The inspection contingency is a frequent discussion topic on the WRA Legal Hotline. As simple as this article’s title makes the inspection contingency sound, there are a variety of issues and concerns that may come up when working through the contingency. The following questions and answers address some of those concerns.
Inspection contingency
Is a drain tile test an inspection or a test? Would it be allowed under the default inspection contingency?
Unfortunately, there is not a court case at a level high enough that has published an opinion on this issue. There is an argument on both sides. First, a “drain tile test” does not fit neatly into the definition of “test” in the Wisconsin offers to purchase. There is typically no taking of samples from the property or a laboratory analysis of the material. On the other hand, a drain tile test isn’t necessarily merely an “observation” that would be defined as part of an inspection, and thus it may be difficult to argue that a drain tile test is not a test. In this situation, refer parties to their legal counsel to determine what their rights and responsibilities may be if the parties do not mutually agree.
A seller accepted an offer on a commercial property. The buyer included the inspection contingency in the WB-15 Commercial Offer to Purchase. The buyer wants to take a building inspector and an engineer through the property under the inspection contingency. Do the parties have to amend the offer?
The parties do not have to amend the offer. The inspection contingency in the WB-15 Commercial Offer to Purchase is less restrictive than the inspection contingency in the WB-11 Residential Offer to Purchase. The WB-11 Residential Offer to Purchase limits the buyer’s choice of inspectors for the initial inspection to a “Wisconsin registered or Wisconsin licensed home inspector,” whereas the WB-15 Commercial Offer to Purchase allows a buyer to use a “qualified independent inspector(s),” which does not tie the buyer to a home inspector registered in Wisconsin. As long as the person is qualified to inspect a commercial property, the buyer can use them.
As for the number of inspectors who can inspect a property during the initial inspection, here too the WB-15 Commercial Offer to Purchase is less restrictive than the inspection contingency in the WB-11 Residential Offer to Purchase. The commercial offer says the buyer can have “qualified independent inspector(s) conducting inspection(s).” The inclusion of the plural version of inspector and inspection by adding the “(s)” after both opens the door for the buyer to have more than one inspector conducting more than one inspection at that initial inspection. The inspection contingency in the WB-11 Residential Offer to Purchase does not have that same “(s)” after inspector or inspection, which implies the buyer gets one inspector and one inspection for the initial inspection.
Defects
The inspection report summary page has four sections: needs repair, needs further evaluation, items to monitor, and maintenance items. Is the “needs repair” category the defect category?
If a home inspector labeled something as a defect in the inspection report, a buyer can object to that condition. Additionally, there are items that a buyer can object to even if a home inspector did not label them as defects. Home inspectors are prohibited from commenting on the value of property, so a home inspector might comment on a condition without specifically identifying it as a defect, but if that condition would have a significant effect on the value of the property, the buyer could still object to it.
After the inspection, the buyer’s home inspector provides a report to the buyer. As required by Wis. Stat. § 440.975(3)(cr), the report must include a summary page that includes “a list of conditions, labeled as defects, that are observed under par. (cm) to be defects, as defined in s. 440.97(2m)” based on the home inspector’s judgment on the day of the inspection. Therefore, when a home inspector calls something a defect in the inspection report, the condition must meet the Wis. Stat. § 440.97(2m) definition.
The buyer may object to items labeled as defects in the home inspection report summary page, but they may also object to items not labeled as defects if they rise to the meet the definition of defect in the buyer’s offer to purchase. The WB-11 Residential Offer to Purchase defines defect as “a condition that would have a significant adverse effect on the value of the Property; that would significantly impair the health or safety of future occupants of the Property; or that if not repaired, removed or replaced would significantly shorten or adversely affect the expected normal life of the premises.”
A significant distinction between this definition and the home inspector’s definition is the value component. A buyer can object to conditions that would have a “significant adverse effect on the value” of the property. A home inspector cannot comment on the value of the property or its components. Because of this, there may be items in the home inspector’s report that would affect the value of the property but are not labeled defects.
An agent heard that an item cannot be labeled a defect if it is located in the garage because the garage is not a living space. Is this true?
The seller makes property condition representations per the real estate condition report (RECR). The disclosures in the RECR relate to the entire property. Likewise, the inspection contingency in the offer provides for an inspection of the property.
The RECR provides:
"A2. In this form, “defect” means a condition that would have a significant adverse effect on the value of the property; that would significantly impair the health or safety of future occupants of the property; or that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises."
The WB-11 Residential Offer to Purchase provides:
"INSPECTION CONTINGENCY: This contingency only authorizes inspections, not testing (see lines 178-192).
(1) This Offer is contingent upon a Wisconsin registered or Wisconsin licensed home inspector performing a home inspection of the Property after the date on line 1 of this Offer that discloses no Defects. …
PROPERTY: Unless otherwise stated, “Property” means the real estate described at lines 4-8.”
Inspection report
The accepted offer includes the inspection contingency and the appraisal contingency. Is the buyer required to deliver the inspection report to the seller regardless, or only if the buyer is objecting to defects?
Inspection and testing reports are treated differently than appraisal reports. When a buyer does an inspection or test, per the terms of the offer, the buyer agrees to provide copies of the reports to the seller, even if the buyer is not objecting to the results.
A buyer is only required to provide a copy of the appraisal report if the buyer’s offer was contingent on an appraisal and the buyer is objecting to the value under that contingency.