Most astute purchasers realize the importance of getting a building inspection done before committing to purchase a property. They do this by inserting a specific condition (clause) in the Sale and Purchase agreement making the contract subject to their obtaining and approving a builders report on the property.
A report from a building inspector will set you back anywhere between $400 and $1000 depending on the property and company used which is not a lot if you consider the investment of hundreds of thousands in the property. What many people don’t realize however, is how vital the wording of the condition in the Sale and Purchase agreement is. I have come across countless cases of purchasers asking the agent for a builders report condition and then signing the agreement without ever reading or understanding the implications of the wording of the condition. Particular things to look out for are clauses that limit the issues you can raise under the condition or limit who can perform the inspection as well as ones that give the Vendor the first right to rectify the issue.
Vendor has option to rectify issue prior to settlement:
It is very common for agents to use conditions which give the Vendor the first option to fix any problems raised in a builders report. This is good from a Vendors perspective as it limits the ability of the purchaser to get out of the contract, which is often not in the purchasers best interest! See the below example of an excerpt from a builders report clause included in a recent agreement we received from a real estate agent:
“14.0 Building Report.
This agreement is conditional upon the Purchaser confirming by 4pm on the 5th working day from the date of this agreement their satisfaction with a Building Report on the property to be obtained from a Registered Master Builder of their choice. Should the purchaser in good faith be dissatisfied with any matter contained in this report, then the Purchaser must notify the Vendor of the defect giving rise to such dissatisfaction and before the contract can be cancelled allow the Vendor to remedy the same. Upon receiving notice from the Purchaser of such defect the Vendor shall advise the Purchaser within two working days whether or not the Vendor is prepared to remedy the said defect. In the event of the Vendor agreeing to remedy the said defect then the Vendor warrants that the defect will be remedied prior to settlement in a proper manner and in accordance with the Local Body requirements at the Vendor’s expense….”
According to this condition the if the building inspector finds a problem the Vendor first has the option to fix it. The nature of the problem could mean that the purchaser may not want to go ahead with the purchase even if it is fixed by the Vendor but they would not have the option to pull out so long as the Vendor agrees to attend to the necessary work. This clause can also lead to disputes between the purchase and Vendor as to the extent of remedial work required, vendors often try for a quick cheap fix whereas purchasers want to ensure no future maintenance issues for the next 20 years.
From a purchasers perspective it is advisable to ensure the power is in your hands to walk away from the deal if anything untoward shows up in the builders report. You can still negotiate with the Vendor, but in the end the decision is yours as to whether or not you want to proceed.
Clauses that are limited to structural integrity and watertightness:
It is not unusual for builders report conditions to limit what the purchasers may raise to structural integrity and watertightness issues. This is to prevent the purchaser coming back with an extensive list of petty issues such as loose door handles and blown lightbulbs, however there are often significant costly problems identified in a builders report that may not be strictly structural or related to water tightness. As a purchaser it is better not to put any limitations on what you may or may not raise.
Who will carry out the inspection?
There have been cases where builders report conditions have specifically stated that the inspection be carried out by“a Qualified Master Builder” or a “Registered Building Inspector” or “Registered Master Builder” as per the example clause above. Purchasers who have not read this carefully have then obtained a building inspection from a builder / company that does not meet the criteria. When they have raised the issues with the Vendors their lawyers have come back and said that the building inspection did not meet the criteria outlined in the condition and that the purchaser is now out of time for obtaining a new report so the builders report condition is deemed as satisfied… despite the fact there were serious issues identified in the building report! Wording that would be more favourable to the purchaser could be along the lines of “Builder of the purchasers choice” or even “….a report on the property to be obtained from a professional of purchasers choice” which would allow them to get a structural engineer or other professional which may be necessary in light of the Christchurch earthquake!
These are just three examples of types of issues to consider when approving the wording of a builders report condition, but there are many other factors to take into account. The best advice is to always get the wording of your conditions checked by your lawyer prior to entering into an agreement.
Failing to get legal advice can be a costly mistake in the long run!