Introduction. This is a continuation of Part One, which addressed the printed contingencies found in the 2022 OREF Residential Real Estate Sale Agreement. (References to section and line numbers may be different today.)
Part One already covered:
- Sections 5.1 (Financing Contingencies) and 5.2 (Failure of Financing Contingencies);
- Section 6. (Seller-Carried Financing); and
- Section 9 (Title Insurance).
As a reminder, a contingency is an event that must occur (or not occur)[1] for the transaction to become binding. All printed contingencies in the Sale Agreement are for the buyer’s benefit. There may be other contingencies in the transaction, such as the seller finding a replacement home, but they would be added by Addendum.[2]
Section 11.1 (Private Wells). This section asks: “Does the Property include a well that supplies or is intended to supply domestic water for household use? [ ] Yes [ ]No. If yes, Buyer has attached OREF 082 Private Well Addendum to this Agreement.”
For buyers who have never owned a property serviced by a well, this contingency demands caution. Contact the Water Resources Department for information: https://www.oregon.gov/owrd/pages/index.aspx.
Even for experienced buyers, caution must be exercised. The seller’s knowledge and opinions are important, but expert verification is critical. The Addendum asks about well logs, well reports, and other information. If available, an expert should carefully review them. If there are no such logs or reports, ask why.
Buyers should familiarize themselves with the experiences of nearby neighbors who are also on wells. Are there any known problems? How much does it cost to drill a new well in the area? Are there any geologic issues that are problematic? What about water purity and flow? Has the seller complained about any well issues in the past?
Well testing is critical. The Well Addendum provides that Seller, at Seller’s expense, is to have the well tested for arsenic, nitrates and total coliform bacteria and to submit the results to the Oregon Health Authority and buyer. However, unless there is a transfer of title, well testing is not required.
Areas impacted by recent wildfires could contain arsenic, nitrate, bacteria, lead, and, possibly benzene, toluene, ethylbenzene, and xylenes (BTEX). However, these are “extra” tests and at buyer’s cost.
Well flow testing is at buyer’s expense. It should never be waived.
Buyer’s right to terminate in the Well Addendum is slightly different from the professional inspection provision in the Sale Agreement, discussed above. In the latter, there is an immediate right to “unconditionally disapprove” of the home inspector’s report. But in the Well Addendum, after release of the test results, there is a “negotiation period” for the parties to attempt to reach agreement on the nature, cost and financial responsibility for remedying any “substantial deficiencies” in the system. However, in the end, buyer is not obligated to reach agreement on a solution and may terminate the transaction and obtain a refund of their earnest money deposit.
Risk Management Tip. Well water problems discovered after closing can be costly to buyers – and their real estate agents who may be brought into the dispute. For brokers who are new to the business or unfamiliar with well water issues, it is critical to partner with another broker with this expertise. And regardless, the buyer should always secure an experienced professional to evaluate the system. Brokers should resist the temptation to offer their opinions about a well, the system, or quality and flow of drinking water – regardless of their familiarity with the seller, well water in general, or their experience. The minute an opinion is expressed, it makes you an expert. The Sale Agreement goes to great lengths in saying Realtors® are not experts – allow that disclaimer to protect you!
Section 11.2 (Septic/Onsite Sewage System). This too is an important contingency for buyers unfamiliar with these systems. If the system is shared, buyer should have an expert review the terms of the sharing agreement. They can vary in terms and clarity. Buyers should find out if there have been any problems in cost sharing. The Oregon DEQ regulates residential septic systems. See link here.
The protocols in the Septic Addendum are similar to those for well water. But interestingly, contrary to the Well Addendum, there is no “negotiation period” after the test results are shared. The “unconditional termination” provision of the Septic Addendum is similar to the one found in the professional inspection section of the Sale Agreement.
Risk Management Tip. Brokers should always remember that when dealing with septic systems, there are two issues: (a) the tank; and, (b) the drain field. In some cases, the tank could be perfectly fine, but the drain field shot – or vice versa.
And as with the Well Water Addendum, brokers with limited familiarity with these systems should partner with a more experienced person. And as with well water problems discovered after closing, the cost to remedy a failing tank or drain field can be significant. As the dollars increase, buyers are more inclined to look around for someone – such as a real estate agent with E&O insurance – to share the cost. Let the expert do the talking and stay in the background when dealing with well water and septic systems.
Section 12. (Lead Based Paint Contingency Period). As most Realtors® know, if a residential property is being sold that was constructed before 1978, then on, or promptly after, the Effective Date of the Sale Agreement, the seller is required to deliver to buyer OREF 021 Lead-Based Paint Disclosure Addendum together with the EPA Pamphlet entitled “Protect Your Family From Lead in Your Home.”
Unless waived by Buyer in the Disclosure Addendum, buyer has ten (10) calendar days (or another mutually agreed on period) to (a) conduct a lead-based paint assessment or inspection and (b) unconditionally cancel the transaction by written notice to the seller at any time before midnight on the last day of the 10-day period. If timely made, the transaction is then terminated, and buyer has the right to recover their earnest money deposit.
Seems pretty straightforward, right? Simple enough, yes? This is what the 2022 Sale Agreement says today. This is not what it used to say for several years prior to 2022. The problem today is this: Under the terms of the 2022 Sale Agreement, buyer’s right of cancellation is unlimited, so long as it is timely made – it no longer requires any inspection or evaluation.
For example, say the buyers found a beautiful old pre-1978 home in a beautiful old neighborhood. They loved the home but had not made up their minds whether they could afford the repairs and upkeep. But it was sure to go quickly – there were already multiple offers. Rather than getting repair bids and putting a sharp pencil to the numbers, they immediately made an all-cash offer, paid $100,000 earnest money deposit, and waived their property inspection contingency. The good news for the buyers was that their offer was accepted. The bad news for the sellers is that they accepted the offer without requiring their buyers to waive the LBP Contingency. So now, buyers have tied up the property for a “free peek” and have time to decide whether to remain in the transaction with little or no risk. They may cancel the transaction within the 10-calendar day period for no reason, without inspecting or evaluating the property for LBP, and obtain a full refund of their $100,000 deposit!
Why? Because the LBP Contingency no longer provides that buyer’s right of cancellation may occur only if a certified LBP inspector identifies the existence of LBP or LBP Hazards in the property.
Risk Management Tip. First, consider the rationale for buyers having LBP inspections. If the home is pre-1978 the chance of it containing LBP somewhere is pretty high since lead was found in all paint back then. The question today isn’t really if there is LBP, but whether it has been “incapsulated” – i.e., painted over with more recent non-LBP in the years since 1978 i.e., during the last 44 years.
“Lead based paint hazards” are those you can see, include peeling, chipping, chalking, cracking, damaged, or damp LBP. Certainly, these conditions bear evaluation, especially if the buyers have small children. But most buyers, assuming they are familiar with LBP risks to their kids, would likely recognize during one or more walk-throughs whether those conditions existed, and would hire remediation experts immediately after closing and before taking possession.
The Take-Away. Listing agents should view with caution buyers’ use of the LBP Contingency as it currently reads. It can – and has – been used as a ruse to tie up a property with very little risk of losing the earnest money deposit. Is it a ruse, or is it based on a legitimate good faith concern? I submit that if its use arises from a legitimate good faith concern, then listing agents suggest their seller require that the LBP Contingency include an inspection and report by a professional. But if there is a suspicion the purchasers are merely using the LBP Contingency to buy time, suggest the seller require that the purchasers waive it.
One last comment. The reason the Seller Property Disclosure Section 13 of the Sale Agreement is not discussed as a “contingency” in these two articles is because it was not created by OREF, but by Oregon statute. It really is not a “contingency” since it does not depend on any third-party events, such as unsatisfactory inspections, LBP, title defect, or sewer and well water reports.
All rights and duties relating to the Seller Property Disclosure Statement are found at ORS 105.464 et seq. It was well-intended legislation that serves as a cautionary tale about how things can go awry when forms drafting is relegated to disparate legislative committees and interest groups with differing agendas, skills, and attention spans. ~Phil
©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin
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[1] I say “not occur” because the professional inspection contingency is tied to buyer not rejecting the report. Same for the title contingency. Silence is consent.
2 Note to sellers: This contingency can be risky if not carefully drafted to assure that the contingent event is not satisfied or waived too early. Merely “entering into an agreement to purchase a replacement home” can be premature. The inspection should be completed, and financing pre-approval obtained – at minimum.
