One of the issues that we often come across in the winter months when a client is buying a home is, what happens if the central air-conditioning system cannot be tested? Often inspectors will write in their report that the said system cannot be tested due to the weather not being above 55 degrees Fahrenheit for three (3) consecutive days. (Please note that some inspectors will require the temperature exceed “60 degrees Fahrenheit” or “65 degrees Fahrenheit” for three (3) consecutive days, before the said system can be efficiently tested). Nevertheless, the point is that if the system cannot be tested, and how can a buyer be expected to waive any issues regarding a system if he/she does not know if it works? The logical answer is the buyer can’t.
How then do you move a transaction forward if (due to this issue) the inspection contingency cannot be concluded? While there is no sure-fire solution, in the past we have suggested and agreed to the following resolutions. Please note that each resolution has its pros and cons, which we will set-forth below.
The first resolution we have used in the past is reserving the buyer’s rights to test the central air-conditioning system at a later date. The buyer would then be able to raise any issue it deems necessary regarding the said system after it has been tested. This way, the (i) seller can either agree to remediate or credit any issues the buyer raises, or do nothing and (ii) buyer can agree to seller’s proposed resolution, make a counter-offer, move forward “as is”, or terminate the transaction without penalty. The problem is it can be a while before the temperature reaches the level the inspector finds optimal for testing. For example, if the home inspection takes place in January, it may be another two (2) months before the weather becomes optimal to test the central air-conditioning system.
This would be problematic for a multitude of reasons, one of which is would a seller agree to wait two (2) months before the subsequent inspection takes place, knowing that the deal could “die”? I would submit, probably not. The reason is, most sellers would not want to keep the property off the market for two (2) months, knowing it can be cancelled. The concern is it will have lost out on many potential buyers. A seller would rather have all inspection issues addressed right away, because if the parties couldn’t come to an agreement, the seller could put the property back on the market, with the hope of being under contract with another buyer shortly thereafter.
Another concern – and this is for the buyer – is what happens if the buyer’s mortgage commitment or rate lock expires before the central air-conditioning system can be tested? Often there are fees to extend those rates. Who would be responsible for paying them? Since the closing would not be time of the essence, the cost would most likely fall on the buyer.
A second resolution we have used in the past is closing, but escrowing certain monies until the buyer is able to have the central air-conditioning system tested. The buyer’s rights would also need to be reserved to raise any issues it deems necessary regarding the said system after it has been tested.
Some of the benefits of escrowing are (i) the buyer will have the ability to test the system to see if it is working, (ii) the closing will not be held up due to the inspection contingency not being concluding – which would mitigate against the mortgage commitment and interest rate lock being extended for this issue, and (iii) the monies being escrowed could be used to remediate any issues raised regarding the said system after it can be tested.
However, there are also negative consequences. After all what happens if the parties cannot agree on the condition of the system, or the escrow is not enough? Litigation can then arise, which can be costly, as well as timely, without a guaranty as to how a court would decide. Many buyers and sellers do not want to go through the aggravation that litigation entails or may not have the resources to deal with it.
A third resolution is to purchase a limited home warranty. There are several companies that offer a one (1) year home warranty, which covers among other things the central air-conditioning system. The positives are if the system does not work or has issues that need to be remediated, the same may be covered under the warranty. This in turn would give the buyer some peace of mind, which would allow the inspection contingency (regarding this issue) to be satisfied quickly; thus negating the risk of the mortgage commitment or inspection contingency expiring prior to closing.
The negatives are (i) the repairs or remediations may not be covered, (ii) the warranty costs money (i.e., anywhere from $750 – $1,500.00)[1], and the question becomes who pays for it, and (iii) the warranty only lasts for one (1) year, so if the warranty expires and a problem occurs, the buyer will have to pay for the same. Please note however, the warranty can be extended (I believe) multiple times, but (I believe) there is a fee associated with each renewal.
A final resolution we have used is if the parties agree on a credit/concession in lieu of the central air-conditioning system being tested. The benefit of this, is (similar to the above) it concludes the inspection contingency regarding this issue. The negatives are: (i) what the parties agree is a fair credit for an unknown, and (ii) what happens if the credit/concession is too much or too little after the said system is tested. The parties agreed on a credit, so it would most likely be a problem to come back to the other at a later date if the said system needs significant repairs beyond the credit, or if there is nothing wrong with the system and the buyer receives a wind-fall regarding this issue.
While each of the above solutions have their issues, the parties should explore them when deciding how to deal with an issue such as this during the winter months.
The information in this blog posting is for general information purposes only. Nothing in this blog or associated pages, documents, comments, answers, emails, or other communications should be taken as legal advice for any individual case or situation. The information in this blog is not intended to create, and receipt or viewing of this information does not constitute, an attorney-client relationship.
[1] Please do not rely on these figures. Please contact home warranty companies directly to obtain the cost as well as what exactly the warranties cover.