In January we kicked off a series of articles exposing the truths of real estate practice and dispelling any perpetuated myths. This month the focus is on the inspection contingency, specifically the use of amendments versus notices.
Before breaking down the myths, let’s go over some of the basics. When drafting an offer to purchase, the inspection contingency should be completed to include:
- Information, if any, included on the blank lines regarding specific property components that the buyer would like to have inspected by a qualified independent inspector or independent third party.
- A deadline that provides the buyer sufficient time for the inspection, noted follow-up inspections in the inspector’s report, additional inspections of any component inserted on the blank lines, negotiations through amendments, if necessary, and Notice of Defects, if necessary. Licensees should remember that a short time frame will not provide the buyer time for all of the enumerated items to occur, especially if the home inspector is not able to get into the property right away. Additionally, licensees should keep in mind that the time frame is counted in days, running Monday through Sunday, meaning the time moves quickly.
- A selection of either (shall) or (shall not) in the right to cure provision.
Urban Legend # 1: The right to cure provision should always say, “seller shall have the right to cure.”
The truth: There is no right or wrong way to draft the right to cure provision. Licensees should explain the provision and discuss the buyer’s options. Below is an overview of the provision.
The buyer delivers to the seller a Notice of Defects and a copy of the inspection report. The right to cure provision is drafted to say:
- Seller shall have the right to cure. The seller then has three options:
- Deliver to the buyer within 10 days written notice that the seller will cure the defects, thus keeping the offer alive. The seller must cure the defects in a good and workmanlike manner and deliver to the buyer a written notice detailing the work done within three days prior to closing.
- Deliver to the buyer written notice that the seller will not cure the defects. This option makes the offer null and void.
- Do nothing. This also makes the offer null and void.
- Seller shall not have the right to cure. The offer is null and void.
Urban Legend # 2: A notice and an amendment are the same.
The truth: The notice and the amendment are distinctly different. The inspection contingency makes this distinction: “Caution: A proposed amendment is not a Notice of Defects and will not satisfy this notice requirement.” A WB-40 Amendment to Offer to Purchase is used when the parties are agreeing to modify terms; the WB-41 Notice Relating to Offer to Purchase is utilized when one party is giving notice that does not require the other party’s agreement.
If the buyer wishes to negotiate terms after a home inspection, then the buyer would draft an amendment. If the buyer would like to provide a Notice of Defects, then the buyer would draft a notice and attach the inspection report. An easy way to remember to reserve the buyer’s negotiating rights is to think of, “A before N,” “amendment before notice,” or 40 before 41. A Notice of Defects will activate the right to cure provision of the offer. Therefore, once a buyer provides a Notice of Defects, the situation is dictated by the right to cure language. Since the amendment is not a notice, the amendment provides the parties with the ability to negotiate terms without activating the right to cure provision.
According to lines 421-423 of the 2011 WB-11 Residential Offer to Purchase, a copy of the written inspection report must accompany the buyer’s Notice of Defects. The contract provides that the contingency is waived unless the buyer delivers to the seller, “a copy of the written inspection report(s) and a written notice listing the Defect(s) identified in those report(s) to which the Buyer objects (Notice of Defects).”
Urban Legend # 3: An amendment must be given before a notice.
The truth: A buyer is not required to provide an amendment prior to a notice. However, a buyer wishing to negotiate terms would provide an amendment first. A buyer may also choose to skip the amendment process and go right to the Notice of Defects.
If the buyer provides a notice and the parties later decide they would rather negotiate the defect issue, then the parties should document a withdrawal of the Notice of Defects with an amendment. Any amendment proposed after a Notice of Defects has been given should include a provision agreeing to the withdrawal of the notice of defects. If the amendment is signed, the Notice of Defects would be withdrawn and the parties would have agreed to certain repairs in the amendment. If the amendment is not signed, the Notice of Defects will be enforced.
Urban Legend # 4: A notice and amendment should be given simultaneously.
The truth: Giving the notice and amendment simultaneously will cause a great deal of confusion. Therefore, the path of least confusion would be to provide the amendment attempting to negotiate the terms, followed by the notice if the seller does not agree to the amendment terms. However, a buyer who is concerned about the time frame of the inspection contingency may supply both the amendment and notice at the same time if the buyer includes specific language. For instance, “This Notice of Defects is effective only if the seller does not accept the buyer’s amendment dated ______ on or before ______.”
Urban Legend # 5: A notice should include the defects to be fixed and the name of the company to make the repairs.
The truth: The inspection contingency provides that the buyer may give a written notice listing the defects identified in the report to which the buyer objects. It is not appropriate for the buyer to dictate how the seller will cure in a Notice of Defects. The seller’s obligations to cure are outlined on lines 428-431 of the offer to purchase. If the buyer wishes to negotiate a certain method for repairing a defect, then an amendment is the appropriate tool.
Urban Legend # 6: The home inspector determines what is or is not a defect.
The truth: The offer to purchase defines “Defect” for the inspection contingency. Line 425 states, “For the purposes of this contingency, Defects (see lines 182-184) do not include structural, mechanical or other conditions the nature and extent of which Buyer had actual knowledge or written notice before signing this Offer.” Lines 182-184 defines Defect as “a condition that would have a significant adverse effect on the value of the Property; that would significantly impair the health or safety of future occupants of the Property; or that if not repaired, removed or replaced would significantly shorten or adversely affect the expected normal life of the premises.” Whether any item listed is actually a defect is determined on a case-by-case basis. If the parties cannot agree whether an item is a defect, as defined in the offer, then the parties should be directed to their respective attorneys for advice.
Cori Lamont is Director of Brokerage Regulation and Licensing for the WRA.