Request for Repairs: Be Careful What You Ask For
By David Hamerslough
June 8, 2016
The PRDS and C.A.R. contracts are set up, in a balanced real estate market, to allow a buyer to investigate the property and request that the seller make repairs or take some other action.
Typically, this involves putting together a list of defects or conditions that have been identified in home and/or pest inspection reports or a report generated by a contractor or engineer. A seller may respond by agreeing to do some or all of these repairs based upon reports that they have obtained. The buyer’s expectation is that these repairs are going to be performed by the close of escrow, by qualified professionals, and with all governmental approvals. The seller, hopefully, will have the same expectations, albeit there is probably a stronger motivation on the seller’s part to simply get the work done so escrow can close.
Problems arise when these expectations are not met. For instance, in a common scenario, the seller starts repairs but does not have all of them completed by close of escrow, or the quality or scope of the work does not meet the buyer’s expectations. Seller then claims that their inability to complete all of the repairs is due to issues with workers or requirements beyond seller’s control (e.g., a contractor, a supplier of some component part, governmental agencies) or claims that the repairs that have been completed are consistent with the scope and quality agreed upon by the parties.
The listing and selling agents start talking about how the transaction can be salvaged and begin making proposals about what work will be completed, when it will be completed, and under what terms and conditions it will be done. There may be an addendum drafted for the seller to give the buyer a credit in lieu of completing the repairs, and there may even be a suggestion that this addendum not be provided to the lender, as doing so might create issues with the loan or the timing of the close of escrow.
The buyer then decides that they do not want to complete the transaction because their expectations have not been met, they have concerns about being able to requalify for the loan, they’re upset with the seller’s handling of the repair issue, or they start to have doubts about the property. Buyer then instructs the selling agent to cancel the transaction and demands a return of the deposit. The seller continues to press for a credit, price reduction, or perhaps a short extension on the basis that the repairs can still be completed promptly. Buyer reaffirms their right to cancel, and the seller responds by claiming that the buyer is in breach of contract and seller is entitled to retain the deposit. Who gets to keep the deposit?
I’m sorry to disappoint those of you who are looking for a definitive answer. As with many legal issues, the answer depends on the facts and circumstances of each situation, what was actually agreed to, what was actually motivating the parties, the equities, subsequent events, and the law. Even that list is not exhaustive, as many other factors can impact the outcome of this type of dispute.
This article will discuss some of those factors. Next month’s article will focus on some of the legal issues related to this type of dispute and how the terms and conditions of the repair agreement and the parties’ subsequent statements and conduct can impact the outcome of the deposit dispute.
The following are some of the factors that a buyer and seller might take into consideration during the negotiations regarding repairs.
- Does the final agreement specify with sufficient detail the work that is going to be done?
- If the repairs are being made based on a report, does that report clearly spell out what work is going to be done?
- Are there any ambiguities in the scope of that work or the method or manner in which it is going to be completed?
- If the operative report for the repairs is one obtained by the other party, what level of control does that give that party over the repair process, including any issues or disputes that arise over the scope of the repair, the quality of the work, etc.?
- If the repairs are going to be completed and controlled by the seller, does the buyer want the right to have those repairs inspected by their own consultant as the repairs are being completed? If so, how will any issues or disputes that are raised be resolved?
- Who will be doing the work? (Remember that under the C.A.R. contract, the seller has the right to complete repairs, while the PRDS contract requires that the repairs be performed by a licensed contractor.) If this is a C.A.R. contract, the request for repairs could specify that a licensed contractor perform the work. Under either contract, identifying who will do the work eliminates any potential confusion.
- Can the repairs be completed in the timeframe called for in the purchase contract (i.e., by close of escrow under the PRDS contract or prior to final verification of condition under the C.A.R. contract unless the parties agree otherwise in writing)?
- Are there any materials or supplies required to do the repairs that need to be fabricated or ordered that will impact this timeframe? This might happen when an engineer has specified an item to strengthen or support the foundation or framing, such as a bracket or connector, that has to be custom-made.
- Does the work require permits? Can those permits be obtained, the work inspected, and the permits finales within the agreed-upon timeframe?
- Are there potential lender/loan issues if the work is not completed or escrow does not close (loss of a rate lock, lack of funding due to the repairs not being completed, concerns about the buyer requalifying in the event that becomes necessary, etc.)?
- If the repairs include pest-control work, what report has been identified as the basis for those repairs? Are there any areas of the property that are inaccessible and require further inspection? To what extent, if any, does the work involve opening walls to determine its scope, which will impact not only what has to be done but the time in which that work can be completed? How will issues regarding fumigation and potential damage to landscaping and the roof be handled?
- What are the parties’ expectations in the event the repairs are not timely completed and escrow does not close, and what have the parties agreed upon, if anything, if those events do not occur?
- Finally, is there some other action (e.g., credit, price reduction, joint evaluation by consultants) that can be requested? What are the consequences of such a request? For example, if a credit or price reduction is taken, is there enough information about the scope of the repairs to determine the extent and cost of the necessary repairs, or are there conditions such as dry rot that will require opening the walls before the full extent of the damage (and therefore cost) can be ascertained? Will a credit or price reduction trigger any lender/loan issues? If there is to be a joint evaluation by the buyer’s and seller’s consultants, what mechanism is in place to resolve any differences in the conclusions reached by those consultants.
The goals and objectives of the buyer and seller may also dictate the direction of the negotiation and agreement regarding repairs. For example, if a buyer plans on remodeling or constructing an addition and the repairs will be to areas that will be affected by that work, then the potential for a credit or price reduction may be more advantageous to the buyer, even though there may be some risks associated with that option. On the other hand, if the seller is short on funds or does not have the time or inclination to coordinate the repairs, they may be more interested in a credit or a price reduction.
A good way to explore the needs and objectives of the parties before initiating a request for repairs is to make an inquiry first rather than delivering a formal request for repair or a response to it. Such an inquiry can be made orally or in writing. The inquiry should specify that it is in fact an inquiry, not a demand or a counteroffer. Another factor to remember is that both purchase contracts provide that this process can include a request by the buyer that the seller take any other action. If market conditions and other pressures otherwise allow, the buyer and seller can negotiate for any other action to be taken by either party. Buyers and sellers should consider as many factors, needs and objectives, expectations, and consequences as they can, especially in view of the fact that the final agreement on repairs is typically done in conjunction with the removal of the buyer’s contingencies.