Selling after storm Sandy

By: James L. Goldsmith, Esq.

The agreement of sale has been fully negotiated and signed. The mortgage application has been submitted and a clean commitment issued. The inspections have been completed with the ensuing corrective proposal negotiated and locked-in. With a few weeks to go, there is nothing to do but wait and perhaps window shop with anticipation of a nice juicy commission.

Amidst these visions of sugar plums you hardly take note of that blurry white pinwheel that appears on the weather map somewhere beyond Cuba. It has a name: Sandy. By next day you are consumed by its trajectory and implications.

I hope you and yours weathered Sandy and have been little impacted by its passing. Our hearts and donations go out to those who have fared less well.

Not intending to trivialize those scared by Sandy, we turn to our hypothetical of the transaction that was intersected by Sandy's passing. With the window for completing inspections closed, how can the buyer know that the condition of the property has not changed?

The usual starting point is with the agreement of sale. It (PAR Standard Agreement - ASR) states at paragraph 22 that the property is to be sold in its present (as existed when the agreement was executed) condition. Paragraph 17 (Maintenance and Risk of Loss) provides that the property is to be maintained in its present condition with the exception of normal wear and tear. But how, after an extreme weather event and after the inspection period has ended, does a buyer determine the property is in its "present" condition?

As with most contracts, one must trust that the other party will honor his contractual obligations. In this case we anticipate that the seller will inform the buyer if any system or appliance has failed and will not be repaired before settlement. Failure to abide by this obligation of paragraph 17 could be the basis of a post-settlement lawsuit. If the seller elects not to repair, he/she is obligated to inform the buyer whether seller will credit buyer with the fair market value of the failed system/appliance or do nothing. If the seller elects to do nothing, then the buyer is not obligated to proceed with the purchase. Likewise, if the seller fails to provide the buyer with timely notice of seller's election to credit or do nothing, the buyer may walk.

For paragraph 17 to work as intended, the seller must disclose the damage that will not be repaired. A buyer who hears nothing from the seller after a storm may presume, absent knowledge to the contrary, that there is no damage. To be safe, the buyer could make a written inquiry and demand a written answer. "Dear Seller, unless we hear from you to the contrary, we will presume that the recent weather event did no damage.... We remind you risk of loss provisions of paragraph 17 of the Agreement..."

Of course nothing in paragraph 17 provides the buyer with the right to engage an expert to assess storm damage. Such an inspection, however, is a possibility. Paragraph 12 is where the buyer elects inspection contingencies. That paragraph begins with a general statement that requires the seller to provide access to insurers, appraisers, and representatives of the mortgage lender if requested. If the lender were to require as a condition of buyer's mortgage a post-storm inspection, then the seller would have to accommodate. I have received some anecdotal evidence that lenders are seeking these post-storm inspections. I see no reason why a buyer or her agent cannot contact the buyer's insurer or lender to advise that the property was in the area struck by the weather event and ask whether any post-event inspection would be required.

As homeowners, we live with risk. Some of us, who choose to live on the banks of a creek, along a fault line or at the beach, accept more risk than others. We guard against that risk as best we can by arming ourselves with insurance to the extent available or by employing extraordinary construction techniques. No preparation, however, will always be enough in all situations.

The period between executing the agreement and settlement is a unique transitory period. And when that storm hits, who sheds tears and who breathes a sigh of relief? Under Pennsylvania law, a buyer assumes all risk of loss at the moment the agreement of sale is fully executed, unless the agreement provides otherwise. Yes, under such circumstances, a buyer would have to tender the full purchase price even though the property blew out to sea!

The PAR agreement alters common law by providing that the risk of loss remains with the seller until the date of settlement. That is why the seller must either repair or credit the buyer with the amount of loss; failing to elect either gives the buyer the right to walk away.

Perfect? Hardly. It is never perfect when there is serious loss of property and worse when it is accompanied by loss of life. The best we can do is create a formula or path to allocate the risk. Understanding our agreement and the rights it accords will hopefully enable your clients to proceed with eyes wide open. Making disclosures and electing options before settlement is far better than post-election surprises and lawsuits.

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Mr. 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 and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels employers on employee relations issues as one of the voices of the PAR Legal Hotline. He may be reached at realcompliance.com.