Contracts 101 - Who Pays for the Repairs
Real estate transactions don’t have a required format. Although, residential real estate contracts typically include provisions that address the physical condition of the property. Not only does Florida law require that the Seller disclose any inherent problems with the property, but the contract should also provide the Buyer with ample opportunity to inspect the property for termite damage and the overall condition of the home.
Consider this scenario: David Smith recently paid cash for a house and was given the keys at closing. Upon entering the house, David discovered that the front door light switch was broken and that a number of the light fixtures didn’t work. Later he learned that the a/c unit was defective and had to be replaced. The Seller, an old acquaintance, had mover somewhere up north. David remembers him saying that there were some minor cosmetic problems, but that everything else was in good working order.
This type of situation, fortunately, rarely occurs today. Banks and mortgage companies typically require both home and termite inspections. The FAR/BAR contract and other attorney prepared contracts also typically include provisions for home and termite inspections. In the example above, the cash only contract was prepared by the Seller, never reviewed by an attorney, and the Buyer relied solely upon the good faith of the Seller.
Unless the house is being razed for new construction, purchasers should always be concerned with the physical condition of the house. Most residential real estate contracts include a time period during which the Buyer may inspect the property to determine whether any repairs are necessary, and whether there is any termite damage, while also defining the maximum amount of money that the Seller will be obligated to pay for any repairs. If the Buyer gives timely notice, the Seller will be obligated to pay for those repairs but only up to the maximum amount stated on the contract.
A Buyer should always obtain professional home and termite (a/k/a wood destroying organisms) inspections, and never rely solely upon the representations of a Seller. Contracts generally provide that the Seller is not obligated to make any repairs that exceed the Maximum Repair Costs that have been agreed to. If the Seller chooses to make, and does in fact complete, the repairs in excess of the agreed amount (other than for termite damage), then the Buyer must proceed with the contract. If the Seller refuses to pay those excess costs, the Buyer will have two options to proceed with the closing (and be responsible for those additional costs), or to terminate the contract and receive a return of the deposit.
Sam Seller, for example, agrees to pay for repairs up to $15,000. Bob Buyer determines through inspections that the roof ($12,500) and a/c system ($6,500) must be replaced. Sam refuses to pay for any repairs in excess of $15,000. Bob must, therefore, elect to either terminate the contract, or to proceed with the closing and be responsible for the additional $4,000 to complete the repairs. However, termite damage is generally treated differently. Under the standard FAR/BAR contract, the Buyer has the absolute right (but not the obligation) to terminate the contract if the termite repair and treatment costs exceed the maximum amount stated in the contract, even if the Seller agrees to pay for those excess costs.
For example, if Sam knows in advance that there is $20,000 worth of termite damage but insists that he will not pay for more than the agreed to $5,000 amount, Sam essentially provides Bob with an automatic right to cancel the contract. Bob, of course, must give timely notice of his election, or he will waive his right to terminate the contract based on these excess expenses.
In place of establishing a formula for repairs, parties often utilize the “As Is” Contract for Sale and Purchase, which provides that the Sales Price is absolute, and that the Seller will not be obligated to pay for any repairs to the property. “As Is” terms generally include a specific time period during which the Buyer may inspect the property (the “Due Diligence Period”). During this due diligence period, the Buyer must elect to either proceed with the purchase or opt to terminate the contract and obtain an automatic return of the Escrow deposit. The Seller has no obligation to make any repairs or to reduce the purchase price, while the Buyer has the right to terminate the contract for any reason during the Due Diligence Period. As always, timely notice must be given to the other party.
Although “As Is” contracts provide that the Seller is not obligated to lower the purchase price of the property for repairs, it is not a device by which the Seller can hide problems. Under the Florida Supreme Court decision of Johnson v. Davis, the Seller must always disclose to the Buyer any known defects with residential property. If a house is being sold during a dry season, for example, and the Seller knows that during heavy rains water comes onto the back porch and seeps into the back bedroom, the Seller has an affirmative obligation to disclose this fact to the Buyer. The Seller can later be sued for damages and/or rescission of contract if he fails to disclose this information.
The caveat of “Let the Buyer Beware” does not apply to the sale of residential real property in Florida. Variations of these undisclosed fact scenarios are the subject of many lawsuits. Consider the following scenarios. The neighbor’s bright backyard lights consistently shine into the back room of the house. The Seller knows that tennis courts in an adjacent field are scheduled to have lights installed three months after the closing. The Seller is moving due to frequent vandalism in the neighborhood. In each case, the Seller should consult with legal counsel to determine if it is appropriate to disclose a potentially relevant issue.
ABOUT THE AUTHOR: Frank L. Pohl, Esq.
Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.