By Douglas K. Marsico, Esquire
Brett M. Woodburn, Esquire
James L. Goldsmith, Esquire
A recent Hotline caller described a residential transaction in which the Buyer delivered his Written Corrective Proposal to the Seller two days after the Contingency Period ended. The Inspection Contingency detailed in Paragraph 13 obligates the Buyer to either (i) accept the property as-is; (ii) terminate the agreement in writing; or (iii) present a Written Corrective Proposal identifying corrections, repairs or credits that the Buyer would like to see effected. This election must occur within the Contingency Period (ten days if not modified). The Buyer missed this window and found himself up the proverbial creek without the required paddle. While the Seller could have taken the position that by failing to terminate the Agreement and failing to submit a timely corrective proposal, Buyer waived all options and was bound to purchase the property in its as-is condition, he did not do so. Rather, the Seller engaged in negotiations, though he took a very hard stance because of his advantageous position. Ultimately, the parties were not successful in negotiating an acceptable agreement and the Buyer tendered a written termination notice. Seller now took the position that the Buyer had waived the benefit of the home inspection contingency because Buyer failed to elect one of the three options within the ten days. Seller claimed that Buyer, therefore, had bought the property in its "as-is condition" and that if Buyer backed out at this stage, Buyer would lose his $10,000 deposit! Is the Seller right?
In this transaction the Buyer had ten days to conduct a home inspection and elect one of the three available contingencies. He did not do so. Query: did the Buyer breach the Agreement? It’s not so much a question of whether there was a breach of agreement, but whether the Buyer had waived the benefit of the inspection contingency. Arguably, the Buyer lost the benefit of the protections provided by the contingency, including the option to terminate or submit a corrective proposal and therefore . . . has bought the property.
If Buyer had three options and didn’t elect any of the three, why should Buyer be presumed to have elected the option to proceed without any amendment to the Agreement? Of the three options, proceeding with purchase is the only option that does not require the submission of a written notice. To terminate requires the submission of a written notice of termination. To propose modifications to the Agreement or repairs to the property requires the submission of a Written Corrective Proposal. If Buyer does not terminate in writing or submit a Written Corrective Proposal, then Buyer has elected to proceed with the purchase.
Has Buyer, by failing to purchase the property, now breached the Agreement so that Seller can retain the deposit? There are facts in this case that render a simple answer difficult (unless your answers is: "it depends"). If Seller had balked at the invitation to negotiate repairs when Buyer submitted the late corrective proposal, Seller would have a stronger argument that Buyer breached the Agreement. By engaging in negotiations with Buyer, Seller may have relinquished his argument that the inspection contingency was waived. There are two legal theories at play: waiver and estopple. The waiver theory suggests that if you have a right, but fail to exercise that right, you lose it. This is the very argument that Seller is using to claim that Buyer lost the benefit of the inspection contingency. As applied to the Seller’s conduct, we examine whether Seller having engaged in negotiations waived his right to stand firm that the home inspection contingency was lost and no longer a part of the Agreement.
The estopple theory is similar and works hand-in-hand with the concept of waiver. This theory suggests that when presented with several options and having chosen one, you can’t return and later claim you want the benefit of one of the options not selected. As applied to our case, it means that Seller, having chosen to ignore the untimeliness of Buyer’s corrective proposal, having chosen to negotiate the corrective proposal on its terms, and having failed to reach an adequate accommodation, cannot return to the formerly available option to declare the inspection contingency waived.
We have seen courts quickly adopt the doctrines of waiver and estopple in cases arising from real estate transactions. If a party has so many days to perform and the other party ignores the tardiness but later, when things don’t work out to his liking, returns to declare untimeliness, don’t count on a win. In other words, the conduct of a party may be seen as a tacit amendment to the agreement of sale that forgives the other party from untimely performance.
What could Seller have done differently? Consider declaring the inspection contingency waived by Buyer’s untimely submission of a corrective proposal. This would be followed by an email claiming that the benefit of the contingency is clearly waived though Seller is willing to provide limited repairs or modifications to the Agreement as a gratuitous gesture only. Such a provision should be drafted by counsel with the understanding that it may be the subject of subsequent judicial scrutiny.
Best practice is to require timely adherence to the temporal obligations of the agreement of sale and when additional time is required, an attempt to enlarge the scope of the time period should be sought in writing as an amendment to the agreement of sale. One thing is fairly certain, if a party is found to have lost the benefit of a contingency or has inadvertently waived the right to remove a contingency, they are likely to turn to the salespersons involved to lay blame. Hopefully your file will reflect ample written warning of the impending time deadline or other documentation suggesting that you gave the right advice.
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