Most residential contracts will include a building and pest inspection condition.
The building and pest inspection condition allows a Buyer to terminate the contract in the event that they receive a building and pest inspection report that is not satisfactory to them.
Before purchasing a new home or investment property we strongly encourage all Buyers to engage a licenced trades person to undertake a building and pest inspection to ensure that they know exactly what they are buying before handing the money over.
Right To Terminate
When a Buyer receives an unsatisfactory building and pest inspection report, the right to terminate the contract is the Buyers only right. Despite this, it is not uncommon for Buyers to successfully use the threat of terminating the contract to extract a compromise from the Seller, such as a reduction to the purchase price or an agreement that the Seller will attend to certain repair works at the property prior to the settlement date.
For better or worse, the re-negotiation of terms under the building and pest inspection condition is now common practice. However, Buyers who wish to engage in these kinds of negotiations need to be aware of the risks.
Be Careful What You Wish For
Entering into negotiations under the building and pest inspection condition, can leave a Buyer vulnerable to missing the condition deadline. Typically, under an inspection condition the Buyer must confirm that it is satisfied with the results of it's inspection reports or otherwise by 5 pm on the inspection date. If the Buyer has not confirmed that it is satisfied by 5 pm on that date, then the Seller has an automatic right to terminate the contract for the Buyer's failure to comply with the standard condition.
Just because a Buyer may have commenced negotiations with the Seller regarding the inspection report, does not mean that the Seller's right to terminate after 5 pm on the due date is invalid. A Buyer should ensure that they commence negotiations well and truly before the condition due date ends or request to extend the inspection condition due date prior to entering into negotiations. However, doing this can call the Buyer's bluff.
Who’s Bluffing Who?
Quite often negotiations that take place under an inspection condition contain empty threats of terminating the contract. However it is impossible for parties to distinguish what is an empty threat and what is a genuine warning that one party is considering exercising it's rights of termination.
When it comes to the 11th hour, more often than not that a Buyer will decide that an additional $2,000 for repair works is a small price to pay when they have found their dream home. Similarly, a Seller will rationalise that reducing the price by $2,000 with a guarantee of settlement some 2 weeks later is worth it compared to the cost of putting the property back onto the market.
The problem is, it’s almost impossible to know who is bluffing who and (as stated above) it can leave parties very vulnerable under the contract if an agreement is not reached prior to the condition expiry.
We recommend getting your building and pest inspection condition as soon as possible so that you have ample time to consider the results of that report prior to the condition due date. We do not actively encourage Buyers to renegotiate under the contract however if Buyers instruct us that this is what they want to do, then we recommend the following:
- Be sure that your negotiations are reasonable. Is threatening to terminate the contract because a light bulb needs to be replaced reasonable? Most likely, no.
- Allow adequate time to commence negotiations in relation to the inspection reports.
- If you want to negotiate, you need to give the Seller clear instructions about what you want the Seller to do. This may involve you engaging further licenced trades people to inspect and clarify the extend of works that need to be undertaken. Be prepared to meet these additional costs upfront.
- If you are emotional about losing the property, do not attempt to renegotiate under the building and pest inspection condition as there is a risk the Seller may terminate the contract on you after 5 pm on the condition due date.
If you would like to discuss your rights and obligations under the building and pest inspection condition further please do not hesitate to contact us.