2014 September Working with the inspection contingency

By James L. Goldsmith, Esq.

Without a doubt, our members have more difficulty with the Inspection Contingency than any other provision of the standard agreement. Reading the contingency makes clear that certain things are to be done within specified times. No problem. No problem, that is, until real life inserts itself. Take this example.

A buyer has her home inspection completed within 10 days and concludes that she will move forward with the purchase if, and only if, the seller will make a number of specific repairs. She instructs her buyer agent to put together a corrective proposal which states that the agreement of sale is "deemed terminated" unless seller satisfies all of buyer's corrective proposal. This seems straightforward and easily understood. What can go wrong?

Let's assume buyer's corrective proposal was put in the hands of the listing agent timely, but at the end of the contingency period. Two days later, now in the Negotiation Period, buyer agent receives email from the listing agent with a scanned copy of a Notice of Termination. The Notice includes a checkmark in the box that says seller terminates the agreement of sale and the reason given is that the buyer had already elected to terminate as permitted by the Inspection Contingency: " . . . if the result of any inspection . . . is unsatisfactory to buyer, buyer will, within the stated Contingency Period: accept the property . . . or terminate this agreement . . . "

Clearly, seller took the position that the buyer's corrective proposal indicating that seller do certain things or the agreement was terminated, allowed seller to accept the termination. As it turns out, the buyer was willing to take the property even if the seller didn't do all of the repairs sought. [Query: has this happened to you? Your client takes a hard stance only to freak-out when the other side calls his/her bluff?] The buyer and her agent, both shocked, felt that this was unjust. The parties were, after all, in the Negotiation Period and neither party has the right to terminate until its conclusion. Do you agree?

To answer this we must read the applicable provision. If you do so, you will note that during the Negotiation Period seller will either agree to satisfy the proposal or will negotiate a mutually acceptable written agreement. The agreement does not provide for seller termination during the Negotiation Period.

On the other hand, seller makes the claim that it was not he who terminated the agreement. While he signed the Notice of Termination, he was merely underscoring the fact that the buyer terminated the agreement during the Contingency Period by stating that if the seller would not make all of the repairs the agreement was "deemed terminated." And, if you read the provision, it does indeed state that, during the Contingency Period, buyer can accept the property or terminate the agreement. The issue becomes whether buyer's demand that seller repair or the agreement would be "deemed terminated" was in fact a termination or an invitation to negotiate. Unfortunately, the language in the inspection contingency won't sort this out. The inspection contingency contemplates that during the Contingency Period buyer will either accept the property or submit a corrective proposal. It doesn't say that the buyer can submit a corrective proposal like the one submitted by our buyer, with a "deemed" termination.

What did the buyer mean to suggest when she inserted that the agreement was to be "deemed terminated" if the seller wouldn't make all of the repairs? My guess is that the buyer was posturing and trying to emphasize the importance of seller agreeing to the proposal in its entirety. Was it puffing to suggest that the buyer would actually walk? If indeed it was posturing (it seems so, since the buyer was shocked that the seller caller her bluff), why posture? Why not submit a corrective proposal without the "deemed terminated" and then determine what can be negotiated? The buyer certainly would have the opportunity to hold a hard line during the negotiations and would have a clear opportunity to terminate if the seller was unable or unwilling to meet her terms.

Bluffs abound and in my opinion they are not always effective, and they can backfire. How many times have we heard a seller state that the buyer was permitted to inspect the property but "because I've dropped the price to much I am not doing a darn thing"? Any how many times have you heard this only to find that the seller is willing to make some repairs in order to accomplish the seemingly impossible: a sale!

My advice is that you become familiar with every word of the inspection contingency. My advice is also that your clients follow the letter of the agreement and not attempt to bluster their way to a better deal. Taking a hard stance in a negotiation may be appropriate, but loose and unnecessary blustering causes problems. I suppose problems aren't all that bad; they keep my office busy!

Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2014

All Rights Reserved

Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.