Written by attorneys · grounded in primary & secondary sources — see below
A rule that assigns responsibility for damage to or destruction of property to one of the parties to a contract for its sale before title or possession passes. Under the majority approach in land sales, once a binding contract is formed equity treats the buyer as owner of the land so the risk of loss from casualty passes to the buyer at contract formation even though legal title remains with the seller. The buyer must therefore pay the full price and cannot rescind or demand a reduction merely because improvements are destroyed before closing.
Sources & Authorities
How it applies
Common Examples
6
Storm Destroys Turbines After Contract
Lake Solar Corporation signed a binding purchase agreement with East Wind LLC for a rural tract containing operating wind turbines. After signing but before closing a lightning storm destroyed two turbines and damaged the control building. Lake Solar sought to avoid the purchase or reduce the price but East Wind insisted on full payment. Lake Solar must complete the purchase at the contract price because the risk of loss passed to it upon contract formation.
Fire Destroys Building Before Closing
Roberto Reyes contracted to buy a commercial building from Ronald Reed. Before closing a fire destroyed the structure without either party's fault. Reed tendered a deed to the vacant land and demanded the full purchase price. Reyes must pay the full price because the risk of loss had already passed to him at contract formation.
Select any source to read its text and confirm it supports the definition.
Cases
Uniform Acts
Model Codes
Common Law
Restatements
Casebooks
Hornbooks
Course Outlines
Study Supplements
Dictionaries
Lightning Topples Cell Tower Pre-Closing
Grove Fiber signed a binding contract with South Satellite to purchase a hilltop parcel containing an operational cell tower. One week before closing a lightning storm toppled the tower. Grove Fiber refused to close at the original price and demanded rescission. Grove Fiber must still pay the full price because the risk of loss passed to it upon contract formation.
Flood Damages Improvements During Executory Period
Roger Ramirez contracted to purchase undeveloped land with a small operations building from Rachel Ramirez. After contract formation but before closing a flood damaged the building. Roger Ramirez claimed the damage excused performance. Roger Ramirez remains obligated to pay the full price because the seller holds legal title only as trustee for the buyer after contract formation.
Warehouse Flood Damages Identified Goods
Riverstone Manufacturing contracted to buy a serialized batch of specialized equipment that the vendor had set aside exclusively for the buyer. Before risk of loss passed a forklift collision damaged part of the batch. Riverstone Manufacturing may avoid the contract or accept the remaining units with a price allowance because the goods were identified at contracting and suffered casualty before risk passed.
Aluminum Company of America v. Essex Group, Inc.499 F. Supp. 53 (W.D. Pa. 1980)
Landlord Bears Risk on Defective Fixtures
Rosa Ruiz rented an apartment from Rocky Mountain Mining that included a defective water heater installed before her tenancy. The heater caused property damage. Rocky Mountain Mining bears the risk of loss because it retained control over the premises and the installation of the fixture that created the hazard.
Becker v. IRM Corp.698 P.2d 116 (Cal. 1985)
Common questions
Frequently Asked
4
When does risk of loss pass to the buyer in a land sale contract?+
Under the majority rule the risk passes to the buyer at contract formation once a binding agreement is signed. The buyer must pay the full price even if the property is later destroyed without the seller's fault. Some jurisdictions or statutes leave the risk on the seller until deed delivery or closing.
Supporting sources
Does the seller's retention of legal title keep the risk of loss on the seller?+
No. After contract formation the seller holds legal title only as trustee for the buyer. The buyer's equitable ownership shifts the risk of loss to the buyer even though legal title has not yet passed.
Supporting sources
What remedies does a buyer have when identified goods suffer casualty before risk passes?+
If the contract requires goods identified at contracting and those goods suffer casualty without fault before risk of loss passes the buyer may treat the contract as avoided or accept the remaining goods with a price allowance. The buyer has no further claim for damages once one of those options is chosen.
Supporting sources
How does equitable conversion affect rents and taxes during the executory period?+
Equitable conversion places both the benefits and burdens of ownership on the buyer after contract formation. Rents accruing after the contract belong in equity to the buyer and the seller must account for them as trustee.
Supporting sources
499 F. Supp. 53 (W.D. Pa. 1980)Contracts
…particularly economic uncertainties. Where parties to a contract deliberately and expressly undertake to allocate the risk of loss attendant on those uncertainties between themselves or where they enter a contract of a customary kind which by common understanding, sense, and legal doctrine has the affect of allocating…