Suite 1819
Philadelphia, PA 19103
Phone: (215) 399-1346
Facsimile: (215) 399-1347
contact@nochumson.com
By Alan Nochumson*
In most residential real estate transactions taking
place in
InWelteroth v. Harvey, the Superior Court of Pennsylvania recently
determined whether buyers to a residential real estate transaction
waived their rights under the inspection contingency provision
contained within this form agreement of sale.
AGREEMENT OF SALE
In late
winter 2005, the parties in Welteroth used the form agreement of sale to effectuate the
transfer of a residential six acre parcel of land containing a
two-story house. The
form agreement contained an inspection contingency provision whereby
the buyers were allowed, within 15 days from the date the agreement
was executed, to inspect the property and deliver a written report
detailing the condition of the property at the time of the
inspection. Within the
time given for completing the inspection and delivering the
inspection report, the buyers were then required to accept the
property unless the cost to correct the defective conditions, if
any, on the property exceeded $500.
If this
cost exceeded $500, the sellers, within seven days of receiving the
report, had to inform the buyers in writing of the their choice to
either make repairs before settlement so that the cost to repair the
remaining defective conditions on the property was less than or
equal to $500, credit the buyers at settlement for the difference
between the estimated cost of repairing the conditions and $500, or
not make repairs and not credit buyers at settlement for any costs
associated with repairing the conditions. If the sellers elected to make repairs or credit the buyers
at settlement, the buyers were required to accept the property and
consummate the real estate transaction. If, however, the sellers decided not to make repairs and not
to credit the buyers at settlement, or if the seller failed to
choose any option within the seven-day time frame, the buyers had,
within five days, to either accept the property and consummate the
real estate transaction or terminate the agreement in writing by
notice to the sellers, in which case all deposit monies paid on
account of purchase price would be returned promptly to buyers and
the agreement would be void.
After the
inspections were already completed and the inspection contingency
period expired, the sellers had “timbered off” roughly 30 full-grown
trees, leaving high stumps and damage to the grounds caused by the
dragging of logs. Upon
discovering the logging operation, the buyers offered to modify the
agreement to ensure that closing would go through subsequently if
the sellers would agree to deposit money in escrow to ensure
adequate compensation for cleaning up after the logging operation. The sellers flatly rejected that offer.
TRIAL COURT ACTION
The buyers subsequently filed a complaint both for specific performance and damages for breach of the agreement and damages for conversion of the timber.
The sellers
then filed preliminary objections in the nature of a demurrer,
asserting, among other things, that the buyers failed to exercise
their rights under the inspection contingency provision contained
within the agreement of sale and thus the buyers had failed to state
a cause of action upon which relief could be granted. Moreover, in the preliminary objections, the sellers alleged
that, at the time of inspection, the property was being logged and
that the logging was “open and obvious”.
The trial
court sustained the preliminary objections with respect to the claim
for specific performance while, for whatever reason, declining to
address the claims for breach of contract and conversion of timber. In doing so, the trial court relied upon the buyers’ alleged
failure to exercise their rights under the inspection contingency
provision.
After the
buyers filed an appeal with the Superior Court, the trial court
issued a written memorandum in further support of its ruling. In the memorandum, the trial court did note that it had erred
in relying upon the sellers’ allegation that, at the time of the
property inspection, it was open and obvious that the property was
being logged, but nevertheless found that this error was “de minimis”.
SUPERIOR COURT DECISION
The
Superior Court found that the trial court erred as a matter of law
in concluding that the agreement provided for an exclusive remedy
and in crediting the sellers’ statement that the property was being
timbered with the buyers’ knowledge during the 15-day inspection
window.
The
Superior Court first concluded that nothing in the agreement limited
the right of the buyers to inspect the property after the 15-day
window closed. Rather,
the Superior Court pointed out that the intention behind the
inspection contingency provision is to create a mechanism for
terminating or modifying an existing agreement within a short period
of time after the agreement is consummated, as evidenced by the
15-day default inspection window.
In reaching
its conclusion, the Superior Court cited another provision of the
agreement which imposed a duty on the sellers to maintain the
property “in its present condition, nor
Taking the
provisions together, the Superior Court refused to imply an
artificial limitation on the sellers’ duties under the agreement by
foreclosing the buyers’ remedies for a breach of these duties after
the inspection window had closed.
In dicta,
the Superior Court did explain that, if the buyers had learned of
the timbering during an inspection conducted during the 15-day
window, the curative and remedial provisions contained within the
inspection contingency clause would have been triggered and they
would have been foreclosed from being afforded a remedy outside the
prescribed time frame.
In doing
so, the Superior Court clarified that its ruling in Welteroth was limited to
situations where the condition of the property changes after the
inspection period in the agreement of sale already expires. As a result, the Superior Court emphasized that this real estate dispute essentially
hinged upon whether the buyers, when they conducted the inspection,
knew of the timbering and decided to forego their remedy under the
inspection contingency provision.
At this early juncture in the proceedings, the Superior Court, however, refused to place any weight on the sellers’ allegation that the buyers were aware of the timbering prior to the close of the fifteen-day inspection window simply because the record was unclear as to whether the buyers knew of the logging after a timely inspection of the property. As such, the Superior Court believed that the trial court’s reliance on the allegation was not de minimis but rather dispositive “when viewed through the prism of an accurate interpretation of the agreement of sale”.
LESSONS LEARNED
The trial court’s ruling in Welteroth highlights the
risks associated with relying upon the form agreements of sale used
in most real estate transactions in
Like most
contracts, terms and conditions must be added and subtracted from
the “form” to effectuate the true intent of the contractual parties
for that particular transaction. For that reason alone, even in the simplest of real estate
transactions, the parties should be represented by legal counsel so
as to prevent the parties from attempting to fit a square peg in a
round hole.
*Alan Nochumson is the sole shareholder of Nochumson P.C. where he specializes in real estate, litigation, employment and labor, and land use and zoning. Mr. Nochumson regularly speaks at and writes for trade and professional associations, local universities, and adult education programs on issues commonly confronted by businesses, individuals, and professionals. Mr. Nochumson is also President of Bear Abstract Services where he offers comprehensive title insurance, title examination, and closing services for transactions ranging from simple residential agreements of sale to complex commercial projects. He may be reached by telephone at (215) 399-1346 or by e-mail at anochumson@nochumson.com.