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The Impact of Colorado Fires on Contracts to Purchase Property

Q: I’m under contract to purchase real estate in Colorado. The area around the property has been impacted by wildfires. Am I able to get out of the contract?

A: Summer 2013 has already been another difficult season for fires in Colorado, with the Black Forest, Royal Gorge and West Fork Complex fires following the destructive 2012 High Park, Waldo Canyon and Last Chance fires. Buyers who are under contract to purchase properties in fire damaged or threatened areas may have second thoughts about whether they want to close on the purchase. This article will examine different sections of the Colorado form Contract to Buy and Sell Real Estate that may allow Buyers to terminate their contractual obligation to purchase and seek return of their Earnest Money (references in parentheses refer to numbered Sections in the Contract).

Inspection. The Buyer may, prior to the Inspection Objection Deadline (§ 3 – item #23), terminate the Contract if, in the Buyer’s sole subjective discretion, “any other activity, odor or noise (whether on or off the Property) and its effect or expected effect on the Property or its occupants is unsatisfactory” (§ 10.2(5)). This provision allows Buyers to consider both direct factors that affect the Property, as well as those that are off-site but may impact a resident’s use or enjoyment of the Property. If the Buyer learns that the Property is in an area that is uncomfortably close to fire danger zones, the Buyer could use the Inspection Objection provision to terminate the Contract.

Insurability. Insurance underwriters are carefully re-considering their ability to write policies in areas exposed or potentially exposed to fire danger. The Insurability provision in the Contract allows the Buyer the opportunity to review the “availability, terms and conditions of and premium for property insurance” (§ 10.5). If it’s prior to the Property Insurance Objection Deadline (§ 3 – item #25) and the Buyer is unable to obtain an insurance policy to cover the Property, or if the policy found is too expensive or otherwise unsatisfactory, the Buyer can terminate the Contract.

Appraisal. Exposure to fire-threatened areas may cause an appraiser to value the Property at an amount which is less than the Purchase Price that the Buyer and Seller agreed on. The decreased valuation may impact the Buyer’s ability to qualify for the loan needed to purchase the Property. If the appraisal comes back as less than the contracted Purchase Price prior to the Appraisal Objection Deadline (§ 3 – item #20), the Buyer is authorized to terminate the Contract (§ 6.2).

Property Damage. If the Property or related Inclusions suffer a relatively small amount of fire damage prior to Closing (less than 10% of the Purchase Price), the Seller is obligated to repair the damage before Closing (§ 19.1). If the Seller cannot make the repairs prior to Closing, or if the Property damage is greater than 10% of the Purchase Price, the Buyer can terminate the Contract through the Closing Date. If the fire causes actual damage to the Property, this may be a late-term provision that permits the Buyer to terminate and claim return of their Earnest Money even after the Inspection contingency has expired.

Damage to Utility Services. If any utilities or communication services that serve the Property are damaged prior to Closing, the Buyer can terminate the Contract if those Services are not repaired prior to the Closing Date (§ 19.2). For example, if power or telephone lines that serve the Property are damaged by fire and have not been repaired prior to Closing, this provision allows the Buyer an out under the Contract. This may be a clause for the Buyer to utilize even if the Property itself was not damaged by fire, but the Inspection Objection Deadline has already passed.

No Remaining Contingencies. The previous items in this article identify contingencies and other provisions that may allow a Buyer to terminate the Contract and claim return of their Earnest Money (§ 25). If none of the identified factors can be utilized in good faith to terminate the Contract, the Buyer may still decide that they do not want to close on the purchase of the Property. If the Buyer does not want to close, and assuming the Specific Performance box in § 21.1.1 is not checked, the Buyer stands to forfeit their Earnest Money if they do not close. However, forfeiting a relatively small amount of Earnest Money may ultimately be the right financial decision for Buyers who are concerned about making a large investment on a Property that they are no longer comfortable owning due to potential fire exposure.

Recent wildfires have affected both Buyers and Sellers of real estate in Colorado. If you are buying or selling property in the state and have questions about your contractual obligations as a result of the fires, please contact me.

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