Walk-through issues

The standard agreement gives the buyer an opportunity to conduct two pre-settlement walk-through inspections of the property.

Why a walk-through? The walk-through is the means by which the buyer determines that the seller has kept her end of the bargain by delivering the property in the agreed-upon condition.  Just as the seller counts the money to make sure it is all there, the buyer checks out the house to make sure it is all there.

So, what if the house “is not all there?” As you know, the range in severity of problems can vary from a leaky faucet to a leaky roof. What to do when the problem is seen at the walk-through? What are the buyer’s rights and the seller’s obligations?

It depends.  What did the seller promise to deliver that the buyer agreed to accept?  Paragraph 25 tells us that the seller had promised to deliver the property “in its present condition subject to inspection contingencies…” Regardless of severity, if problems existed when the agreement was signed and if there was no amendment or addendum providing for the repair of such item as a result of various inspections, the buyer shouldn’t complain about that problem at the pre-settlement walk-through. [Note: At this point I would ask how much deposit the buyer had on the line, and if the amount is relatively low (with a checkmark indicating that it is a liquidated damage), it is fair to predict that the buyer will walk rather than purchase a property with defects that were there to be seen, but which weren’t. This why, if you represent a seller, you want a substantial deposit.]

Of course, what constituted the “present condition” as of the signing of the agreement is subject to dispute. For that reason, a listing broker wisely makes a reasonable investigation of the property at or near the signing of the listing agreement to make note of those items that are in disrepair. The list can prove helpful in guiding a seller as to what should be done to put the property in its best light, but equally as important is its purpose in establishing “present condition” should a dispute later arise.

The scenario painted by the hotline caller who inspired this article advised that the seller had indeed hired a plumber who “fixed the faucet,” but lo and behold, the drip, drip, drip was apparent during the walk-through.

The starting point for this inquiry is with the agreement of sale and the change in terms addendum (Form CTA). Hopefully, the language is clear.  [Note: An addendum providing that the seller will have a plumber address miscellaneous plumbing issues is not the same as clearly providing that the seller will have specific items repaired by a professional plumber.]

Let’s presume that the language was sufficiently clear and that it required the seller to have the leak fixed before settlement. Now what?  On the morning of settlement there is little chance of having the drip fixed before the deed and money swap hands, so the only practical solution is to figure out how to ensure that it gets done after settlement.  But what if the problem is more substantial – like a leaky slate roof? A delay to appropriately assess a serious issue may be worth the difficulties it causes, but those difficulties may ripple through the transaction. How you address it is critical.

A common solution is to hold money in escrow until repairs are completed. PAR has a standard escrow agreement for this purpose, or sometimes an attorney or settlement company will agree to hold escrowed funds. The problem, however, is getting the parties to agree to an amount. Some smaller problems will be repaired within a financial range that is fairly tight. But other conditions require a diagnosis, that might reveal a wide range of possible remedies and costs. Advise your clients to get lawyers, but hope that they are reasonable and that a workable solution is achieved in which the escrowed funds do actually reflect the cost of required work. What if the buyer finds a problem after closing – either a condition that wasn’t fixed as promised, or one that may have cropped up between inspections and the closing date?   When found post-closing, does the buyer have any right to demand its repair by the seller?

It depends. The answer partly has to do with the common-law doctrine of merger. The merger doctrine provides that in the typical real estate transaction, those obligations between the parties that are set forth in the agreement of sale are no longer enforceable after settlement.  The doctrine takes its name from the concept that all prior negotiations and agreements are deemed “merged” into the deed. It is a long-standing doctrine in Pennsylvania and elsewhere.

Like many old doctrines and concepts, courts fashion exceptions when they lead to just and proper results. When parties intend to create a right that is enforceable post-settlement, courts will usually find an exception to the merger doctrine. Likewise, when a defect is not material, courts have held that it will not merge into the deed and that the repair may be called for after settlement. It depends, however, on whether the buyer exercised due care in his walk-through and in the effort to determine that the property was in the condition it was to be delivered. Bottom line, don’t take chances. Conduct the walk-through and have the matter addressed in an addendum that is intended to survive settlement. [Note: “Survive settlement” was coined to assure that the intent of the parties, that the merger doctrine would not preclude enforcement, was clear.]

A pre-settlement walk-through is not a home inspection, but can be an equally important step in the process since it is a buyer’s last chance to identify any new issues or broken promises to repair. I frequently remark that Realtors® sell a home twice: once when they get an acceptable offer and again when the home inspection report arrives. I guess there could be a third sale when the pre-settlement walk-through reveals problems not anticipated to be found. This third sale can be avoided by thorough inspections conducted during the contingency period, followed by a very carefully constructed CTA with the appropriate follow-through. If problems are found at the walk-through, however, knowing what respective rights of the parties are is critical.