The Pennsylvania Association of Realtors® (PAR) Standard Agreement for the Sale of Real Estate (Agreement of Sale) is probably the most frequently and widely used Agreement of Sale in residential real estate transactions across the Commonwealth. PAR can be … is … very influential in the evolution of the real estate profession throughout Pennsylvania, especially when fundamental shifts in real estate practice are introduced through changes to the Standard Agreement of Sale. However, when such shifts are introduced without advance notice and training for practitioners, such changes should be carefully examined.
The exchange of information about a property should be encouraged; in fact, both case and statutory law mandate sellers to disclose material defects of which they have knowledge. The law does not, however, require sellers (or real estate agents) to investigate the condition of the property to discover defects; neither would it be forgiving of the sellers or real estate agents who attempt to evade knowledge by hiding behind willful ignorance. Historically, buyers and sellers have enjoyed the freedom to negotiate the term, conditions and contingencies that formed the framework of buying and selling real estate. Until now.
The new PAR Agreement presents a drastic change to the process of responding to inspections. Should buyers be encouraged to provide copies of inspection reports to sellers? It depends, of course! There are excellent arguments as to why buyers should share reports with sellers, regardless of how they plan to proceed in a transaction. For example, if sellers have moved across country leaving their house vacant, and the buyers’ inspections show that there is a worsening leak with the plumbing or evidence of arcing in the electrical panel, then the buyers should provide this information to sellers, even if they intend to buy the property. On the other side of the fence are the buyers who decide they don’t want to buy a house with radiant heat, or an electric stove, or just got ‘cold feet’ but the inspection reports revealed a well-cared-for house in excellent condition. In this instance, perhaps providing the inspection reports to the sellers would create conflict affecting the deposit money where otherwise conflict might not exist.
The ways that real estate is practiced across Pennsylvania is as varied and diverse as are buyers and sellers. Consumers have relied on their agents to guide them, advise them, wrangle them, and massage them through the myriad of potential pitfalls and obstacles that comprise a residential real estate transaction… including how to handle and respond to inspections. In the most recent version of the Agreement of Sale (1/1/2019), Paragraphs 12 and 13 continue to include the terms covering the largest portion of buyers’ due diligence. Paragraph 12 has remained largely unchanged since at least 2005 (although paragraph numbers have changed). Paragraph 12(A)(4) in the 2019 version is nearly identical to language that was adopted in 2005 providing, “all inspectors, including home inspectors, are authorized by Buyer to provide a copy of any inspection Report to Broker for Buyer.” Similarly, Paragraph 12(A)(5) reads, in part. “Seller has the right, upon request, to receive a free copy of any inspection Report from the party for whom it was prepared.” Compare that language to that from 2005, which states, “Seller has the right, upon request, to receive without charge a copy of any inspection report from the party for whom it was prepared.” For more than a decade, sellers have had the right, but not the obligation to request copies of any or all of the reports generated as part of the buyers’ due diligence, and buyers have had the right to negotiate whether they would or would not provide some or all of the reports, including whether or not sellers would reimburse some of the buyers’ costs incurred generating those reports. (The Home Inspection Law mandates buyers to provide a copy of a home inspection to sellers, upon request, and at no cost. The Agreement cannot change this.) In most instances, the real estate agent has been at the center of the transaction, providing consumers with the information and guidance they need to negotiate and make those decisions, based on the nuances of each individual deal.
While Paragraph 12 of the 2019 Agreement sets the terms pursuant to which buyers and sellers negotiate the inspections, investigations, and certifications upon which buyers’ obligations to purchase property are contingent, Paragraph 13 establishes the procedure for how buyers and sellers respond to the results of the inspections. Since at least 2014, Paragraph 13 gave buyers three options to communicate to sellers: (a) accept the property with the information stated in the reports; (b) terminate the Agreement with written notice to the sellers; or (c) present the reports to sellers with a Written Corrective Proposal identifying corrections and/or credits requested by buyers. The 2019 Agreement of Sale fundamentally changes how buyers must react once they receive the written reports. Specifically, buyers are now required to give copies of all reports to sellers, no matter how they intend to react to the results of the reports.
Why has the autonomy of buyers and sellers to negotiate how to respond to the inspections results been effectively eliminated? What was the problem this new language is meant to address?
The 2019 Inspection Contingency in Paragraph 13 of the Agreement now provides that regardless of the buyers’ response to the results of their inspections, the “Buyer WILL present all Report(s) in their entirety to Seller…” The buyers can then decide to accept the property in its then-current condition, terminate the Agreement, or submit a Written Corrective Proposal and negotiate new terms for the Agreement. What was once within the discretion of the sellers to request, is now a mandate for buyers to provide.
Why, if the buyers decide to accept the property with the information stated in the reports, is the onus put on them to provide entire copies of all reports to the sellers, presumably without compensation? Is there a reason sellers are being denied their right to exercise their discretion vis-à-vis getting copies of the reports?
Similarly, prior to 2019, buyers could terminate an Agreement if they were not satisfied with the results of any inspection or report. Historically, this paragraph has been taught to emphasize that buyers do not have to be ‘reasonable’ in their dissatisfaction with a report. By mandating full disclosure of all reports, does the PAR Agreement now set the stage for sellers to challenge the validity of buyers’ decisions to terminate the Agreement? Will this new requirement allow for more disputes between buyers and sellers over entitlement to deposits if a seller refuses to accept the buyers’ decision to terminate based on the reports?
If buyers opt to negotiate repairs, modifications, or credits against the purchase price, the buyers must provide complete copies of all reports to the sellers – even reports having nothing to do with the requested repairs or concession. Will this create an environment of increased tensions between buyers and sellers as sellers focus on ‘what’s good in the report’ and, therefore, become less accommodating to buyers’ demands? Will the lenders who requested copies of sellers’ disclosure statements (which are not part of the Agreement) now demand to see copies of all inspection reports?
The revised language raises several questions that are not easily answered.
Why are the real estate agents across the state being compelled to change the way they practice? Why are buyers and sellers being denied the ability to structure their transaction?
Does it make sense to institutionalize the approach to inspection reports, rather than relying on agents and consumers to negotiate and navigate transactions based on the deal, the local custom and practice, and the agents’ experience?
How does imposing a standard reaction to inspection reports benefit buyers or sellers?
What are the consequences if buyers (or their agents) refuse or fail to provide copies of some or all reports, but are ready to close on the property?
What impact will this change have on licensees and their duties to their consumers?
It has been argued that the sellers have a right to know what is and is not ‘wrong’ with their property. Of course they do! Sometimes the best way for a seller to learn about their property is from a report prepared by a disinterested third party. Since 2005, the sellers have had the right to ask for all of the reports and the buyers were obligated to provide them, and the 2019 Agreement still includes this right. Buyers have always had the right to provide copies of reports to sellers. Have sellers (or their agents) not been asking for these reports? Does it make good business sense to deprive the seller of the right to choose to get copies of the reports and instead obligate buyers to give them? Would make more sense to advise sellers to have a pre-listing inspection (at their expense); a practice that is becoming popular in some markets.
These new standard clauses impose fundamental changes upon buyers, sellers and the agents involved in the transaction. They eliminate some of the rights that consumers previously enjoyed regarding control of and access to information. Sharing information is generally good, often important, and occasionally critical. But should the practice be standardized.
It is difficult to predict what the consequences of these changes will be. Will sellers become more reluctant to accept offers with inspections contingencies? Will there be an increased number of challenges to buyers’ requests to have their deposits returned because the Agreement was terminated based upon information found in certain reports (or where the reports were exemplary but the buyer chose to cancel in any event)? Will this contractually-mandated access to information about the property alter the scope of sellers’ and listing agents’ duties to know about the condition of the property?
For additional information contact Brett Woodburn.