Seller warranties have their limitations

By James Goldsmith | July 2, 2012 | 3 min. read

Conceptually, settlements are permanent. The risk of loss passes from a seller to a buyer, bills and assessments are prorated, utilities transferred, insurance terminated and acquired.

But in some transactions, settlement is a misnomer. There are loose ends that extend beyond the settlement date.

This happens when the property is not in the condition promised. Money may be escrowed for work to be done after. Likewise, settlement is not finality when a buyer is purchasing under an installment sales contract and money is due in the future.

I have written about this before and I will not belabor the point: I am a big fan of settlements where all money is paid and the property is turned over in the condition promised. Yet, today, I pitch a concept that does indeed take the finality out of settlement.

I purchased my current home last winter when the ground was frozen. The home had been vacant, and water provided by the well had not been used. The line to the home had frozen and the well pump had broken. This occurred between our reaching an agreement and the date of the home inspection.  Because the water service was out of commission, the plumbing, hot water heater and other ancillary items could not be tested. The seller readily agreed to replace the well pump before settlement, but was that good enough? Maybe there were other plumbing issues, such as leaky or broken pipes or an inoperable dishwasher.

One option would be to have the well pump replaced and then conduct another inspection of the plumbing system and appliances. The alternative, which I favored and which we employed, was to negotiate the seller’s warranty of the plumbing system and all appliances that ran on or used water. This was different from the approach employed by the PAR Standard Agreement where seller does not warrant the condition of the property beyond settlement.

Drafting a seller warranty is not standard and is not an easy task. Negotiation and precise language should be employed. Without requiring you to read between the lines, let me be clear: drafting a warranty to extend beyond the date of settlement is a matter for legal counsel.

In my case, I am glad of my representation (generally, I subscribe to the legal maxim that he who represents himself has a fool for a client)! In early spring I opened the valve to allow water to flow to one of the exterior spigots. Unknown to all, during the winter, the pipe leading to the spigot had burst, but since the interior valve was shut, little water leaked. Now that the valve was open and the line had an unlimited water supply, water gushed everywhere. Fortunately, the seller’s warranty of the plumbing system was for a “reasonable period of time beyond settlement” and was deemed by all to cover this loss.

A dead-of-winter settlement may not allow for inspection of swimming pool mechanicals or air conditioning. A heat-of-the-summer settlement may not permit inspection of the operating condition of the heating system.  Repairs before settlement may or may not truly repair an item. These cases and others call for consideration of an extended warranty – one that extends beyond the date of settlement.

Seller warranties have their limitations. Unlike warranty companies that are in the business of insuring condition, sellers are not. They move and become difficult to reach or may be uncooperative. These are just factors to take into consideration for your client. While we are proud of our associations’ standard forms, there may be conditions that are not standard and when ‘out of the box’ solutions are appropriate.

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