Authored By: Ryan Featherstone, Esq. rfeatherstone@dunlapmoran.com
Understanding the distinction between the Inspection Period clauses of the two most commonly used contracts (i.e. the FAR-BAR “As Is” and “Standard” Contracts) is vital to your practice. As lawyers, we view every line of any contract as a potential dispute. But nothing is more hotly contested or results in more litigation than the terms of the inspection period. And nothing is more vastly different between the two contracts than this paragraph.
So, let’s dive into this distinction. First, the simpler of the two, the “As Is” contract. In my experience, easily more than 50% of the contracts I see are of this version. I believe the reason for this is because of its inspection period paragraph. It is a simplistic concept, it simply states that during the inspection period (the default provided is 15 days), the buyer is allowed to do any and all inspections of the property and has the right to cancel at any time up to the expiration of the inspection period. In fact, the buyer is not even obligated to do any inspections during this time and can still cancel for any or no reason whatsoever. So, this means the buyer essentially has a “free look” at the property and has a blanket ability to cancel during this period. That is a powerful thing and gives the buyer strong leverage should negotiations be needed for repairs or credits. It also gives buyers comfort that their deposit funds will be protected and refundable should the buyer decide to cancel. It’s important to note here that “As Is” means the seller is not obligated to make repairs and is not warrantying anything. However, this does not relieve the seller of its obligation to disclose to the buyer any and all material facts (especially latent defects) about the property within the seller’s knowledge.
The other version of the contract, what most refer to as the “Standard Contract” has a vastly different inspection period. Quite frankly, it could be talked about over a couple of blogs. Therefore, I’ll keep it basic for these purposes. Essentially, this inspection period requires the buyer to complete inspections before going to the next step (remember, under the As Is contract, the buyer can cancel without even doing inspections). Once inspections are completed, then the contract dictates how things progress from there. Within the contract are 3 pre-negotiated repair limit amounts for 3 categories, as follows: General Repair Items, Wood Destroying Organisms (termites) and Permits. Each of these has a separate amount that is negotiated at the time of the contract. They can end up all being different amounts. For our purposes, let’s assume each category is agreed upon at $2,000. What does this mean?
In my example, if termite issues or permit related matters arise during the inspection period and the cost of remediation of closing out the permits or treating the termites doesn’t exceed the $2000 limits imposed for each, then the seller is obligated to make the repairs/treatment as long as the buyer informs the seller of these issues within the inspection period. This is the same for the General Repair Items notified to the seller during the inspection period. As long as the General Repair Items requested are both covered in the list of items included in the contract and meet the required standard, i.e. the item is not operating in the manner it was designed to operate, and the total requested/covered repairs don’t exceed the repair limit, then the seller is obligated to make the repairs.
However, if any repairs or treatments under the 3 categories exceed their respective repair limits, then it turns to the seller to get the first “bite at the apple.” If the seller agrees to make all the requested repairs, even if they exceed the repair limits, then the buyer remains “locked in” to close, irrespective of the repairs needed, because the seller has agreed to make all the repairs. However, should the seller not agree to make all the repairs, the buyer can either (1) advise the seller which repairs to make, up to the repair limit, and then the buyer accepts all the additional repairs as the buyer’s obligation, or (2) cancel the deal and receive its deposit back.
Ultimately, this section of the contract is significantly more complicated than discussed here, because again, there are 3 categories, each with its own set of rules that apply to how repairs in that particular category are made, and certain deadlines provided for notices, etc., much of which is not covered here. And for the General Repair Items, there are other mechanisms for the seller to dispute the initial buyer’s inspection, which would then result in a second and maybe even third inspection being necessary, along with the costs thereof. But this is well beyond the scope of this article.
If you are tasked with explaining the distinctions between the inspection period clauses of these contracts, or dealing with a dispute over their terms, it is always best to refer your clients to a licensed real estate attorney for explanation and guidance.
This blog is intended for informational purposes only and it is not intended to be, nor should it be construed as, legal advice or legal opinion. The reader should not consider this information to be an invitation to an attorney/client relationship, should not rely on information presented here for any purpose, and should always seek the legal advice of counsel in the appropriate jurisdiction.
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