The Professional Inspection Report Conundrum

Posted on by Phil Querin

Hand With Magnifying Glass Over House

The Licensed Professional Inspections portion of Section 10 of the 2018 OREF Statewide Residential Sale Agreement form, contains the following provision:

Buyer shall not provide all or any portion of the inspection reports to Seller unless requested by Seller or Seller’s Agent. However, at any time during this transaction, or promptly following termination, upon request by Seller or Seller’s Agent, Buyer shall promptly provide a copy of such reports or portions of reports, as requested. (Emphasis in original text.)

In addition to the above-quoted text, the professional inspection section says that the:

Buyer must specifically identify in this Agreement any desired invasive inspections that may include testing or removal of any portion of the Property including, for example, radon and mold.

The genesis of these concepts (i.e. not gratuitously delivering reports to seller, and not conducting invasive inspections without a seller’s consent), goes back to the days when abandoned (i.e. unused) underground storage tanks were the topic du jour. While such tanks remain an important consideration in residential transactions today, they are less an issue because of the law requiring that they be documented as empty by closing.  In some instances, buyers insist that the tank be “decommissioned”, which is a more detailed process, and recorded with the DEQ.[1]

Several years ago, there was no mandate about emptying tanks upon sale, and when buyer’s unilaterally sought to test the ground around an underground tank and found contamination, the transaction stopped dead in its tracks. This is because under the law, the DEQ is required to be notified, and the property owner is strictly liable. In some cases, the buyer would walk away, thus leaving the seller with a costly cleanup on their hands and suspending all further marketing until the work was completed.

The Sale Agreement form changes thereafter created a sort of “don’t ask, don’t tell” approach; a seller could refuse to permit the buyer to conduct invasive tests such as taking soil sample around an abandoned tank, and similarly, on those inspections actually conducted, the buyer was not to deliver reports to the seller unless requested. Thus, in the event of a sale-fail, the seller would have not have actual knowledge of negative information possibly contained in their buyer’s undelivered report(s).

Gradually, over the years, the issue of underground storage tank issues seem to have abated. So today, the focus of many listing agents has shifted to the inspection report(s) obtained by buyers as a part of the due diligence process. The professional inspection contingency in the Sale Agreement allows buyers to conduct one or more inspections of the home and thereafter negotiate with the seller over certain requested repairs and/or price concessions based upon the information in the report, and withdraw from the transaction if no agreement can be reached.[2]

The debate can be summarized as follows:

  • Sellers and their brokers argue that not all inspections are equal; some are better than others. Some reports can be just plain wrong. Different inspectors can come to different conclusions about the existence and severity of certain problems. It is unfair to saddle sellers with information in a report that may be wrong; and once some or all of a report is in their possession, it must be turned over to the buyer, because the Seller Property Disclosure Statement asks:

*Has pest and dry rot, structural or “whole house” inspection been done within the last three years? (And since there is an asterisk next to the question, the seller must: “…describe the defect on attached sheet and explain the frequency and extent of the problem and any insurance claims, repairs or remediation.”)[3]

  • Buyers and their brokers argue that such information should be required to be turned over to sellers in all transactions, so that future buyers are allowed to see it and decide for themselves whether it is reliable. Buyers typically have their own inspections, so this additional information may be nothing more than redundant, and if not, the buyer can vet it through their existing inspector.[4]

To be clear, it is my opinion that a seller who was not privy to the undisclosed contents of their buyer’s inspection report cannot be held liable for failing to ask for the report after a sale fail.  Why? Because where there is no “special relationship”[5] between seller and buyer; it is an arms-length transaction, and as such, sellers have no fiduciary duties to their buyers, nor are they required to obtain and review reports from persons they did not select or hire.

However, real estate transactions, like life, are never so simple. Here are some conundrums:

  • What if, following the professional inspection, the buyer is asked to pay for the installation of a french drain around the house? Although no portion of the report has been provided to the seller, one could reasonably conclude that something in the report precipitated the request. The transaction fails. Does the buyer now have a duty to disclose to subsequent buyers what he merely suspects was contained in the report he never saw?
  • Following the sale fail, the buyer’s broker, in a fit of pique, emails the entire inspection report to the seller’s broker. Can the broker just hit “delete”? And if she does, will anyone believe she didn’t open it first? And how does the seller respond to the question in the Seller’s Property Disclosure Statement asking if there has been a professional inspection within the last three years?
  • Conversely, should the listing broker who is now in possession of the report, and being in a “no-win” situation simply open it? Does she now have a duty to do so?
  • Can the listing broker, with knowledge of the contents of the buyer’s inspection report, simply not share it with the sellers, so they have “plausible deniability”?[6]

Conclusion.  To the question whether, following a sale fail, all buyers should always be required to turn over reports to sellers, the law does not mandate this (absent some affirmative legal obligation under statute or contract). Which leads to another question: If not required by the law, why should the real estate brokerage industry, or its forms provider, contractually require it – as if one size fits all?

The current language of the Sale Agreement seems to come pretty close to the best solution, i.e. let sellers decide if they want a copy of the report(s). A corallary is also true: If a buyer’s broker is aware the home previously went “pending” (i.e. was under contract per the multiple listing service), and later sale-failed,  they should request a copy of all  reports, and if the seller does not have them, do two things: (a) Seek to learn the reason for the sale-fail, and (b) Make sure the new buyer’s inspector goes through the home and property with a fine toothed comb.

To the question how sellers and their brokers deal with the unsolicited delivery of reports or portions of reports, the answer is much more elusive. In a perfect world, it would not occur, the the Sale Agreement is clear on its face. In an imperfect world, where such events can occur through intention, inadvertence, or a failure to read and understand the prohibition, I suggest the best solution is for it to be dealt with by company policy.

I acknowledge that company policy cannot dictate how sellers should deal with the issue, but since their brokers are more likely to obtain such reports before their clients, company policy can dictate how they are to deal with that situation. And lest anyone asks, the broker, armed with material information about the property disclosed in the report(s), has a duty to so inform the seller, who can then decide whether to review it.  And because of ORS 696.805(2)(c), if a seller said they did not want to know the information in their own broker’s possession (a risky decision, aka the Sargent Shultz defense), I submit the seller’s broker, nevertheless, has the duty to disclose the existence of the report to the buyer and buyer’s broker, for them to decide if they want to review it. ~Phil 

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[1] For information on the process, go to this link.

[2] Caveat: It is important for buyer brokers to remember that the selected time frame covers not only the inspection(s) but the negotiations as well. So if time is running out, it is important for the buyer broker to negotiate an extension of time. Otherwise, if the inspection contingency period expires before the parties have completed their negotiations, per the terms of the Sale Agreement, the buyer is deemed to have waived the right to object to the report. In other words, the buyer has accepted the condition of the home, and has no legal power to negotiate repairs or price concessions.

[3] Admittedly, the instruction does not say to “attach” the report, but that’s how the industry interprets it, and if the question was marked “Yes”, the buyer would undoubtedly ask for it, if the seller did not voluntarily provide it.

[4] Virtually all inspection reports have caveats that they are produced solely for those buyers who paid for them, and are not to be relied upon by any third parties.

[5] A “special relationship” exists when the seller stands in a relationship of trust and confidence to the buyer (e.g. the seller is the buyer’s lawyer or real estate agent). In such cases, there can be a finding that due to the special relationship, the buyer placed a higher degree of trust and confidence in their seller, who thereby had a greater duty of disclosure. In Oregon, absent such relationships, residential transactions are viewed as being “arms-length” and buyers retain the responsibility of performing their own due diligence.

[6] The short answer to this question is an emphatic “No”. See, ORS 696.805(2)(c).

Posted in Broker Risk Management, Miscellany, Professional Inspection, Real Estate General, Real Estate Laws, Realtor Risk Management, Realtors | Tagged , ,
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