The ubiquitous corrective proposal

Most residential agreements of sale are eventually modified by a Change in Terms Addendum to Agreement of Sale.

Many times the changes may involve repairs that are to be made before settlement, and other times the seller is called upon to leave sums in escrow for repairs to be made post-settlement.

The best transaction involves no overhanging obligations. The buyer pushes cash or a lender’s check across the table, while the seller slides a signed deed across to the buyer. There are no obligations that survive settlement and the transaction is completed. Get all concerns addressed before settlement, including repairs, whenever possible.

Tying loose ends was easier when it was common for there to be a gap of 90 days between execution of the Agreement of Sale and settlement. Today, 30 days or less is not uncommon, hence, there is far less time to do the needed tasks before settlement.

Why should repairs and other tasks be completed before settlement when a seller can escrow funds to cover the future completion of these obligations? Take a stint on the hotline and the answer becomes apparent. We get tales of woe regarding issues discovered post-settlement that were supposed to be repaired or addressed before. The termite eradication, and the repair of resulting damage that was to have resolved all ills, didn’t.

Buyer subsequently finds substantial damage that seller’s repair company did not find or that the seller did not reveal. [NOTE: When buyers find conditions post-settlement that were supposedly addressed by the seller, it is common for buyers to conclude that the sellers lied or concealed (not much difference) something. This is generally not the case and a good exercise is to consider whether the seller and buyer may both be truthful. The seller did reveal and fix what the seller knew to be wrong and the buyer, indeed, found subsequent problems not previously discovered.]

Along a similar line, work to be done post-settlement may reveal latent conditions that nobody anticipated. Now the buyer finds herself holding escrow that would have covered the problem as originally anticipated, but that is insufficient to cover what was ultimately found. If the work is done prior to settlement, these problems are more likely revealed during repair, and can be disclosed and addressed, thus, a buyer should seek to have the repairs done before settlement.

For the seller, performing repair work before settlement presents challenges. What happens if the seller makes substantial renovations for the benefit of a buyer who then loses his financing? Assuming the buyer hasn’t breached the Agreement of Sale, the seller has no recourse under the terms of the standard agreement. Hopefully, the renovations will enable the seller to market the property to someone else, but that may not be the case, especially when the repairs are unique to a specific buyer.

Deciding who will undertake the repairs is extremely important. If the seller controls repairs, and the buyer subsequently finds problems, the likely conclusion is that the seller addressed the problem on the cheap. Did the seller replace the bad section of hose or merely cover it with a band-aid? If the buyer dictates the measure of repair, will it swing too far in the other direction? By that I mean, will the buyer guild the lily or seek more than is required to fairly address the problem?

One way to assure that seller-controlled repairs are appropriate is for buyer to engage an engineer or an appropriately skilled contractor to monitor work while in progress. The change in terms addendum should reflect that buyer’s representative is permitted access to the property during the scope of repairs to assess and monitor progress. This would certainly prevent seller’s contractor from looking the other way in the face of signs suggesting a worse condition than anticipated.

Regardless of who has the upper hand in negotiating the Change in Terms Addendum, specificity is desirable. Referencing an attached proposal prepared by the contractor should be considered. There should be no loose ends. Items that are to be replaced are to be something specifically described. To the extent possible, model numbers, repair persons and costs should all be identified.

Most importantly, your clients must understand the “what ifs.” What happens if a seller undertakes expensive repairs pre-settlement and the buyer loses a job and his mortgage loan? What happens if repairs are reserved for after settlement and unanticipated problems are encountered?  Discussing the pitfalls while negotiating the Change in Terms Addendum will better enable your clients to assist in the process.

Assuring that you addressed the pros and cons with your client ahead of time will keep you out of hot water.

There is no perfect formula. Both sides of a transaction will assume a measure of risk. The parties must understand and assess the risks they are accepting. You have to make clear that the risk rests with your client and that their decisions may have profound consequences.