The Best of the Legal Hotline: Inspection Contingency

It is different, but it’s the same


 March 09, 2020
Best of the Legal Hotline

As the first few months of 2020 are behind us, there is a good chance you have had the opportunity to use the 2020 version of the WB-11 Residential Offer to Purchase. The Inspection Contingency has moved within the organization of the offer, and the layout is very different, however, the content is substantially similar. Let’s take a closer look at the Inspection Contingency and what is different and what is the same.

What is different?

In the 2020 WB-11 Residential Offer to Purchase, the Inspection Contingency in the new WB-11 is now on page 4, and it looks different. There are two timelines in the inspection contingency. The first is the time for the buyer to have the home inspection, component inspection if any, and any follow-up inspections as suggested in a written report. The contingency now includes a default for the buyer’s inspections. It is now 15 days.

The second timeline is for the seller to elect to cure when a buyer issues a notice of defects. In the event the buyer issues a notice of defects listing the defects to which the buyer objects, the default for the seller to elect to cure is 10 days. Although there are defaults for each of these deadlines, either may be negotiated by mutual agreement of the parties. 

Layout

The inspection contingency remains a three-part contingency for the home inspection, component inspections and follow-up inspections. The formatting of the contingency was changed to clarify the three-prong nature of the contingency. Likewise, the formatting of the contingency for the right to cure and no right to cure has been modified to help the parties understand the implications of giving a notice of defects when a report contains defects as defined in the offer. Rather than the provision in a paragraph format, the steps are laid out in a list to describe what is expected or required. 

To help explain choices to the buyer and seller and the potential outcomes depending on inspection results, see the inspection flowchart at www.wra.org/InspectionFlowchart. 

Definition of ‚Äúdefect‚ÄĚ repeated

To help educate the buyer and seller about which conditions are or are not defects, the definition of ‚Äúdefect‚ÄĚ is repeated within the inspection contingency. Once a buyer receives a written inspection report, the broker may help facilitate conversation about a Notice of Defects with the definition of ‚Äúdefect‚ÄĚ repeated at lines 213-216. In addition, lines 211-212 state, ‚ÄúFor the purposes of this contingency, Defects 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.‚ÄĚ

What is the same?

Most everything else. The inspection contingency remains dedicated to inspections and not testing. If the buyer wants to facilitate radon testing, there is now an optional radon testing contingency in the offer.

Who may attend inspections?

There have been several articles regarding the home inspection contingency, home inspections, home inspectors and liability issues. Specifically, see ‚ÄúHome Inspection Roll Call‚ÄĚ in the June 2014 Wisconsin Real Estate Magazine at www.wra.org/WREM/June14/RollCall.

Included are discussions about advantages and disadvantages of brokers/agents attending home inspections. There is no one right or wrong analysis on whether a licensee should attend an inspection because there are pros and cons to justify attending or not attending the inspection. The modification to the offer at line 185 was included to clarify the buyer or licensees or both may be present at inspections and testing.

WRA legal hotline discussions

After the buyer’s home inspection, the buyer demanded the seller provide follow-up inspections at the seller’s expense. Isn’t the buyer supposed to have follow-up inspections at the buyer’s expense?

The offer is crafted for the buyer to pay for and obtain follow-up inspections. Lines 201-203 of the offer indicate:

‚ÄúBuyer may have follow-up inspections recommended in a written report resulting from an authorized inspection, provided they occur prior to the Deadline specified at line 207. Inspection(s) shall be performed by a qualified independent inspector or independent qualified third party.‚ÄĚ

The buyer may, in an amendment, request the seller obtain follow-up inspections, however, if the buyer does not receive inspection reports prior to the contingency deadline, the contingency will be deemed satisfied. The buyer will not have the opportunity to respond to the follow-up reports.

The buyer’s agent delivered the news that the buyer objected to defects. What is the best way to draft a Notice of Defects?

If the buyer wishes to provide a Notice of Defects to the seller, the buyer may use the WB-41 Notice to Offer. The buyer should identify the defects to which the buyer objects. Therefore, language along the lines of, ‚ÄúThis is a Notice of Defects. The following are defects to which the buyer objects,‚ÄĚ would be appropriate. Additionally, the buyer should list each item the buyer deems to be a defect from the written report(s). The buyer is also required to provide a copy of the inspection report(s), if he or she has not already done so. To meet the requirements of lines 207-209, the written report is required. While the buyer is not obligated to use the magic phrase ‚Äúthis is a Notice of Defects,‚ÄĚ it does make it clear to all the parties involved that the buyer is providing a Notice of Defects.

The buyer may not use a notice to ask a seller to repair or replace items, ask for a price adjustment or terminate the offer if there is a right to cure. The Notice of Defects is not a place for the buyer to dictate how the seller will cure such defects because the standard, good and workmanlike manner has already been negotiated into the contract at line 221.

The inspection is complete. The buyer asked if he should try an amendment or a notice. What are the buyer’s other options? Is the buyer required to give an amendment first? 

So long as there is time remaining in the contingency, the buyer has three choices: 

  • Try an amendment.
  • Issue a notice of defects.
  • Purchase the property in the condition it is in.¬†

The buyer can try an amendment with the WB-40 Amendment to Offer to Purchase before a notice with the WB-41 Notice Relating to Offer to Purchase. 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. The notice and the amendment are distinctly different. The caution included in the Inspection Contingency assists the parties in making this distinction:

Caution: A proposed amendment is not a Notice of Defects and will not satisfy this notice requirement.

A WB-40 is used when the parties are agreeing to modify terms; the WB-41 is utilized when one party is giving notice that does not require the other party’s agreement.

When there is a seller right to cure, a Notice of Defects triggers 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, allowing a seller to terminate the offer if he or she does not want to cure. Alternately the seller may give written notice electing to cure or offer an amendment.

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 of Defects and the parties later decide they would rather negotiate the defect issue, 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 remain in effect.

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

Resources

Three prior issues of Wisconsin Real Estate Magazine focused heavily on inspection contingency issues:

LegalTalks videos on the inspection contingency: www.wra.org/LegalTalks/InspectionContingency

‚ÄúUncovering the Truth: Inspection Contingency,‚ÄĚ in the¬†April 2011 Wisconsin Real Estate Magazine:¬†www.wra.org/WREM/Apr11/UncoveringTruth

‚ÄúUncovering the Truth: Dismantling the Inspection Contingency,‚ÄĚ in the June 2014 Wisconsin Real Estate Magazine: www.wra.org/WREM/June14/UncoveringTruth

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