The Best of the Legal Hotline: Inspection Contingency


 Tracy Rucka  |    March 07, 2012
HotlineLRG

What is covered in the Inspection Contingency?

The broker and buyer are sitting down to write the offer. The seller’s RECR states that there has been water in the basement, and the buyer and broker observed cracks in the basement walls. The buyer wants a home inspection but also wants an engineer or foundation specialist to look at the basement. Can the broker just use the Inspection Contingency?

The Inspection Contingency in the WB-11 offer is a three-prong contingency that allows for: 1) a home inspection conducted by a Wisconsin-registered home inspector, 2) a component inspection conducted by a qualified independent inspector or an independent qualified third party, and 3) a follow-up inspection resulting from the results of one of the aforementioned inspections. The broker may include the foundation or basement inspection as a component inspection at lines 413-414 in the Offer to Purchase. Alternately, it is also possible that the buyer uses the Home Inspection Contingency for the home inspection and negotiates an independent inspection contingency for the foundation. A separate contingency would be used if, for example, the buyer and seller wanted a different timeline for the inspection, a different choice about right to cure or not, a limit on costs for potential repair, or a different definition of defect. 

What will be inspected at the follow-up inspection?

A buyer’s Home Inspection Contingency provided for the general home inspection and then listed the roof, electrical and furnace as component inspections. The buyer had the home inspection and gave notice of defects to the seller. The seller has the right to cure and now has 10 days to decide if they will cure or not. The buyer, still within the time allowed for the inspection, is asking for access to the property for follow-up inspections saying they have the right to have additional
inspections done. Because the seller has received a notice of defects, the seller is refusing access for further inspections. Can the seller refuse access?

The terms of the WB-11 Residential Offer permit a buyer to have follow-up inspections if the inspections are recommended in a written report resulting from an authorized inspection, as long as those inspections are completed before the deadline on line 421 of the buyer’s offer. So long as the home inspection report recommended follow-up inspection - not testing - the buyer may conduct the follow-up. The right to have follow-up inspections is not dependent on whether the buyer has already provided a notice of some defects. Additional inspections may reveal additional defects. In order to prevent additional inspections, the seller could make the offer null and void with the delivery of a notice to the buyer stating  the seller will not cure, since the buyer issued a notice of defects and the seller has the right to cure. 

The buyer, by initiating the notice of defects, gave the seller the power to terminate the offer by electing not to cure.  

What does the buyer use: an Amendment or Notice?

THE BUYER’S CHOICE
The broker wrote an offer as a buyer’s agent on an FSBO condominium. The home inspection gave the sellers the right to cure. The buyers are objecting to several things in the inspection report that the inspector noted as needing repair or replacement immediately. The buyers submitted an amendment to the sellers for a $5,000 price reduction in the purchase price to compensate for the items that the inspector noted as needing immediate repair or replacement. The sellers rejected the amendment the day before the Inspection Contingency expired.

The buyers prepared a notice of defects the day the Inspection Contingency expired and delivered it before the deadline. The broker told the buyers that the sellers will have 10 days to decide if they want to cure or negotiate an amendment to the offer. The sellers are saying that the buyers did the notice and amendment in the wrong order; the notice should be given first so that the sellers know what the buyers want cured followed by an amendment to negotiate the cure. Who is right and who is wrong?

It is the buyer’s choice to initiate a notice or an amendment and in what order. Per the offer, the buyer is obligated to promptly provide the seller with a copy of the home inspection report, regardless if the buyers will give an amendment or a notice of defects or purchase the property in its current condition. There are no rules regarding what must be done in what order in the time before the contingency deadline. If the buyer is unwilling to have the seller terminate the offer, the buyer will not give a notice of defects when there is a seller right to cure. By delivering the notice, the seller can terminate the deal. So long as there is time in the contingency, the buyer may try an amendment based on information contained in the home inspection report. If the seller agrees, the parties move toward closing; if the seller does not, the buyer may try a different amendment or notice as time allows. The decision to give a notice or amendment must be made on a case-by-case basis, taking the buyer’s situation into consideration.

THE SELLER’S CHOICE

After the home inspection, the buyer gave the seller a notice of defects and the seller has the right to cure. Can the seller try to negotiate by using an amendment before the end of the 10-day timeline, and then use a notice if necessary like the buyer can before serving their notice regarding the home inspection? 

Yes. At any time, either party may attempt to modify the terms of the contract by amendment. If the amendment is not agreed upon, then the party still has, given the timing in the offer, the options to give notice per the offer. If the parties agree to amend, the amendment should show that the parties agree that the notice of defects is withdrawn, otherwise the offer would become null and void by passage of the 10-day timeline. 

In the described scenario where the buyer has delivered a notice of defects, the seller has 10 days from the delivery to reach an agreement by amendment with the buyer, give notice of the seller’s election to cure the listed defects, give notice that the seller will not cure, or the seller may do nothing. If the seller gives notice that they will not cure, or if the seller does nothing and the 10 days pass, then the offer will be null and void.

What are the testing standards?

A selling agent provided a notice of defects for a testing contingency due to a high level of radon. The agent understands that with a Home Inspection Contingency, if notice is served to the seller, the seller has the option to declare the offer null and void. Is this also the case for a  testing contingency? The buyer gave notice, but wants the property. However, the seller has a better offer in the wings. How to proceed?

Don’t assume what the standard may be for any testing contingency since each contract must be reviewed to determine the particular terms and conditions that the parties have included - in this case, the Radon Testing Contingency. In general, there are three ways such a contingency might be drafted: the seller has no right to cure, the seller has a right to cure, or the seller is obligated to cure. 

If the offer includes a typical ‚Äúseller right to cure,‚ÄĚ the buyer must¬†understand that by delivering a notice regarding elevated radon¬†levels, the buyer is giving the seller the ability to choose to either¬†cure the defect, by mitigating the radon, or terminate the offer.¬†A seller with another buyer may ¬†choose not to cure and make the¬†offer null and void. Most often, a buyer cannot withdraw the notice¬†without the seller‚Äôs permission. Therefore, a buyer delivering the¬†notice must be willing to lose the property.

The parties may consult with legal counsel to review the specific testing contingency used and discuss the parties’ options.

Who attends the inspection?

Since home inspectors are registered, does a licensed real estate agent need to be present at the home inspection?

There is no one right or wrong analysis or answer on this issue because there are pros and cons to justify attending or not attending the inspection. The Department of Safety and Professional Services has not taken a position on the issue, other than that the Administrative Code rules do require real estate licensees to make a reasonable inspection of the property during the course of a transaction. See Wis. Admin. Code § REEB 24.07(1).

As far as agents who do accompany home inspectors, there are¬†dangers of potential liability coming from different directions. If the¬†agent actually starts assisting or supervising the home inspector, the¬†agent could face possible liability for negligence for a defect that is¬†missed, as was the case in a 2002 REALTOR¬ģ Magazine article titled¬†‚ÄúPass the Baton: Do Your Job and Let Inspectors Do Theirs.‚ÄĚ Liability¬†may also arise in the context of negligent hiring or supervision of an¬†inspector or other professionals.

An agent accompanying an inspector could also face problems if the home inspector oversteps his or her authorization and, for example, engages in sampling for radon or mold tests. The agent has responsibility to stop any unauthorized procedures. On the other hand, if the agent is not there, no one is on-site to monitor the inspector - the fact that they must be registered does not eliminate the possibility that an inspector might overstep his or her authority. One way to control the scope of the inspector’s activity is to have the broker attend the showing or have the buyer who hires the inspector enter into a contract that specifically sets the parameters of the inspection.

Timing?

The buyer and seller have an accepted offer that includes a Closing of Buyer’s Property Contingency and a 14-Day Home Inspection Contingency. At the time of acceptance, the buyers do not have an accepted offer on their home. The selling agent has indicated that he believes the 14 days for inspection notice delivery begins when the buyers sign off on their home sale contingency. The listing agent thinks the date of inspection runs from date of offer acceptance, without regard to the buyer’s home sale contingency. Please advise.\

As per line 423 of Inspection Contingency in the WB-11 Residential¬†Offer to Purchase, ‚ÄúThis contingency shall be deemed satisfied unless¬†Buyer, within ___ days of acceptance ...‚ÄĚ The WB-11 also states on¬†lines 173-175, ‚Äú‚ÄėDeadlines,‚Äô expressed as a number of ‚Äėdays‚Äô from¬†an event, such as acceptance, are calculated by excluding the day¬†the event occurred and by counting subsequent calendar days.‚Ä̬†Therefore, unless otherwise stated in the contract, the Inspection¬†Contingency runs from the date of acceptance, not the date of the¬†Closing of Buyer‚Äôs Property Contingency.

The buyer is thinking about writing an offer on a short sale property. Can the buyer wait until the short sale is approved to have all the inspections and tests?

The timing of any tests and inspections is a matter of negotiation.¬†When the cooperating broker drafts the offer and the listing broker¬†presents the offer, the brokers should understand the buyer‚Äôs and¬†seller‚Äôs concerns regarding the timing. The buyer does not want to¬†pay for the inspections unless the buyer has confirmation that the¬†lender will approve the short sale. There are potentially two ways to¬†accomplish this: have the inspection and testing contingencies time¬†frame run from lender approval of the short sale, or alternately, to¬†have the inspections paid for by the seller. Given it is a short sale,¬†the seller may not have the funds to pay for an inspection or repair¬†any defects. Therefore, the seller would want the inspections paid¬†for by the buyer and conducted earlier in the transaction to identify¬†defects that need repair or allow the seller to terminate if they will¬†not repair. Even if the seller is selling ‚Äúas-is‚ÄĚ and does not intend¬†to repair any defects, the buyer will want to conduct inspections to¬†know the condition of the property.

End of Useful Life

Is a roof that is considered to be at the end of its useful life, but is not¬†leaking and is still working, considered a ‚Äúdefect?‚ÄĚ If a buyer gives¬†notice in regard to the roof, can they remove themselves from the¬†contract under the Home Inspection Contingency?

The terms of the Home Inspection Contingency in the WB-11¬†Residential Offer to Purchase allow the buyer to give a notice of¬†defects if the home inspection identifies defects. A ‚Äúdefect‚ÄĚ is defined¬†on lines 182-184 of the WB-11 Residential Offer to Purchase as ‚Äúa¬†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.‚ÄĚ Pursuant to the Inspection Contingency,¬†the written Notice of Defects need only contain the list of those¬†defects identified in the written home inspection report to which the¬†buyer objects. The parties may review the terms and conditions of¬†the home inspection report to determine if the inspector considered¬†the age of the roof as a defect. The fact that an item is old does not,¬†per se, make the item a defect, however other roof conditions may¬†factor into the evaluation.¬†If the seller does not have the right to cure, the offer will become¬†null and void if the buyer delivers timely a written Notice of Defects¬†accompanied by a copy of the home inspection report. If the seller¬†has the right to cure and the buyer delivers a Notice of Defects, the¬†seller may choose to cure the listed defects or to allow the offer to¬†become null and void.¬†

Resources

  • November 2009 Legal Update, ‚ÄúWB-11 Residential Offer¬†to Purchase - 2010 Edition‚ÄĚ at www.wra.org/LU0911.¬†
  • February 2007 WRA Broker Supervision Newsletter,¬†‚ÄúProper Use of the Home Inspection Contingency‚ÄĚ at¬†www.wra.org/bsnFeb07.
  • August 2004 Legal Update, ‚ÄúEffective Home Inspections‚Ä̬†at www.wra.org/LU0408.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.

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