Are Repairs Required to be Completed Prior to Closing? Were They?

Are Repairs Required to be Completed Prior to Closing?
Were they?

If you are representing a buyer and repairs must be made to the home how do you outline this in the agreement to ensure that it is completed to your client’s satisfaction? The case of Rosenhek v. Breda touched on the question of how to deal with repairs when buying a home and illustrated how important it is to ensure that terms contained within the contract are clear in order to avoid potential legal action. Also, it is recommended that you ensure a holdback is obtained so that if repairs are not made, there is money available to complete the work. To read the case of Rosenhek v. Breda, please click on the following URL:
http://www.canlii.org/en/on/onsc/doc/2010/2010onsc2786/2010onsc2786.html

In Rosenhek v. Breda a home inspection revealed various items which were required to be repaired. The total cost of the repairs was estimated to be between $5,000 and $10,000. The buyers agreed to waive the inspection condition and to firm up, but only on the basis that a Repair Agreement be included. The Repair Agreement listed all items which were required to be repaired on or before the closing of the transaction. The sellers approved this agreement and conducted work to rectify the issues.

On the day of closing (September 14, 2004), there was no evidence provided that the lawyers or any parties involved made any inquiries in relation to the repairs that were required to be completed. The deal closed as scheduled. Not all repairs had been completed as required. The sellers believed the work they undertook satisfied the terms of the Repair Agreement.

The Judge determined that the first indication of any attempt by the buyers to contact the sellers about an issue with the repairs was almost three years after the closing when a leak occurred in the family room ceiling. Even though the sellers believed that the work had been completed as required, they arranged for an experienced roofer to attend at the property. The roofer did not identify any signs of water leaking but recommended that pea gravel be spread on the roof which would help the water to disperse faster in the event of a rainfall. The sellers agreed to have this work completed as a goodwill gesture but without any warranty “due to the amount of time which [had] already lapsed with no previous concerns brought forth.”

The buyers rejected this offer from the sellers and obtained several quotes from roofing companies which ranged between $22,000 and $27,000. The buyers retained the services of the lowest bidder to complete the work.

The Judge reviewed the wording of the agreement and the intention of the parties as to whether or not the Repair Agreement would merge or survive closing. After viewing the agreement, he decided that this obligation was not intended to survive the closing as the agent provided for the items listed to be repaired on or before the closing date. As a result, the doctrine of merger was applied meaning that once the property was conveyed, the agreement was deemed completed and the Repair Agreement merged. The Judge determined this due to the fact that the obligations in the agreement were specific and they were intended to be completed on or before closing. To read more on what it means to ‘merge’ versus ‘survive’ closing view our brief blog on this topic: https://elliottlawyers.com/real-estate-law/difference-between-surviving-closing-and-merging-on-closing .

Another important term in the Repair Agreement was that the buyers were permitted to contact the sellers on or before closing to inquire about the status of the repairs and obtain confirmation that they had been completed. No such action was taken by the buyers or the buyer’s lawyer in this regard. If such action had been taken, and it was determined that the repairs had not been completed, the buyers would have had the right to terminate the Agreement of Purchase and Sale, or create a further agreement which would extend the obligation to complete the repairs beyond the day of closing. As a result of this inaction, the judge dismissed the action.

This case points to the importance of carefully drafting all provisions in an agreement, especially when there are issues associated with repairs and deficiencies. Also, it is very important that on or before the day of closing steps are taken to ensure compliance with any specific items that need to be addressed before the transaction closes. Another recommendation is to include a holdback relative to the amount of the repairs so that if they are not completed as required, that money can be used to complete the repairs. Attached is a sample clause to be considered when faced with a similar situation.

NOTE: The attached clause has been drafted with the intention to specifically separate & itemize repairs so there is no dispute when funds have to be released if only some of the work has been completed. Also be careful to rely upon the advice of a home inspector or specific consultant i.e electrician for electrical repairs when setting out the estimate.

Your client can be further protected by including a requirement for the seller to sign an undertaking to be responsible for the actual cost of the repairs that have been estimated upon presentation of a receipt for the work. I suggest this will be a second level of negotiation to occur after an inspection close to the closing day when it is evident the repairs will not be completed by the seller.

The content of this article is intended to provide a general guide to the subject matter. The information does not constitute legal advice and a solicitor and client relationship is not created.

Shari D. Elliott
Elliott & Elliott
135 Bayfield Street, Suite 101A
Barrie, Ontario, L4M 3B3
Tel: 705-797-2672
Fax: 705-797-8445
Email: shari@elliottlawyers.com

SAMPLE HOLDBACK CLAUSE
(Holdback for completing work prior to closing)

1. The seller, at its expense, will complete and/or repair the following items:

ITEM ESTIMATE TO RECTIFY
Leak in basement bathroom faucet: $60.00 Crack in north exterior garage wall: $450.00
Broken window in kitchen: $90.00

The total value of repairs: $__600.00________

2. The buyer will hold back from the sale proceeds the amount specified in the above clause until all deficiencies specified are completed, and will place this holdback in the buyer’s lawyer’s trust account.

3. Deficiencies are to be completed before 5 p.m. on ____________________ (day, month, year). If the work is not completed, the total held back for each item not completed will be released to the buyer.

SAMPLE UNDERTAKING

The seller shall reimburse the buyer for completing the following repairs: (Insert work done).
The sum of $________ has been held back for these repairs based on estimates. The seller shall reimburse the buyer for the actual cost of the repairs upon receipt of invoices provided the work is completed and invoices are provided within 30 days of the closing.