In the Chicago SMSA, many, if not most municipalities, impose certain requirements on the parties to a purchase and sale, as well as a condition to recording the deed. Getting a final reading on, and paying that final water bill, are typical. They may be far more extensive: payment of municipal, county and/or transfer taxes, but many municipalities require a pre-closing property inspection for code compliance and perhaps repair of other conditions. Therein hangs the tale.
A few years ago, your attorney co-author represented the seller of an older, “recently rehabbed” (per seller), property. While under contract, the buyer inspected the property and was satisfied with its condition. The municipality then made its inspection, requiring a few modest repairs. All seemed fine, and the deal was set to close, until the buyer got cold feet, defaulted, and breached the contract. The deal died, the seller received the earnest money, and the property went back on the market. Kudos to the seller’s broker, (an SIOR of course), who found buyer #2. Within 45 days of the first failed deal, the property was again under contract. A smooth closing was expected as most documents were done and the property had been inspected, so what could go wrong?
Experience shows that a well-advised seller should know about its own property’s condition, not just through general familiarity, but perhaps through its own third-party inspection BEFORE marketing the property for sale.
The initial municipal inspection had expired, so a second inspection was made. THIS time the municipality found numerous conditions and violations requiring extensive and expensive repairs. The seller had an overdue mortgage and meager sale proceeds. The workout was complicated: sales proceeds were escrowed to perform repairs post-closing; and the seller’s lender temporarily took a reduced payout. Fortunately, we somehow closed the deal, but it wasn’t easy. The seller had been moments away from a successful closing with buyer 1, only to undergo that second municipal inspection and face dramatically increased repair costs. Who could have expected such a turn of events?
Now, your co-authors represent a buyer hoping to purchase a single tenant bank branch building in a municipality where an inspection is required, a hefty transfer tax is assessed, and the ordinance doesn’t assign the transfer tax responsibility to one party or the other. But that wasn’t the toughest issue. The seller refused to commit to make any repairs that might be required by the municipality, insisting that if the inspection required repairs that the seller was not willing to make, the seller wanted the right to rescind the contract and continue to own and occupy the building. Seemingly, this seller has a fear of expensive repairs. The buyer was anxious for the deal to close, being under pressure to find its new location. Moreover, the buyer feared that if the seller could refuse to make the repairs and rescind the contract in order to then sell the property to another buyer, then the buyer would be in a tough spot. In fact, the buyer wanted the right to assume the cost of repairs to the building so that the deal could continue, even if the repairs were extensive. In other words, the unknown regarding the municipal inspection results became a stumbling block to PSA completion. Talk about the municipal tail wagging the private sector dog!
Experience shows that a well-advised seller should know about its own property’s condition, not just through general familiarity, but perhaps through its own third-party inspection BEFORE marketing the property for sale. That might reduce some uncertainty and enable an informed seller to negotiate a PSA. Alternatively, if the inspection reveals flaws in the property or problems not known earlier, the seller would have a duty to repair or disclose these defects, which defects might have gone unknown but for that early inspection, another less than desirable situation.
Our view is that there is no right or wrong course of action. Good stewardship of the property by its owner/occupier should be the norm. When it isn’t, and a municipal inspection looms on the horizon, what is the best approach? As the great and wise Yogi Berra said long ago, when his damn Yankees were beating the beloved Brooklyn Dodgers in almost every World Series, “When you come to a fork in the road, take it!”
What would YOU do with an older building for sale with a mandatory municipal inspection on the horizon?