Risk of Loss vs. Undiscovered Defects After Condition Removal 

What You’ll Learn:

• What Section 11.1 of the residential purchase contract really means
  
  

• How it applies to new damage vs pre-existing defects
  
  

• Why buyers may have limited recourse after condition removal, even if they haven’t taken possession
  
  

• Real-world case example of a failed septic system
  
  

📘 Section 11.1 – Risk of Loss Before Possession

“The seller bears the risk of loss or damage to the Property until the Purchase Price is paid. If such loss or damage occurs before the Purchase Price is paid, any insurance proceeds will be held in trust for the seller and buyer based on their interests.”

This means the seller is responsible for any new damage that occurs after condition removal but before closing — such as:

• Fire
  
  

• Hail damage
  
  

• Flooding
  
  

• Vandalism
  
  

If an insurable event occurs, insurance proceeds are held in trust and typically negotiated between the parties at closing.

⚠️ Caveat Emptor & Defects: What’s the Difference?

Caveat emptor (“buyer beware”) still applies in real estate, but with important limits.

Concept

Applies To

Who’s Responsible?

Risk of Loss

New damage after contract acceptance

Seller

Caveat Emptor

Pre-existing, unknown defects

Buyer (unless latent defect or misrepresentation)

🧾 Real-World Case: Rural Septic System Dispute

An agent in our brokerage encountered the following:

• The buyer discovered a broken line at the septic tank during inspection.
  
  

• Buyer and seller agreed to split repair costs with a $5,000 holdback, via amendment.
  
  

• After certified repairs, the scope of work revealed backflow and eventual failure of the septic mound.
  
  

• Buyer requested full replacement (~$20,000).
  
  

• Seller’s lawyer demanded closing, stating that the buyer waived conditions and the amendment resolved the issue.
  
  

• Litigation lawyers confirmed: because the defect wasn’t known to the seller at the time conditions were waived, the buyer had no legal grounds to demand full replacement.
  
  

💬 Discussion Questions:

• How would you guide your buyer in a similar situation?
  
  

• When do you recommend adding more detailed repair terms into an amendment?
  
  

• How would Section 11.1 apply if hail hit the roof after conditions were waived?
  
  

✅ Best Practices:

• Don’t rely solely on the inspection — ask questions about rural systems, water, septic, structural, or insurance history.
  
  

• Remind buyers that waiving conditions means they’re accepting the property as-is, except for clearly defined amendments.
  
  

• If new damage occurs (e.g., roof leaks or fire), Section 11.1 still protects the buyer — but defects missed during inspection may not.
  
  

• When drafting an amendment for repairs, clearly define scope of work and what happens if further problems are found.
  
  

📬 Pending Clarification

We've sent a request to our real estate association for clarification on the legal scope of Section 11.1, specifically:

• Whether it applies only to sudden damage (e.g. hail, fire)
  
  

• How it intersects with unknown or undiscovered defects like septic failure
  We’ll update this page when we receive a response.