In honor of Halloween, this column is about things that go bump in the night, namely when real property is under contract and something breaks before closing. Who is responsible, the buyer or the seller, and what can be done about it?
Let’s assume that the buyer and seller are using the standard contract approved by the Colorado Real Estate Commission. The contract requires the seller to deliver the property to the buyer in the same condition existing as of the date of the contract, ordinary wear and tear excepted. The buyer has the right to walk through the property before closing, upon reasonable notice to the seller, to verify the physical condition of the property. To the extent that an issue comes to light before closing, the buyer’s rights depend on the nature of the issue and fall into one of three categories.
The first category would be a problem directly caused by the seller such as damage caused while moving out. This situation is governed by the general rule, recited above, that the seller must deliver the property in the same condition existing as of the date of the contract. To the extent that the seller is in breach of this requirement, the buyer can refuse to close without penalty.
The second category would be an “insurable loss” such as a fire that damages the property. In this case, it is necessary to determine the “amount” of the loss. If the amount of the loss is not more than 10 percent of the purchase price, the seller must repair the damage before closing. If the amount of the loss exceeds 10 percent of the purchase price, or if the seller does not repair the damage before closing, the buyer can terminate the contract without penalty.
Alternatively, the buyer can choose to go forward with closing despite the property damage in which case the buyer is entitled to a credit at closing for all insurance proceeds received by the seller resulting from the loss plus the insurance deductible provided in the policy. If the seller has not received the insurance proceeds prior to closing, the parties may agree to extend the closing or the buyer may elect to receive assignment of the insurance proceeds from the seller together with a credit for the deductible.
The third category is when one of the components at the property, such as the heating or plumbing, breaks before closing due to normal wear and tear. These items would typically not be covered by insurance. In this case, the seller must repair or replace the broken component before closing. If the seller fails to do so, the buyer can elect to either terminate the contract without penalty or accept a credit at closing for the cost of the repair or replacement. The seller is only required to replace a broken item with a unit of similar size, age and quality, not a new unit. This suggests that the credit must also be for the cost of a used item rather than a new item. The seller’s obligation to repair broken items ends when the buyer takes possession even if that is before closing.
The standard contract could be drafted more clearly and there is ample room for dispute about problems that may occur. The ultimate resolution of these issues is generally a matter of negotiation, which is where great real estate brokers shine. When something does go bump in the night before closing, and notwithstanding the technicalities of the contract, it is often solved with the seller giving the buyer an agreed credit or the parties escrowing funds until the seller fixes the problem.
Noah Klug is owner of The Klug Law Firm, LLC, in Summit County, Colorado, emphasizing real estate, business, and litigation. He may be reached at 970-468-4953 or Noah@TheKlugLawFirm.com.