“The seller’s property has been damaged and there is an accepted offer. What now?” This is a common question, or rather a derivative of a common question, we hear quite often as WRA attorneys.
Stripped down, the scenario is simple. The offer is accepted. After acceptance, damage occurs to the seller’s property. Damage including but not limited to, wind and hail damage to the roof, a 100-year-old tree struck by lightning, the 100-year-old tree struck by lightning falls onto the house, the basement takes on water, and the list goes on. Damage happens. That’s the reality in real estate.
However, lately I have realized there are two items we should be discussing when damage after acceptance of an offer and prior to closing happens: 1) what the seller must repair and disclose to the buyer, and 2) the Real Estate Condition Report (RECR).
The events that occur after the damage can be complicated. Our analysis takes us first to the provision of the offer addressing damage that occurs after the offer is accepted but before the closing.
1. Damage has occurred after offer acceptance
Lines 206-215 of the WB-11 Residential Offer to Purchase (WB-11) directs the parties of actions to take when the property is damaged after acceptance and before closing. See the resource box below. Damage to the property between acceptance and closing is controlled by the offer to purchase signed by the parties. Often referred to as the “5 percent provision,” this section breaks down a variety of situational outcomes.
Damage is less than 5 percent
Unless modified, the WB-11 provides in the Property Damage Between Acceptance and Closing section that if the damage is in an amount of not more than 5 percent of the selling price, then the seller shall be obligated to repair the property and restore it to the same condition that it was on the day the offer was accepted. No later than closing, the seller is to provide the buyer with lien waivers for the repairs.
If the seller is unable to make the repairs before closing and the buyer does not wish to explore the default remedies, the parties could amend their contract to provide a resolution, which may include a repair escrow holding insurance money, adjustment of the purchase price and/or possible extension of the closing date. If the closing cannot be extended for whatever reason, it would be prudent for the parties to speak with their respective attorneys with as much information as possible from the repair contractors and the assigned insurance claims adjuster.
Damage is more than 5 percent
The seller must promptly notify the buyer in writing of the damage, and the buyer has the option to cancel the contract. If the buyer wishes to go forward with the offer, the buyer is entitled to the insurance proceeds, if any, plus a credit toward the purchase price equal to the amount of the seller’s deductible on the policy. If the seller is financing the agreement by land contract or mortgage, any insurance proceeds must be held in trust for the sole purpose of restoring the property.
Obviously, the parties are always permitted to make any agreement relating to damage and repair via an amendment regardless of the value of the damage.
PROPERTY DAMAGE BETWEEN ACCEPTANCE AND CLOSING Seller shall maintain the Property until the earlier of closing or occupancy of Buyer in materially the same condition as of the date of acceptance of this Offer, except for ordinary wear and tear. If, prior to closing, the Property is damaged in an amount of not more than five percent (5%) of the selling price, Seller shall be obligated to repair the Property and restore it to the same condition that it was on the day of this Offer. No later than closing, Seller shall provide Buyer with lien waivers for all lienable repairs and restoration. If the damage shall exceed such sum, Seller shall promptly notify Buyer in writing of the damage and this Offer may be canceled at option of Buyer. Should Buyer elect to carry out this Offer despite such damage, Buyer shall be entitled to the insurance proceeds, if any, relating to the damage to the Property, plus a credit towards the purchase price equal to the amount of Seller's deductible on such policy, if any. However, if this sale is financed by a land contract or a mortgage to Seller, any insurance proceeds shall be held in trust for the sole purpose of restoring the Property.
When damage occurs after acceptance prior to closing, then all parties, attorneys and agents should look to lines 206-215.
Next, our analysis takes us to what actions the seller takes regarding the RECR. This is where things can get a bit tricky.
2. Does the seller amend the RECR?
Before acceptance
Generally the seller is not obligated to amend the RECR after an accepted offer. Wis. Stat. § 709.035 states the rules for the amendment of a RECR. If an owner who has already completed a RECR obtains information or becomes aware of a condition that would change a response on the completed RECR, and this occurs before acceptance of an offer to purchase or option contract, the RECR must be amended. The RECR may be amended by either completing another RECR or by preparing an amendment to the previously completed RECR.
After acceptance
The owner has no duty to amend the RECR if the new information or condition arises after acceptance of the offer or option. To disclose damage, the seller may choose to provide a notice regarding the matter. Another viable option to disclose is the licensee disclosing the issues as a material adverse fact. This could be accomplished by using the WRA’s Disclosure of Material Adverse Fact form. You can find it in zipForm listed as WRA-DMAF.
If the seller amends the RECR after acceptance, then a buyer may be able to successfully argue the buyer’s two-business-day right to rescind has been resurrected. See Wis. Stat. § 709.05(3). While it is unclear if a court agrees the buyer has a two-business-day right to rescind when a seller amends the RECR after acceptance, it is clear that everyone has just walked into a mess of a problem.
A listing agent should be very careful about telling a seller how to proceed when damage occurs after acceptance prior to closing. The agents can direct the parties to the language of the WB-11 on lines 206-215 and proceed as directed by the agreement and the parties.
For anything beyond that, though, the agents should encourage the parties to contact their legal counsel. The listing agent certainly would want a seller to consult the seller’s attorney about the seller’s consequence of providing a buyer an amended RECR after the acceptance of an offer.
Finally, for those who enjoy movies and pop culture as much as I do and often identify with my article references and nods to such, I hope you enjoyed the title’s subtle — very subtle — nod to the cult favorite comedy of Heathers.
Resources
Cori Lamont is Director of Corporate and Regulatory Affairs for the WRA.