Termites Bug Me

KrisBerg05 a.jpgThis will undoubtedly go down in history as one of my more glamorous contributions. (Actually, I was just tired of seeing Steve’s photo every time I checked in, as the front page of the Blog always shows the last post first).

Based on a recent experience I had, I wanted to share some cautionary thoughts about the infamous “Termite” inspection, or more appropriately the Wood Destroying Pests and Organisms inspection, which is typically conducted during escrow. As most of us know, it is almost always a contractual obligation of the Seller these days to pay for a termite inspection and is also almost always the Seller’s duty to remediate any active infestation found during that inspection prior to close (what we in the industry affectionately refer to as “Section 1” work).  Having come off of what most consider an extended “Seller’s market” period, it has become commonplace for Buyers and their agents to defer to the Seller on the selection of the company to perform the actual inspection.  In the contract, this is most often accomplished by requiring that the termite report be prepared by “Seller’s Choice”, “Any Licensed”, or “Any Reliable”.  Not all of these terms mean the same thing, however.

Many years ago, I heard a presentation from a real estate attorney who warned that the use of “Seller’s Choice” in the contract means just that; the Seller ultimately makes the decision as to the termite company. The inherent danger is, of course, what happens in the event of a dispute.

I am currently representing Buyers in a transaction where the Sellers provided a termite inspection report which appeared highly suspect to me and the Buyers.  Specifically, they showed findings of termite evidence at many, many locations throughout the home. The termite company recommended that each area be “locally treated” (which involves injection of magic termite-killing stuff), as opposed to a full fumigation (tenting).  The Sellers where satisfied, as this would result in a much lower cost to them; the Buyers were skeptical that this approach would ultimately result in a termite-free home.  Buyers, of course, have inspection rights, and mine opted to have a second, independent inspection done at their own expense. The second report (surprise!) recommended tenting. Now what?

In our contract, we had not used the “Seller’s Choice” language, but instead had specified “Any Reliable”. The result is that the entire issue becomes negotiable. Certainly, the Sellers could have refused to respect and respond to the more onerous findings of the second report in favor of the first, but this could have been subject to challenge by the Buyers. Obviously, the Buyers could have decided to cancel the transaction if not satisfied (and they likely would have). Finally, the Sellers were aware (we made sure they were reminded) that all reports would now have to be disclosed to future buyers should an agreement not be reached with the current ones, therefore this issue would not be going away.

This story had a happy ending in that the Sellers agreed to a full fumigation, and the transaction is proceeding on schedule. The moral is that Buyers have many rights under the contract, and that they and their agents should be certain that those rights are best protected.  Agents should avoid sloppy contract language that may leave dangerous loopholes and should help their clients scrutinize all disclosures received during escrow. Buyers and Sellers alike should read and clearly understand the purchase contract they sign.  The contract is a legally binding document that can work for or against you.

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