Home Inspections - How to Deal With Them

June 2002

Home inspections are generating more and more attention in residential real estate transactions. It makes imminent sense for realtors to suggest to their clients that they obtain these reports when buying a home because it helps to prove to the client that the relator is holding nothing back about the property they are buying. On the other hand these reports represent yet another complication in the life of a realtor.

When a client decides to purchase a home and makes it conditional upon a satisfactory home inspection report, how do you advise your client when they want to terminate the transaction - you know that conflict is on the horizon. What criterion can be used by a purchaser to back out of a contract when using the home inspection report condition?. Recently the Ontario Court of Appeal gave us a glimpse of what the courts are saying.

The case involved purchasers who entered into agreement of purchase and sale to buy a modest shack for a million and a half dollars. They put down a nominal deposit of $150,000. After the closing the purchasers’ wanted to create a roof-top garden area on the home and redesign the garden patio doors. Neither of these items were mentioned in Agreement. The Agreement had a home inspection condition "that was satisfactory to them in their sole and absolute discretion". The Agreement also said the condition was inserted "for their sole benefit" and "could be waived at their sole option".

After signing the offer, the purchasers proceeded immediately with a home inspection. In respect of the condition of the home, the inspector reported that the home was "well-built" and required no major repairs. He acknowledged that there were some minor deficiencies were identified, and that the washroom had a leak that needed further investigation. The inspector also gratuitously added that planned renovations for the roof garden and patio doors would be "disruptive" and "costly".

Take a moment, before you read any further to think about how you would deal with this situation. If the purchasers ask you if they can terminate the transaction, how do you advise them? Can the purchaser terminate the contract for the purchase of a "well-built" home, with no major repairs required? Are the minor repairs that are identified in the report enough grounds for them to terminate the contract? What about the unknown washroom problem? Is the standard home inspection clause enough to allow a purchaser to terminate a contract for even the most minute reason related to the condition of the home? And what about the comment about the cost of renovation - can a home inspection clause be used only in relation the current condition of the property, or a future use of the property? Read further to find out what the court thought.

The court said that purchasers can terminate if they are "motivated by subjective considerations of personal compatibility...based on their judgment pursuant to the authority given to them in the condition clause." They also must act in "good faith" with "honesty and reasonableness".

If you’re like me, you’re probably saying to yourself, "What does that mean?". Since I’ve read the whole case, I’ll try to explain what the court had in mind.

The basic test, that the court described above, will be applied on a case to case basis. Each case will be different and the facts will dictate the result. In the case at hand, the court agreed with the purchasers’ decision to terminate and this is why.

First, they said the deficiencies in the inspection report related to construction, design and condition of the property. Thus the report identified "objective, physical factors concerning the structural integrity of the property". Therefore, even though the court realized that the purchasers took into account the issues relating to the proposed renovations, the inspection report detailed objective facts upon which they could base the exercise of their discretion under the inspection condition.

Secondly, the court found no evidence of "dishonesty or bad faith" by the purchasers.

Third, the inspection condition was absolute - it did not contain language which tied it to the "operative fitness, structural completion, mechanical utility or marketability" of the property. If the condition had such language, the court felt this "might warrant imposition of an exclusively objective standard of reasonableness." But it didn’t, and so an objective test was applied.

So what’s the lesson here? Firstly, remember that as a realtor, you will live and die by your contracts. Don’t be sloppy in draftsmanship. Be precise, when you want specificity, and use open ended language when you want to increase options. Secondly, the smell test is always a great indicator of how your clients should conduct themselves. If the courts suspect that there is any element of Bad faith or dishonesty, no matter how good a job you do for your client, they will lose.

Lastly, hire reputable home inspectors. By making the transaction conditional upon the inspection home report, the report almost becomes part of the contract. If the report is deficient, your Agreement may fail with it.