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The ‘buyer reasonable
disapproval’ process in the AAR purchase contract
T he AAR Residential Resale Purchase Contract allows the
buyer 10 days (or other specified number of days) after
acceptance of the Contract to conduct any inspections and give
written notice to the seller of any items reasonably
disapproved (Lines 235-237). This time period is defined as
the Inspection Period. During the Inspection Period, the buyer
must complete AAR’s Buyer’s Inspection Notice and
Seller’s Response form (or equivalent). If the buyer
reasonably disapproves of any aspect of the property, the
buyer must complete the form, specify the items disapproved,
and state whether the buyer elects to either immediately
cancel the Contract or provide the seller an opportunity to
correct the items disapproved. If the buyer cancels the
Contract, the buyer’s earnest money should be returned. If
the buyer provides the seller an opportunity to correct the
items, the seller must respond in five days and indicate
whether or not the seller is willing to correct all, some or
none of the items. If the seller refuses to correct any of the
items disapproved, the buyer may, within five days of receipt
of the seller’s response, either cancel the Contract or
proceed with the transaction without the correction of the
items not agreed to in writing (Lines 238-253).
What is “reasonable”? The Contract allows the
buyer to give the seller notice of “any items reasonably
disapproved.” Defining “reasonable” out of context is
difficult. Disapproval of any aspect directly related to the
property that logically should be corrected, and such
correction would cost the buyer money is probably reasonable.
However, disapproving of the property just because of
“buyer’s remorse” or because the buyer has had a change
of heart or change of circumstances is not reasonable.
If the buyer elects to cancel the Contract, must the
buyer give written notice of what items the buyer reasonably
disapproves? Yes. The Contract requires that if the buyer
reasonably disapproves of an item, the buyer must deliver to
the seller written notice of the items disapproved and state
the buyer’s election .
What if the seller believes the disapproval is
unreasonable? If the seller believes the buyer’s
disapproval is unreasonable, the seller should respond to the
buyer’s notice, in writing, stating specifically why the
disapproval is not reasonable. A copy of the seller’s
response should be delivered not only to the buyer, but to the
escrow company as well. The seller should also be prepared to
supply documentation or evidence that the buyer’s
disapproval of the item is unreasonable. For example, if the
buyer gives notice of disapproval of the condition of the
roof, the seller should be prepared to submit the statement of
a roof expert that the roof is in excellent condition.
Is the buyer entitled to disapprove of cosmetic items?
No. The Contract specifically excludes cosmetic items from the
items that the buyer may reasonably disapprove (Line 236).
Like the term “reasonable,” the term “cosmetic” is
difficult to define in a vacuum. However, the buyer is not
entitled to disapprove of any items concerning the property
that are related only to its appearance. For example, the
color of the wall would be a cosmetic item.
Why is the AAR’s Buyer’s Inspection Notice and
Seller’s Response form required? The form is required to
encourage uniformity of practice. Additionally, the form
requires the signatures of both buyers, and if applicable,
both sellers. The signatures of both buyers are required to
insure that the buyers are in agreement as to the items
disapproved and their election. If the seller agrees to make
repairs or corrections, the statute of frauds requires the
signatures of both sellers because the agreement is a
modification of the Contract. Finally, the form gives both
parties additional information on the inspection and notice of
disapproval process.
Should the buyer state in the written notice of
disapproval what type of “correction” the buyer expects?
Yes. If the buyer elects to allow the seller an opportunity to
correct the items disapproved, the buyer should state in the
notice how the item must be corrected. For example, if
termites are found, must the entire house be treated, or is
spot treatment sufficient?
Should the buyer’s broker give notice of reasonable
disapproval on behalf of the buyer? No. The buyer is
obligated to make the buyer’s election, either to cancel or
give the seller an opportunity to correct the items, sign and
cause the notice to be delivered to the seller. Buyer’s
brokers should obtain both buyers’ signatures on the notice
to insure that both agree to the items disapproved and their
election.
Must both buyers and both sellers sign the Inspection
Notice and Seller’s Response form? Yes. If the seller
agrees to correct the items disapproved by the buyer, the
agreement constitutes a modification of the Contract, which
must be in writing and signed by the parties to be charged to
be enforceable.
What if the buyer does not give written notice to the
seller during the Inspection Period? The buyer’s failure
to give the seller written notice of items disapproved during
the Inspection Period is deemed to be the buyer’s election
to proceed with the transaction and close escrow without the
correction of any property items (except for warranted items).
What happens if the seller fails to respond to the
buyer’s written notice of items disapproved? The effect
of the seller’s failure to respond to the buyer’s written
notice of disapproval is the same as if the seller had refused
to correct any of the items. The buyer has five days after the
expiration of the time period for seller’s response to elect
to cancel the Contract or proceed with the transaction without
the correction of the items disapproved .
What if the seller agrees to correct some, but not all,
of the items disapproved? If the seller agrees to correct
some, but not all, of the items disapproved, the buyer has two
options under the Contract as written: cancel the Contract or
accept the property with the correction of only those items
seller agreed in writing to correct. If the buyer wishes to
continue to negotiate the items, the buyer must get an
agreement, in writing, signed by all parties, extending the
time periods for cancellation (sample extension language is
available on AARonline.com). If the buyer fails to obtain a
written agreement extending the time periods in which the
buyer may cancel, the buyer will be obligated to proceed with
the transaction without correction of the items that seller
has not agreed to in writing.
Can the buyer change the buyer’s election once the
election has been made? Probably not. If the buyer
reasonably disapproves of items, the buyer must state in the
notice that the buyer elects to either immediately cancel the
Contract or provide the seller an opportunity to correct the
items. If the buyer gives the seller an opportunity to correct
the items, the buyer has made the election and can no longer
“immediately cancel” the Contract. This is certainly true
if the seller has responded and agreed to correct the items.
However, whether the buyer can change the election before the
seller responds is probably less clear cut. To avoid this
dilemma, make sure the buyer has taken the time allotted to
perform all inspections and investigations and has thoroughly
considered the options before making an election.
If the buyer does not disapprove of any items and
requests no corrections, should the Buyer Inspection Notice
and Seller’s Response form still be used? Yes. The buyer
should check the box on the form indicating that the buyer has
conducted the desired inspections and that the Premises are
accepted in the present condition and sign the form. The
seller’s signature on the form is not necessary. The AAR
Contract clearly sets forth the procedure to be followed
during the inspection period and the time period for the
seller’s response thereafter. Brokers should be familiar
with the process and insure that a signed writing evidences
any agreed upon deviation in the process.
By Michelle Lind General Counsel to the Arizona Association
of Realtors, and a State Bar of Arizona board certified real
estate specialist.
Prescott
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