Inspection Contingency Review

The inspection contingency in the Standard Agreement for the Sale of Real Estate (Form ASR) is one of the most frequent topics for the PAR legal hotline.

The election, performance and ensuing negotiations make up a procedure that – it seems – has become so commonplace that many licensees don’t know what to do when something out-of-the-ordinary occurs. Here’s a list of answers to common misunderstandings about Paragraph 13.

The contingency period itself is the number of days inserted in Paragraph 13(A), or 10 days if left blank. During this timeframe, the buyer must do two things: 1) conduct the elected inspections and 2) decide whether and how to proceed with the purchase of the property based on the results of those inspections. Not only must the inspections be completed, but the buyer’s decision is due to the seller by the last day of the contingency period, along with a copy of the inspection reports. An early response by the buyer does not end the contingency period; the seller isn’t “on the clock” for a response until after the last day of the contingency period.

The negotiation period only applies if the buyer submits a written corrective proposal. If the buyer chooses to negotiate, the parties are “locked in” to negotiations based on that request for the number of days provided (5 if not specified). The buyer cannot withdraw or amend their proposal nor terminate the agreement until after the end of the negotiation period. For example, assume the buyer has asked for five things in a written corrective proposal, but two days into the negotiation period, the seller’s initial response is to offer a price reduction instead. The buyer can not immediately terminate the contract upon receiving that response. The text of section 13(B)(3)(a) explicitly states that the parties are to use that time to negotiate but does not give the buyer any additional right to terminate.

Termination only comes back into play in the next section, which states that if the negotiation period ends with no written agreement in place, the buyer then has a choice to accept the property or to terminate the agreement.

It’s worth noting that the functioning of the inspection contingency has changed over the years. We hear from a fair number of members who explain an understanding of this clause that may have been right under prior versions of the form but is not correct today. Given the importance to the transaction, and the apparent confusion in the marketplace, it’s probably a good idea to take some time to do a careful read of this paragraph as a refresher, and to take a look through the Guidelines for Preparation and Use as well.