At the Intersection of the 2023 Forms Revisions and Best Practices
On July 11, 2023, 31 of the statewide forms were revised and half a dozen new forms were introduced.
All of the revisions and new forms are important but none of the changes are likely to cause a huge change in the way you do business or the way you draft offers and counteroffers. Still, if you are not paying attention to the forms revisions, you will get your client in trouble. Your buyer will end up waiving a home sale contingency or an inspection contingency because you were not paying attention. Take one of the many classes offered by Washington REALTORS® and/or NWMLS and read (and re-read) the legal bulletin that describes all of the statewide forms changes.
This article will not cover all of the forms changes. Instead, this article will address best practice strategies for addressing three of the forms revisions.
Form 35: Do Not Include Inspector’s Recommendations When Claiming Additional Inspections Unless Seller Requests
As of July 11, 2023, a buyer is no longer allowed to send any portion of buyer’s inspector’s report to seller, including inspector’s recommendations for additional inspections, without seller’s consent. However, buyer may not claim “additional inspections” unless buyer’s inspector actually recommended additional inspections. Seller may demand proof of buyer’s inspector’s recommendation and if seller demands proof, buyer must deliver inspector’s recommendation for additional inspections. If buyer fails to provide inspector’s recommendations upon seller’s request, buyer will fail to trigger the additional inspection time and will risk loss of the inspection contingency. If “additional inspection” time is effectively claimed, it is a stand-alone period providing buyer the time to conduct the additional inspections.
A lot was said in the prior paragraph. It is helpful to unpack it.
A buyer is no longer allowed to send any portion of buyer’s inspector’s report to seller, including inspector’s recommendations for additional inspections, without seller’s consent.
Prior to July 11, 2023, a buyer could not trigger the “additional inspection” time unless buyer provided seller with a copy of buyer’s inspector’s recommendation for additional inspections. Now, if buyer provides a copy of buyer’s inspector’s recommendation without seller’s prior consent, buyer will waive the inspection contingency.
However, buyer may not claim “additional inspection” time unless buyer’s inspector actually recommended additional inspections.
Form 35, Paragraph 5 begins with: “If an inspector so recommends, Buyer shall have additional time to obtain further evaluation of any item by a specialist…” Buyer may ONLY claim additional inspection time if buyer’s inspector recommends further evaluation of an item by a specialist. While buyer may not deliver a copy of the inspector’s recommendation without seller’s consent, buyer must have inspector’s recommendation for additional evaluation before buyer claims the additional inspection time. This answers a question that is often asked. “What if buyer conducts their own inspection, without a professional inspector? Can that buyer trigger “additional inspections”?” The answer is “no”. Buyer may not claim “additional inspection” time unless buyer’s “inspector” recommends further evaluation. Buyer’s “inspector” cannot recommend further evaluation if buyer does not have an “inspector”.
Seller may demand proof of buyer’s inspector’s recommendation and if seller demands proof, buyer must deliver buyer’s inspector’s recommendation for inspections.
Should buyer claim “additional inspection” time, seller may demand proof of buyer’s inspector’s recommendation. Seller may demand proof at the time of mutual acceptance by marking the appropriate box on the face of Form 35 or after mutual acceptance by delivering Form 35C. Regardless of when seller demands proof of inspector’s recommendation, once the request is made, buyer must deliver the inspector’s recommendation. Buyer has no contractual ability to refuse.
Listing brokers should assist seller in considering whether seller actually wants this proof from buyer. As is often the case, seller’s choice should reflect a balancing of the pros and cons of making the request. If the “additional inspections” time is claimed, buyer will increase the length of the inspection contingency, a contingency that gives buyer a subjective right to terminate the purchase agreement. For that reason, seller may want to force buyer to prove entitlement to the additional time by requiring buyer to deliver a portion of buyer’s inspector’s report. On the other hand, what is the likelihood that buyer would be unable to provide the proof if buyer has actually conducted an inspection? Most inspectors are happy to recommend additional inspections because the act of doing so potentially relieves liability for the inspector. The downside to seller’s request is that buyer is then liberated to deliver some portion of the report that buyer deems responsive to seller’s request. Buyer is only permitted to deliver the few words that comprise the inspector’s recommendation but buyer brokers often over deliver, giving seller more information than seller wants. If buyer still has other contingencies that could potentially excuse buyer’s performance of the purchase agreement, that may mitigate against seller requesting proof of the inspector’s recommendation. Ultimately, listing brokers will have to assist each seller to understand the pros and cons associated with demanding proof of buyer’s inspector’s recommendation, enabling seller to make the decision for themselves.
If buyer fails to provide buyer’s inspector’s recommendations upon seller’s request, buyer will fail to trigger the additional inspection time and will risk loss of the inspection contingency.
What happens if seller demands delivery of buyer’s inspector’s recommendation and buyer fails to deliver? Buyer will fail to trigger the “additional inspection” time. Imagine that buyer delivers the Form 35R claiming additional time on the final day of buyer’s initial inspection period and that seller demands delivery of the inspector’s recommendation. Buyer will not have the benefit of the “additional inspection” time unless buyer delivers buyer’s inspector’s recommendation. If buyer fails to make delivery, then buyer’s inspection contingency will have waived at the end of the initial inspection period when buyer failed to properly trigger “additional inspections” and also failed to seek concessions from seller related to buyer’s inspection contingency.
If “additional inspection” time is effectively claimed, it is a stand-alone time period providing buyer the time to conduct additional inspections.
The parties can agree, at mutual acceptance, how long buyer’s “additional inspections” period will last. By default, the period is five days. This is a stand-alone time period. If the period is five days or less, it includes business days only, based on the “computation of time” provision in Form 21. During this period, buyer should conduct additional inspections recommended by buyer’s inspector. If buyer wants to conduct more inspections than were recommended by buyer’s inspector, buyer should endeavor to get recommendations from buyer’s inspector for all of the additional inspections buyer wants to conduct. With that, buyer will eliminate any argument from seller that buyer is not authorized to conduct a particular inspection because buyer’s inspector did not recommend it.
However, it is not clear why seller would object to buyer performing as many additional inspections as buyer wants to conduct. Assume that buyer’s inspector recommends only a roof inspection but buyer also wants to inspect the electrical system. If seller refuses access to the electrician, buyer may have to terminate at that point because buyer has questions about the electrical system that buyer cannot investigate. The Form 35 inspection contingency would give buyer the subjective right to terminate at that point. Or, consider that buyer conducts both a roof and an electrical inspection and then seller objects because buyer’s inspector recommended only a roof inspection. Buyer would still have the ability to terminate the PSA or seek concessions based on the “additional inspection” period triggered by the roof inspection, even if buyer seeks concessions or terminates based on the condition of the electrical system. That is the power of buyer’s subjective right to terminate. Or, worst of all, assume seller successfully prevents the electrical inspection, buyer closes and then finds problems with the electrical system. In the post-closing lawsuit, seller’s position will be more difficult to defend because seller prevented buyer from investigating the condition of the electrical system.
The modification to Form 35 is relatively minor in appearance but the modification gives brokers on both sides of the transaction much to consider and a requirement to provide good information and advice to clients.
Form 22A: Disclose Loans/Grants For Down Payment
A new check box option was added to paragraph 1 of Form 22A allowing buyer to mark a box indicating that buyer will rely on a loan for some or all of buyer’s down payment. If buyer is relying on down payment assistance, buyer broker will likely mark Form 22A, paragraph 1, to indicate that buyer’s purchase obligation is contingent on buyer obtaining the substantive loan (typically FHA or Conventional) and a loan for buyer’s down payment. Down payment assistance can come from a variety of sources but a common source of down payment assistance is Washington State Bond Money. Beginning in 2024, there will also be down payment assistance provided through the Covenant Homeownership Program. Regardless of the source of the down payment assistance, if the funds are contingent at the time of mutual acceptance (meaning that the funds are not already in buyer’s bank account), buyer must disclose that the funds are contingent. If buyer also wants to make buyer’s obligation to close the transaction contingent on buyer obtaining the down payment assistance, then buyer should disclose both the buyer’s substantive loan and the down payment assistance on Form 22A, paragraph 1.
The vast majority of down payment assistance programs are loans, to include both the Washington State Bond Money and the Covenant Homeownership Fund. Though both programs are identified as grants, both programs require the buyer to repay the downpayment assistance when the home is sold. Although neither grant requires periodic repayment and neither debt incurs interest, the amount of the grant is recorded in the form of a lien against title to the buyer’s home and the grant amount must be repaid when the property is sold, making the down payment assistance a loan.
The Information Verification Provision Makes a First Page Appearance
The Information Verification provision has always found its home as the second to last paragraph on the Form 21 purchase agreement (its location varies with the different statewide forms purchase agreements). The provision allows a buyer to unilaterally terminate the purchase agreement if buyer discovers a “material inaccuracy” in any information provided by seller. Information provided by seller includes all information provided by seller such as seller’s Form 17, representations made in the listing printout, flyers, advertising, information accessed from a local jurisdiction and passed on to buyer, etc. Based on boiler plate language in the provision, located at the end of the form, buyer always had 10 days to confirm the accuracy of seller’s information. As of July 11, 2023, the amount of time available to a buyer is a negotiated term, located on the first page of the purchase agreement.
Buyer and seller now have a blank on page 1 of the purchase agreement in which to identify the number of days available for buyer to confirm the accuracy of seller’s information or for buyer to indicate buyer’s satisfaction/waiver of the provision. If the parties do not complete the blank, the “Information Verification” provision which still resides near the end of the purchase agreement, will give the parties ten days by default.
Understanding the provision and why this forms revision was made is important. The Information Verification provision is NOT an inspection contingency and should never be used by a buyer in place of an inspection contingency. The Information Verification provision does not grant buyer access to seller’s property. It gives buyer no inspection rights. Instead, it gives buyer an opportunity to test the accuracy of information, provided by seller, that is important to buyer. For example, buyer may want to verify the schools serviced by the home, the availability of utilities, connection to the sewer main or the dollar amount of HOA assessments. Whatever information is important to buyer regarding buyer’s ownership of seller’s home, buyer should use the time allowed during the Information Verification period to confirm that information.
While there is a tendency on behalf of sellers and listing brokers to view this provision as detrimental to seller, it is not and listing brokers should be prepared to explain to sellers how this provision benefits the seller. Based on the Information Verification provision, the only reason buyer may terminate the transaction is that buyer discovered a “material inaccuracy” in information provided by seller. If there is no “material inaccuracy” in seller’s information, buyer may not terminate and an attempt by buyer to terminate based on this provision would likely constitute a breach of contract.
For the purposes of this discussion, assume there is a material inaccuracy in seller’s information. Assume seller and/or listing broker disclosed that the home is connected to sewer when, in fact, the side yard sewer line was never constructed and the home is still serviced by an old septic system. Imagine that buyer terminates the PSA based on discovery of that information. Seller and listing broker will be spared grief and probably, litigation, by buyer’s termination of the PSA during the first ten days of the transaction rather than buyer suing seller and listing broker after closing. If there is a material inaccuracy in seller’s information, seller (and possibly listing broker) will likely be called upon to defend the information and pay damages to buyer if the information is proven inaccurate after closing. Thus, if buyer and seller can avoid closing and avoid damages to buyer, seller is benefitted. This describes the primary reason the “Information Verification” provision is included in the boiler plate language of the purchase agreement. Incidental to this is the additional benefit that if seller is sued after closing regarding information that buyer could have investigated during the Information Verification provision, a negotiated term in buyer’s offer, seller may be able to incorporate that argument in seller’s defense.
With all of this as background, what is the best practices approach for both parties in negotiating this provision? As is true in every case, regarding every term, that question can be answered only by each party. Broker should educate broker’s client and then follow the client’s instruction as to how to negotiate this term.
If buyer chooses to terminate the purchase agreement based on the Information Verification provision, buyer broker should access the new Form 90Z. Buyer will use Form 90Z to terminate the purchase agreement and identify the material inaccuracy that forms the basis for buyer’s termination.
Again, brokers should familiarize themselves with all of the forms revisions and prepare to educate clients as to the significance of the contract terms so that clients can make good decisions while negotiating purchase agreements. If brokers are not familiar with the statewide forms, brokers cannot provide the reasonable skill and care owing to every client and cannot conform to the standard of care of a lawyer, which is required from real estate brokers who draft purchase agreements.
About the Author
Annie Fitzsimmons is the Washington REALTORS® Legal Hotline Lawyer. To ask Annie a Legal Hotline question or to access the Hotline Q&A database please visit warealtor.org/legal-hotline.
Read about the 2023 Statewide Forms Revisions in NWMLS’ Legal Bulletin including redlines & bluelines of the revised forms online: www.warealtor.org/membership/for-members/forms-revisions
Watch the New 6-Part Series on YouTube: youtube.com/playlist?list=PLsU-Dcv-PIXapnjV3svRmbHHqTybmVuh4
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This article originally appeared in the Summer 2023 issue of RE Magazine.