Brief Fact Summary. Plaintiffs entered into a contract for the purchase of land. On the following day, an ice storm destroyed a great deal of the property, reducing the value of the land. Plaintiffs notified Defendants that they had elected to rescind the contract and demanded return of the money. Defendants refused to rescind the contract.
Synopsis of Rule of Law. The prevailing law in is that the risk of loss is normally on the buyer.
It was, however, plainly recognized that in a case where the vendor is able to perform, and a binding agreement is entered into to sell land, equity regards the vendor as a trustee of the legal title for the benefit of the vendee, while the latter is looked upon as a trustee of the purchase-money for the benefit of the former; and that if the contract of sale had been so far completed that the vendors would have held the legal title as trustees for the vendee, then they would likewise have held title to the policies in the same capacity.View Full Point of Law
Issue. Which party bears the risk of loss?
Held. Plaintiffs. Judgment reversed.
The prevailing law is that the risk of loss is normally upon the buyer. The rule is based on the logic of equitable conversion, which has been rejected in Massachusetts and in England. In Massachusetts and England, the rule is that the risk of loss is on the seller when there is a failure of consideration.
Though it may reasonably be argued that possession as well as equitable title in the buyer should be necessary to place losses on him, which the party in possession has the power to protect against. This reasoning is not necessarily applicable to losses caused by acts of God. DeFuniak, Handbook of Modern Equity 218 Section: 93. However, the court was unable to find any authority, which deviated from the general rule.
The general rule is that when the purchaser obtains possession under a binding executory contract for the sale of improved realty which the seller is able to convey, but where, before the transfer of legal title is consummated, any loss falls on the purchaser as the owner of the equitable title.
The court found that the parties had entered into a binding contract for the sale of real estate, which the vendor was willing and able to consummate at the time of the destruction of a substantial part of the realty, therefore, the loss falls on the buyer.
Discussion. This case illustrates the need for the contract for sale of real estate to specify the risk of loss. Because it was not specified in the contract, the loss is placed on the buyers, the Plaintiffs. This is an unfortunate result, because Plaintiffs were not in possession of the real estate and had not obtained legal title to the property. Therefore, Plaintiffs will not get the property and they will have to pay the Defendants for the reduction in value of the property.