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Monday, June 26, 2006

Those Pesky Termites Aren't Just in Casebooks

399pxformosan_subterranean_termites_1 Here is a Q&A about termites from the Washington Post's "Housing Counsel" column. The response is written by Washington lawyer Benny L. Kass.  It might ring home for some contract profs and students:

Q: Three weeks ago, I signed a contract to buy a single-family house. I had the house inspected, and the inspector advised me to get a termite inspection. The termite company determined that although there were no active termites in the house, there was a lot of damage in the attic and in the basement.

When I discussed these issues with the sellers, they told me that the damage was in the house when they bought it and that they were not going to do anything about it now.

I don't think this is fair, and I don't want to have to  spend a lot of money correcting this damage. What should I do?

A:  How much will it cost to repair the damage? The first thing you should do is get two estimates from licensed contractors. Do not rely on the estimate provided by the termite company, because generally these companies are not in the business of making repairs.

Then, you should read two documents: the seller disclosure statement and your sales contract.

Your sellers clearly knew about the termite damage when they entered into the sales contract. Was this disclosed to you? In some jurisdictions, sellers can disclose conditions in the property or tell you that they are not going to disclose and that you are on your own regarding the house. This latter position is called a "disclaimer," although states still require certain things to be disclosed, such a latent defects.

If your sellers did not disclaim disclosure, then you have the absolute right to insist that they correct the termite damage or give you a cash credit for the amount of the repairs when you go to settlement.

Your sales contract may also help you. If you were using the Regional Sales Contract that is commonly used in the Washington area, look at paragraph 13, titled "Termite Inspection." This paragraph states that "any . . . structural repairs identified in the inspection report will be at seller's expense."

Now you have to determine if the damage that your termite inspector found was "structural." That is why it is important to have a licensed contractor give you an estimate before you approach the seller. Furthermore, if the damage is extensive and will cost a lot of money to repair, you may have to bring in a structural engineer to assist you in this determination.

You have indicated that settlement is scheduled for the end of this month. Clearly, you do not have a lot of time to do your homework. I suggest that you approach the sellers with these alternative proposals:

They can give you a cash credit at settlement in an amount that you negotiate.

You can postpone the settlement for a reasonable time so that the sellers and you can get all the information needed to make intelligent and informed decisions as to the scope of the damage.

You can go to settlement and have the sellers escrow a sum of money from the sale proceeds. The amount should be based on the estimates that you obtained. The settlement attorney will be instructed to pay the contractor when the work has been completed to your satisfaction, and any balance remaining will be returned to the sellers.

What if the sellers remain obstinate and refuse to accept any of these proposals? You then have a business decision to make. If you go to closing without resolving the issues, in most cases you will not lose your right to challenge the seller afterward. Look at paragraph 34 of the Regional Sales Contract, titled "Entire Agreement." This is known in the law as a "non-merger" clause. It says, "The provisions of this contract will survive delivery of the deed and will not be merged therein."

The general rule of law used to be that if you accepted the deed from the seller, you lost all your rights against the seller, even if there was a clear breach of the contract on the part of the seller. But the courts have decided that this is unfair, and many states have abolished this concept. The Regional Sales Contract reinforces this by making it clear that contract obligations and promises will not be lost just because settlement takes place.

As a practical matter, however, after settlement, you have lost your leverage. You will have to sue your sellers, which is time-consuming, potentially expensive and always uncertain.

In fact, your sellers may have moved to the other side of the country, if not to some other part of the world. Even if you win in court, collection could be difficult, so before you go to settlement, make your best effort to reach an amicable resolution.

[Meredith R. Miller]

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