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Inspection period issues in the Residential Contract by K. Michelle Lind Posted: June 2005 |
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The Inspection Period in the AAR Residential Resale Purchase Contract
(5/05) (“Contract”) allows the buyer ten days (or as otherwise provided)
after Contract acceptance to:
If the buyer provides the seller an opportunity to correct the items disapproved, the seller must respond within five days (or as otherwise provided). If the seller agrees in writing to correct any of the items, repairs must be completed in a workmanlike manner and any paid receipts delivered to the buyer three days (or as otherwise provided) prior to the close of escrow date (Section 6j, lines 241-243). If the seller is unwilling or unable to correct any of the items disapproved, the buyer may cancel the Contract within five days. If the buyer does not cancel the Contract, the buyer is obligated to close escrow without correction of those items that the seller has not agreed in writing to correct (Section 6j, lines 244-248). If the buyer discovers any non-working warranted item(s) during the Inspection Period, the buyer must give the seller notice. The warranted items include: all heating, cooling, mechanical, plumbing, and electrical systems (including swimming pool and/or spa, motors, filter systems, cleaning systems, and heaters, if any), free-standing range/oven, and built-in appliances. The buyer may provide this notice on the Buyer’s Inspection Notice and Seller’s Response form (“BINSR”). If the buyer discovers a non-working warranted item during the Inspection Period and fails to provide the notice, the seller will be released from the obligation to repair the warranted item. Tip: Always provide the buyer’s Inspection Period Notice on AAR’s BINSR form for uniformity of practice. The BINSR provides both parties additional information on the inspection and notice of disapproval process and contains provisions for the buyer’s notice, the seller’s response, and the buyer’s election, as well as a space for notice of non-working warranted items Must all Inspection Period items disapproved be provided in a single notice? Yes. All desired inspections and investigations must be conducted prior to delivering the notice and all Inspection Period items disapproved must be provided in a single notice (Section 6i). Tip: If the buyer elects to allow the seller an opportunity to correct the items disapproved, the buyer should state in the notice how the item must be corrected. For example, if termites are found, must the entire house be treated, or is spot treatment sufficient? If a roof condition is an item disapproved, state the extent of the repair requested or whether only replacement will suffice. If the buyer elects to cancel the Contract, must the buyer give written notice of what items the buyer disapproves? Yes. If the buyer disapproves of an item, the buyer must deliver to the seller written notice of the items disapproved and state in the notice that the buyer elects to cancel (Section 6j, lines234-235). Is the buyer entitled to disapprove of cosmetic items? Yes. The buyer may disapprove of items in the buyer’s sole discretion (Section 6j, Line 234). Of course, both parties are always obligated to act in good faith and the buyer’s disapproval rights are no exception to that rule. Tip: If the buyer elects to cancel the Contract, list all the items of which the buyer disapproves in the Inspection Period Notice. Can the buyer demand a reduction in the purchase price in lieu of providing the seller an opportunity to correct the item disapproved? No. The Contract provides that the buyer may either elect to immediately cancel the Contract or provide the seller an opportunity to correct the items disapproved. Tip: If the buyer wants a reduction in purchase price in lieu of repairs, the buyer should obtain several bids to determine the cost of the repairs, negotiate the reduction, and reduce the modification to writing prior to delivering the Inspection Period Notice. What if the buyer does not give written notice to the seller during the Inspection Period? The buyer’s failure to give the seller written notice of items disapproved during the Inspection Period is deemed to be the buyer’s election to proceed with the transaction and close escrow without the correction of any property items (except for warranted items) Section 6j, lines 251-253). What happens if the seller fails to respond to the buyer’s written notice of items disapproved? The seller’s failure to respond is deemed a refusal to correct any of the items disapproved (Section 6j, lines 239-240). In such case, the buyer has five days after the expiration of the time period for seller’s response to elect to cancel the Contract or proceed with the transaction without the correction of the items disapproved (Section 6j, lines 244-246). What if the seller agrees to correct some, but not all, of the items disapproved? The buyer has two options: cancel the Contract or accept the property with the correction of only those items seller agreed in writing to correct. If the buyer wishes to continue to negotiate the items, the buyer must get a written agreement extending the time periods for cancellation or the buyer will be obligated to close escrow without correction of the items that seller has not agreed to in writing, even if the parties continue “negotiating” (Section 6j, lines 249-250). Tip: For example, these time periods may be extended with the following agreement: “Buyer received Seller's response on ____. Seller is currently unwilling to correct the following items disapproved by Buyer: _____ Pursuant to the Contract, Buyer is entitled to cancel this Contract on or before ___. Buyer and Seller hereby agree to modify the Contract and extend the Buyer's right to cancel this Contract and receive the return of all earnest money until __ to allow the parties additional time to address the items disapproved.” For additional examples go to www.aaronline.com/documents/language_disapp.aspx. Can the buyer change the buyer’s election once the election has been made? Probably not. If the buyer reasonably disapproves of items, the buyer must state in the notice that the buyer elects to either immediately cancel the Contract or provide the seller an opportunity to correct the items. If the buyer gives the seller an opportunity to correct the items, the buyer has made the election and can no longer “immediately cancel” the Contract. To avoid this dilemma, make sure the buyer has taken the time allotted to perform all inspections and investigations and has thoroughly considered the options before making an election. If the buyer gives notice to the seller of a non-working warranted item, is the seller entitled to refuse to repair the item? No. When the buyer and seller enter into the Contract, the seller agrees that the warranted items will be in working condition at close of escrow (Section 5a). The buyer’s notice that one of these items is not working does not change the seller’s obligation to repair the item and deliver it in working condition at close of escrow (Section 6k). What happens if the buyer discovers a non-working item during the Inspection Period but does not notify the seller? The Seller warranty for that item is waived. In other words, the seller will not have to repair the item. What if there is a non-working warranted item that the buyer does not discover during the Inspection Period? If the buyer does not discover the item during the Inspection Period, the buyer cannot give the seller notice. Therefore, the seller continues to be obligated to repair the item and deliver it in working condition at close of escrow. What happens if the seller fails to make the agreed upon repairs? If the seller fails to complete the repairs three days prior to the COE Date and the buyer immediately delivers the cure notice, the seller will be liable for breach of contract and breach of warranty if the repairs are not complete by close of escrow. The Contract clearly sets forth the procedure for the Inspection Period Notice and seller’s response. Brokers should be familiar with the process and insure that a signed writing evidences any agreed upon deviation in the process. K. Michelle Lind, Esq. K. Michelle Lind is General Counsel/Assistant CEO to the Arizona Association of REALTORS® (AAR). She serves as the primary legal advisor to the association. Michelle oversees AAR’s Risk Management Committee, which includes professional standards administration for twenty of the state’s local REALTOR® associations, and the development of standard real estate forms. She is the author of Arizona Real Estate: A Professional’s Guide to Law & Practice and a regular contributor to the Arizona REALTOR® and the Arizona Journal of Real Estate & Business. Please note that this article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel. | ||||||||||||
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