RESIDENTIAL REAL ESTATE
UNDERSTANDING THE INSPECTION CONTINGENCY CLAUSE
Once a contract for the purchase and sale of residential property has been signed by both buyer and seller, and the attorney review period has concluded without cancellation of the contract (or with cancellation and reinstatement of the contract), it becomes binding on both buyer and seller. The seller must sell to the buyer, and the buyer must buy, except for CONTINGENCIES.
CONTINGENCIES are conditions which must be satisfied before the parties are obligated to go forward with the purchase. In a residential sale, contingencies are generally included in the contract to protect the buyer against certain possibilities. One of the buyer’s main concerns is that after he has agreed to pay a certain price for the property, he will discover damage, deterioration, pest infestation or other conditions he didn’t know about and didn’t take into consideration when agreeing on a purchase price. The buyer is charged with knowing about any deficiencies in the property which are open and obvious to an untrained eye, but he is not expected to know about conditions which are hidden or require technical expertise to discover. To provide an “out” for the buyer in the case of serious, not-readily-apparent deficiencies in the property, the contract contains an INSPECTION CONTINGENCY clause. This clause allows the buyer a specific number of days to have the property inspected by a licensed home inspector, who prepares a written report containing the results of his inspection. If the report discloses major defects in the roof, foundation, HVAC, plumbing or electrical systems, or the presence of pests or environmental contaminants (radon, mold) the buyer has the right to cancel the contract, get his deposit back, and move on. If, on the other hand, no such deficiencies are reported, the deal goes forward.
What usually happens is that the buyer presents the inspection report to the seller, along with a request that the seller repair or remediate conditions listed by the buyer. With respect to each request, the seller agrees or refuses to fix it, the buyer responds, and the communications may go back and forth several times.
REMEMBER, if it weren’t for the INSPECTION CONTINGENCY clause, the buyer would be obligated to take the property “as is.” The INSPECTION CONTINGENCY clause, by giving the buyer the right to cancel the contract, provides incentive for the seller to agree to repair or remediate major deficiencies.
WARNING! Buyers sometimes assume that any defect in the property entitles them to demand that the seller fix it. This is not the case. Remember that the buyer’s leverage is his ability to cancel the contract, and that can only be done if there is a major deficiency which was not apparent when the buyer first looked at the property. Minor, cosmetic or obvious defects are not sufficient to cancel a contract.
Not surprisingly, the parties often disagree as to what is sufficiently major to justify cancellation. Some issues have been litigated. For example, the courts have held that a roof which is not leaking but is probably nearing the end of its useful life does not justify cancelling the contract. Unless the house is new construction (which falls under an entirely different legal regime) the buyer is not entitled to assume that the roof is new. On the other hand, if the roof is leaking, that is a major deficiency which justifies cancellation.
Sellers often resent a buyer’s repair requests, regarding them as little more than an unfair opportunity to renegotiate the purchase price. This is a frequent problem with older sellers who have not been in the real estate market for many years. When they purchased the property, the rule was “Caveat Emptor,” and they are unpleasantly surprised by the modern regime of disclosures and inspections. However, in responding to the buyer’s repair requests, they have to consider the likelihood that, if the contract is cancelled, the next buyer will make the same requests. Any buyer is likely to object to things such as a leaky roof, a non-functioning heating system, or radon or mold contamination. All mortgage lenders require a termite inspection and, if necessary, treatment of infestation.
On the other hand, defects such as squeaky floorboards, misaligned interior doors,
torn window screens, scratched paint, popped nail holes, chipped sinks, missing cabinet knobs, etc., etc. are not structural, systemic or environmental and do not justify cancellation.
When the buyer requests remediation of conditions sufficiently grave to justify cancellation of the contract, the seller can refuse to do anything, leaving the buyer the option to cancel, or the seller can agree to make repairs prior to closing, or the parties can agree on a credit against the purchase price in a particular amount to be given to the buyer at closing in lieu of seller repairs. Once the parties have agreed on repairs, credits or inaction, they proceed with the contract.
One of the most misunderstood parts of the purchase contract is the LIQUIDATED DAMAGES clause. That’s the subject of next week’s handout.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning real estate transactions and all other legal matters, consult an attorney.
The Inspection Contingency
RESIDENTIAL REAL ESTATE
UNDERSTANDING THE INSPECTION CONTINGENCY CLAUSE
Once a contract for the purchase and sale of residential property has been signed by both buyer and seller, and the attorney review period has concluded without cancellation of the contract (or with cancellation and reinstatement of the contract), it becomes binding on both buyer and seller. The seller must sell to the buyer, and the buyer must buy, except for CONTINGENCIES.
CONTINGENCIES are conditions which must be satisfied before the parties are obligated to go forward with the purchase. In a residential sale, contingencies are generally included in the contract to protect the buyer against certain possibilities. One of the buyer’s main concerns is that after he has agreed to pay a certain price for the property, he will discover damage, deterioration, pest infestation or other conditions he didn’t know about and didn’t take into consideration when agreeing on a purchase price. The buyer is charged with knowing about any deficiencies in the property which are open and obvious to an untrained eye, but he is not expected to know about conditions which are hidden or require technical expertise to discover. To provide an “out” for the buyer in the case of serious, not-readily-apparent deficiencies in the property, the contract contains an INSPECTION CONTINGENCY clause. This clause allows the buyer a specific number of days to have the property inspected by a licensed home inspector, who prepares a written report containing the results of his inspection. If the report discloses major defects in the roof, foundation, HVAC, plumbing or electrical systems, or the presence of pests or environmental contaminants (radon, mold) the buyer has the right to cancel the contract, get his deposit back, and move on. If, on the other hand, no such deficiencies are reported, the deal goes forward.
What usually happens is that the buyer presents the inspection report to the seller, along with a request that the seller repair or remediate conditions listed by the buyer. With respect to each request, the seller agrees or refuses to fix it, the buyer responds, and the communications may go back and forth several times.
REMEMBER, if it weren’t for the INSPECTION CONTINGENCY clause, the buyer would be obligated to take the property “as is.” The INSPECTION CONTINGENCY clause, by giving the buyer the right to cancel the contract, provides incentive for the seller to agree to repair or remediate major deficiencies.
WARNING! Buyers sometimes assume that any defect in the property entitles them to demand that the seller fix it. This is not the case. Remember that the buyer’s leverage is his ability to cancel the contract, and that can only be done if there is a major deficiency which was not apparent when the buyer first looked at the property. Minor, cosmetic or obvious defects are not sufficient to cancel a contract.
Not surprisingly, the parties often disagree as to what is sufficiently major to justify cancellation. Some issues have been litigated. For example, the courts have held that a roof which is not leaking but is probably nearing the end of its useful life does not justify cancelling the contract. Unless the house is new construction (which falls under an entirely different legal regime) the buyer is not entitled to assume that the roof is new. On the other hand, if the roof is leaking, that is a major deficiency which justifies cancellation.
Sellers often resent a buyer’s repair requests, regarding them as little more than an unfair opportunity to renegotiate the purchase price. This is a frequent problem with older sellers who have not been in the real estate market for many years. When they purchased the property, the rule was “Caveat Emptor,” and they are unpleasantly surprised by the modern regime of disclosures and inspections. However, in responding to the buyer’s repair requests, they have to consider the likelihood that, if the contract is cancelled, the next buyer will make the same requests. Any buyer is likely to object to things such as a leaky roof, a non-functioning heating system, or radon or mold contamination. All mortgage lenders require a termite inspection and, if necessary, treatment of infestation.
On the other hand, defects such as squeaky floorboards, misaligned interior doors,
torn window screens, scratched paint, popped nail holes, chipped sinks, missing cabinet knobs, etc., etc. are not structural, systemic or environmental and do not justify cancellation.
When the buyer requests remediation of conditions sufficiently grave to justify cancellation of the contract, the seller can refuse to do anything, leaving the buyer the option to cancel, or the seller can agree to make repairs prior to closing, or the parties can agree on a credit against the purchase price in a particular amount to be given to the buyer at closing in lieu of seller repairs. Once the parties have agreed on repairs, credits or inaction, they proceed with the contract.
One of the most misunderstood parts of the purchase contract is the LIQUIDATED DAMAGES clause. That’s the subject of next week’s handout.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning real estate transactions and all other legal matters, consult an attorney.