By James L. Goldsmith, Esquire
The only thing good about this winter is that it gave us something to talk about in those lulls when we would otherwise just be staring at each other. The cold temperatures of this winter have also frozen pipes, indiscriminately so as some of those pipes belong to houses under contract.
So what happens when a water pipe bursts and is responsible for two or three inches of standing water in the basement? Can the seller repair before settlement and require the buyer to settle? What if the work can’t be completed by settlement, or what if the buyer simply wants to back out regardless of what the seller is capable doing?
I will say it again: when questions involving rights and obligations arise between signing and settlement, the first resource to turn to is . . . the agreement of sale. Our Standard Agreement is long because we try to cover all of the common contingencies that can arise between signing and settlement. Unintended catastrophes are but one type of contingency covered by the Agreement.
Paragraph 17, entitled “Maintenance and Risk of Loss” is our guide. For some reason, some licensees facing a dilemma like the burst pipe, tend to focus on the second paragraph of this clause that states: “If any system or appliance included in the sale of the property fails before settlement, Seller will: repair or replace the failed system or appliance before settlement, or provide prompt notice to the Buyer of Seller’s decision to credit Buyer at settlement for the fair market value of the failed system or appliance . . . or not repair or replace the failed system or appliance.” If the seller elects not to repair or replace the failed system, or credit buyer with its value, then the buyer can walk from the transaction. This Paragraph gives the seller the control of the transaction because it is the seller who can keep the transaction alive by crediting the buyer with the fair value of the lost item or by repairing.replacing it before settlement.
What if the seller promises to make the repairs, but the buyer doesn’t want to proceed? The pipe is easily repaired, but what about damage caused by the water that sat on the carpeted floor in a finished basement and also migrated a short distance up the drywall? Beside what has evidently been damaged, there may be unseen damage to wall studs, insulation; and dare I say the “m” word (mold). Clean-up is possible, but with settlement days away, a reasonable job cannot be timely completed. In situations like this, buyers frequently seek to terminate, and understandably so.
The section of Paragraph 17 that I quoted would seem to hold the buyer to the transaction if the seller repairs before settlement. It is, however, the wrong section of the Maintenance and Risk of Loss clause that should be considered! The seller’s control over the transaction after damage, is limited to damage that clearly can be fixed. The clause I quoted talks about a failed “system” or “appliance.” Clearly, if an appliance breaks, its easily replaced, or may be easily repaired and certainly it is easy for the seller to merely credit the buyer with the value of the appliance. A failed system can also be repaired or replaced, perhaps with greater expense and less ease. A water heater, HVAC system, a broken pipe or even a septic system can all be isolated, diagnosed and repaired.
What happened when the pipe broke, however, was a different matter. Yes there was a broker system (the pipe is part of the plumbing system) and it can easily be identified and repaired. In addition, however, there was other damage to the property and its fix was less simple. Because the damage went beyond an appliance or system, we look to a different section of the Maintenance and Risk of Loss clause. The initial paragraph of clause requires that “Seller will maintain the Property, grounds, fixtures and personal property specifically listed in this Agreement in its present condition, normal wear and tear accepted.” Unfortunately, the condition at settlement will not be as existed on the date that the agreement was signed, and the broker pipe and its aftermath are clearly beyond “normal wear and tear.”
Certainly buyer and seller can reach an agreement to extend settlement and have the property repaired to the buyer’s satisfaction and even inspect after repairs are completed. If the buyer, however, wishes to terminate rather than enter into such an agreement, I believe the buyer is justified in doing so. I understand that if the transaction fails, it is not as a result of the failure of any one party (I won’t comment on whether the pipe burst as a result of the owner’s negligence). The fact of the matter is, however, that our Agreement places the risk of loss on the seller until the date of settlement. That means if the property suffers a loss, it is the seller’s problem rather than the buyer.
Copyright © James L. Goldsmith, Esquire, CALDWELL & KEARNS, P.C., 2014
All Rights Reserved
Jim Goldsmith is an attorney with Caldwell & Kearns and serves as general counsel to PAR. A substantial portion of his practice is dedicated to providing advice and counsel to real estate licensees. He and his firm represent and defend real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. Jim also defends REALTORS® in disciplinary hearings conducted by the Real Estate Commission. He routinely counsels employers on employee relations issues and is one of the voices of the PAR Legal Hotline. He may be reached at www.realcompliance.com.