When you’re getting ready to sign a contract for the purchase of a house, you probably aren’t thinking of the possibility of a house fire, a burst pipe or vandalism occurring in the time between when you signed the contract and when the property is passed to you in a deed. No matter how remote the possibility of something like this occurring is, it’s good to be aware of at exactly what point liability for the property passes to you.
Equitable conversion
There’s a legal doctrine, known as equitable conversion, which governs the moment at which liability passes to the buyer. Under the doctrine, the moment you sign a contract for the sale of land, the ownership (or title) of the property is split into two portions – legal title and equitable title – until you receive the final deed.
The seller of the land holds onto legal title to the land. This essentially means that, legally, the land is still their property. They have the right to collect the agreed-upon purchase price from you, and they can sue you to enforce the contract if you try to back out of it unjustly. The legal title won’t pass to the buyer until both parties sign the final deed.
You, as the buyer, receive equitable title to the land as soon as you sign the initial sales contract. This means that you too have rights in the land – such as the right to sue the seller if they try to back out of the sale. However, being the holder of equitable title means that you also have the liabilities for the land.
In other words, if the house burns down in the time period in between when you sign the sale contract and when you receive the deed to the house, you as the buyer will be responsible for the loss.
This situation is so rare that you will likely never have to worry about it. However, if you’re getting ready to purchase real estate, it is good to take this risk into account, so that you are not caught unawares if an accident occurs.
