What Happens If the Property Is Damaged Before Settlement

Once contracts are exchanged on a property, most buyers assume the deal is locked in and the only thing left to do is wait for settlement day. But a lot can happen to a property in the weeks between exchange and settlement, and storm damage, fire, flooding or even vandalism are not as rare as people think. When damage does occur during this window, both buyer and seller are often unsure who is responsible, whether the contract still stands, and what steps need to happen next. The answer depends on your contract terms, your state's legislation and how serious the damage is.

Who Bears the Risk After Exchange

In most Australian states, the standard contract of sale allocates risk for damage to the property from the date of exchange, not from settlement. That means a buyer can, in many circumstances, end up responsible for a property they do not yet legally own if something goes wrong before they take possession. This surprises a lot of first-time buyers, who assume the seller remains responsible until the keys change hands. The precise rule differs by state and by the specific wording of the contract, which is why reviewing the risk clause before you exchange is one of the more important things your conveyancer does on your behalf.

Because of this, buyers are generally advised to arrange their own building insurance to start from the date of exchange, rather than waiting until settlement. A seller's existing policy does not automatically protect a buyer's interest, and relying on it can leave a genuine gap in cover. Readers who want a general primer on how home insurance policies work and what to compare between insurers can refer to MoneySmart's guide to choosing home insurance before exchange, so cover is ready to go from day one rather than arranged in a rush after damage has already occurred.

What Happens If the Damage Is Minor

Minor damage, such as a few broken roof tiles, a damaged fence panel or superficial water staining, typically does not affect the contract at all. The buyer proceeds to settlement as planned and either arranges their own repairs afterwards or negotiates a small adjustment with the seller beforehand. Most contracts do not require the seller to fix minor issues before settlement, since the property is generally sold in the condition it was in at exchange, subject to fair wear and tear. A conveyancer can help you assess whether an issue is genuinely minor or worth raising formally with the other side.

What Happens If the Damage Is Substantial

Substantial damage is treated differently. If a property is damaged to the point that it is materially different from what the buyer agreed to purchase, such as a house significantly damaged by fire or a section of the building destroyed in a storm, many state laws give the buyer a right to rescind the contract and recover their deposit. This is not automatic. It usually requires the buyer to give written notice within a defined period after becoming aware of the damage, and the threshold for what counts as "substantial" is a factual question that can be genuinely disputed between the parties. This is an area where legal wording matters a great deal, and a buyer should not rely on a verbal assurance from the seller or agent about how the damage will be handled.

Where the damage does not meet the threshold for rescission but is more than trivial, contracts commonly allow for the purchase price to be adjusted, or for the seller to complete agreed repairs before settlement. Negotiating this outcome usually happens through an exchange of correspondence between conveyancers, supported by quotes, photos and sometimes an independent building report, rather than an informal conversation at the property.

How the Type of Damage Changes the Options

Fire and storm damage tend to be visible immediately, which at least means the issue is identified before settlement day. Water damage from a slow leak, subsidence, or termite activity discovered late in the process can be trickier, because it may not be obvious whether the damage happened before or after exchange, or whether it was pre-existing and simply not disclosed. This is one of several reasons a thorough pre-purchase building inspection remains worthwhile even after a contract has been exchanged, since it creates a clear record of the property's condition at that point in time.

What a Buyer Should Do If Damage Is Discovered

The first step is to notify your conveyancer immediately, before making any promises to the seller or agent and before agreeing to any informal arrangement. Take dated photographs, obtain a written assessment from a builder or insurer if possible, and avoid signing anything that waives your rights until your conveyancer has reviewed the contract's specific risk and rescission clauses. If you have already arranged insurance from exchange, lodging a claim promptly protects your position regardless of how the negotiation with the seller unfolds.

What a Seller Should Do

Sellers are generally expected to notify the buyer as soon as they become aware of damage, rather than staying silent and hoping it goes unnoticed until after settlement. Failing to disclose known damage can create bigger legal problems than the damage itself, including potential claims after settlement has already occurred. A seller's conveyancer can help manage this disclosure properly and advise on whether the seller has any obligation, or simply an option, to carry out repairs before completion.

How a Conveyancer Helps Manage This Situation

A conveyancer's role here is part legal review and part practical coordination. They confirm exactly what your contract says about risk, insurance and rescission rights, communicate formally with the other side so nothing is agreed informally that could disadvantage you later, and help arrange any necessary extension to the settlement date while the situation is resolved. For a straightforward residential purchase this is usually a manageable, if stressful, process. It can be more complex in an off-the-plan purchase where the building itself is still under construction, or when a related sale and purchase are meant to settle on the same day, since a delay on one property can affect the other. This general information does not replace legal advice on your specific contract, and a conveyancer can point you toward that advice if the situation is contested.