to strike, such as a major volcanic eruption?
— Hot in Hawaii
Hot: The event you are referring to, Mount Kilauea’s eruption, is what we lawyers often refer to as a “force majeure event.” Force majeure means “greater force.” The legal concept of a force majeure is derived from the French Napoleonic Code. This clause provides that the parties’ performance under a contract is excused if an unforeseeable event beyond their reasonable control occurs that prevents their performance. Force majeure events are often defined in the contract to include political events such as wars, insurrections, riots, strikes, lockouts, terrorist threats or actions, or explosions. It also applies to acts of nature such as hurricanes, floods, earthquakes, landslides, tornadoes, tsunamis, volcanic eruptions, sinkholes and storms. It would appear that Mount Kilauea’s eruption is a classic force majeure event.
[Graphic: Where the Earth is erupting on Hawaii’s Big Island]
A force majeure clause is a contract provision that allows a party to delay or extinguish the performance of its contractual obligations when certain circumstances beyond their control arise, making performance inadvisable, commercially impracticable, illegal, or impossible. Sometimes this is also referred to as an act of God or act of nature.
You should examine your purchase contract to see if it contains a force majeure clause that may delay or even excuse your performance under the contract. These clauses are also sometimes identified as “Risk of Loss.” The standard Greater Capital Area Association of Realtors contract contains a damage or loss clause that reads: “The risk of damage or loss to the Property by fire, act of God, or other casualty remains with Seller until the execution and delivery of the deed of conveyance to Buyer at Settlement.” If your Hawaii purchase contract contains a similar clause and your property is damaged or destroyed by the lava flow, your obligation to pay for your home will probably be excused.
If you still wish to go to settlement on the home, but just not at the original price or terms, you may also use a force majeure event to renegotiate price or terms as well. This means that if the home is damaged before settlement, because of an unforeseen force majeure event, the seller will be responsible for that damage and any diminution in value caused but that damage. You should be able to proceed to settlement, with a new price and terms.
Hopefully, the seller has a homeowner’s hazard policy that covers volcanic eruptions. The seller can then sell the home to you at its “after-eruption value” and presumably recover their loss from the insurance proceeds covering the damage. The situation gets complicated if your seller has an existing loan that must be paid off, before they are able to convey clear title to you. This can get tricky. I recommend you consult with a member of the Hawaii State Bar Association who is familiar with real estate contracts.
Harvey S. Jacobs is a real estate lawyer with Jacobs & Associates Attorneys at Law in Rockville. He is an active real estate attorney, investor, landlord, settlement attorney and licensed real estate broker. This column is not legal advice and should not be acted upon without obtaining your own legal counsel. Contact Jacobs at email@example.com or firstname.lastname@example.org.
Copyright © Harvey S. Jacobs, Esq. 2019