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The ‘buyer reasonable disapproval’ process in the AAR purchase contract

T he AAR Residential Resale Purchase Contract allows the buyer 10 days (or other specified number of days) after acceptance of the Contract to conduct any inspections and give written notice to the seller of any items reasonably disapproved (Lines 235-237). This time period is defined as the Inspection Period. During the Inspection Period, the buyer must complete AAR’s Buyer’s Inspection Notice and Seller’s Response form (or equivalent). If the buyer reasonably disapproves of any aspect of the property, the buyer must complete the form, specify the items disapproved, and state whether the buyer elects to either immediately cancel the Contract or provide the seller an opportunity to correct the items disapproved. If the buyer cancels the Contract, the buyer’s earnest money should be returned. If the buyer provides the seller an opportunity to correct the items, the seller must respond in five days and indicate whether or not the seller is willing to correct all, some or none of the items. If the seller refuses to correct any of the items disapproved, the buyer may, within five days of receipt of the seller’s response, either cancel the Contract or proceed with the transaction without the correction of the items not agreed to in writing (Lines 238-253).

What is “reasonable”? The Contract allows the buyer to give the seller notice of “any items reasonably disapproved.” Defining “reasonable” out of context is difficult. Disapproval of any aspect directly related to the property that logically should be corrected, and such correction would cost the buyer money is probably reasonable. However, disapproving of the property just because of “buyer’s remorse” or because the buyer has had a change of heart or change of circumstances is not reasonable.

If the buyer elects to cancel the Contract, must the buyer give written notice of what items the buyer reasonably disapproves? Yes. The Contract requires that if the buyer reasonably disapproves of an item, the buyer must deliver to the seller written notice of the items disapproved and state the buyer’s election .

What if the seller believes the disapproval is unreasonable? If the seller believes the buyer’s disapproval is unreasonable, the seller should respond to the buyer’s notice, in writing, stating specifically why the disapproval is not reasonable. A copy of the seller’s response should be delivered not only to the buyer, but to the escrow company as well. The seller should also be prepared to supply documentation or evidence that the buyer’s disapproval of the item is unreasonable. For example, if the buyer gives notice of disapproval of the condition of the roof, the seller should be prepared to submit the statement of a roof expert that the roof is in excellent condition.

Is the buyer entitled to disapprove of cosmetic items? No. The Contract specifically excludes cosmetic items from the items that the buyer may reasonably disapprove (Line 236). Like the term “reasonable,” the term “cosmetic” is difficult to define in a vacuum. However, the buyer is not entitled to disapprove of any items concerning the property that are related only to its appearance. For example, the color of the wall would be a cosmetic item.

Why is the AAR’s Buyer’s Inspection Notice and Seller’s Response form required? The form is required to encourage uniformity of practice. Additionally, the form requires the signatures of both buyers, and if applicable, both sellers. The signatures of both buyers are required to insure that the buyers are in agreement as to the items disapproved and their election. If the seller agrees to make repairs or corrections, the statute of frauds requires the signatures of both sellers because the agreement is a modification of the Contract. Finally, the form gives both parties additional information on the inspection and notice of disapproval process.

Should the buyer state in the written notice of disapproval what type of “correction” the buyer expects? Yes. If the buyer elects to allow the seller an opportunity to correct the items disapproved, the buyer should state in the notice how the item must be corrected. For example, if termites are found, must the entire house be treated, or is spot treatment sufficient? 

Should the buyer’s broker give notice of reasonable disapproval on behalf of the buyer? No. The buyer is obligated to make the buyer’s election, either to cancel or give the seller an opportunity to correct the items, sign and cause the notice to be delivered to the seller. Buyer’s brokers should obtain both buyers’ signatures on the notice to insure that both agree to the items disapproved and their election.

Must both buyers and both sellers sign the Inspection Notice and Seller’s Response form? Yes. If the seller agrees to correct the items disapproved by the buyer, the agreement constitutes a modification of the Contract, which must be in writing and signed by the parties to be charged to be enforceable.

What if the buyer does not give written notice to the seller during the Inspection Period? The buyer’s failure to give the seller written notice of items disapproved during the Inspection Period is deemed to be the buyer’s election to proceed with the transaction and close escrow without the correction of any property items (except for warranted items).

What happens if the seller fails to respond to the buyer’s written notice of items disapproved? The effect of the seller’s failure to respond to the buyer’s written notice of disapproval is the same as if the seller had refused to correct any of the items. The buyer has five days after the expiration of the time period for seller’s response to elect to cancel the Contract or proceed with the transaction without the correction of the items disapproved .

What if the seller agrees to correct some, but not all, of the items disapproved? If the seller agrees to correct some, but not all, of the items disapproved, the buyer has two options under the Contract as written: cancel the Contract or accept the property with the correction of only those items seller agreed in writing to correct. If the buyer wishes to continue to negotiate the items, the buyer must get an agreement, in writing, signed by all parties, extending the time periods for cancellation (sample extension language is available on AARonline.com). If the buyer fails to obtain a written agreement extending the time periods in which the buyer may cancel, the buyer will be obligated to proceed with the transaction without correction of the items that seller has not agreed to in writing.

Can the buyer change the buyer’s election once the election has been made? Probably not. If the buyer reasonably disapproves of items, the buyer must state in the notice that the buyer elects to either immediately cancel the Contract or provide the seller an opportunity to correct the items. If the buyer gives the seller an opportunity to correct the items, the buyer has made the election and can no longer “immediately cancel” the Contract. This is certainly true if the seller has responded and agreed to correct the items. However, whether the buyer can change the election before the seller responds is probably less clear cut. To avoid this dilemma, make sure the buyer has taken the time allotted to perform all inspections and investigations and has thoroughly considered the options before making an election.

If the buyer does not disapprove of any items and requests no corrections, should the Buyer Inspection Notice and Seller’s Response form still be used? Yes. The buyer should check the box on the form indicating that the buyer has conducted the desired inspections and that the Premises are accepted in the present condition and sign the form. The seller’s signature on the form is not necessary. The AAR Contract clearly sets forth the procedure to be followed during the inspection period and the time period for the seller’s response thereafter. Brokers should be familiar with the process and insure that a signed writing evidences any agreed upon deviation in the process.

By Michelle Lind General Counsel to the Arizona Association of Realtors, and a State Bar of Arizona board certified real estate specialist.

 

 

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