Does your building and pest inspection clause really protect you?

We face this question every single time we assist a purchaser with an offer that is subject to an acceptable building and pest inspection being done within a short timeframe following the acceptable offer.

Building and pest inspections offer buyers peace of mind, and in a lot of circumstances we arrange them prior to making offers. Bidding at auction the most common reason for a building and pest inspection to be conducted prior to signing contracts.

An offer would generally be made with a building and pest inspection clause when there is no commercial advantage to conducting the report prior to offer. The cost ranges, but is typically around $600 – $800 for both reports. For a buyer who finds themselves in a competitive offer situation, the report on hand could potentially enable them to make an unconditional offer, favourable to the vendor if the offers are similar. For a buyer who isn’t facing competition though, or who has pressure to make the offer and insufficient time to find an inspector, the clause is a great go-to option.

However, the wording of the clause is critical to understand.

The standard contract wording doesn’t offer overarching protection to the buyer at all. Below is an example of the wording of the clause for both building and pest inspections.

I don’t particularly like this wording. It places a buyer in a very difficult position if there is argument about what denotes “major”. It also prohibits a buyer from exiting the contract if there are multiple, expensive minor defects, or major “non-structural” defects.

We much prefer to use a shorter-range, broader clause that enables the buyer to exit the contract if the report is not to their reasonable satisfaction.

Agents, vendors and vendor’s legal representatives don’t always like this though. The question I often ask when challenged by an agent is, “What is the purchaser’s position if the report shows up $50,000 worth of urgent, non-major, or non-structural repairs?” And, “What rights to exit the contract do they have if the trees around the property are riddled with termites?”

Sometimes our proposed clause is approved for inclusion. Other times, the negotiation won’t come together unless we yield to the situation.

In such circumstances, we have two options;

• We can arrange an inspection prior to putting in the offer,
• We can rely on the cooling off period, and ensure that the building and pest inspection is conducted within the three day cooling off timeframe.

The latter approach comes with some important caveats through. Firstly, if a buyer cools off in Victoria, the legislated penalty cost is 0.2% of the purchase price. For example, a $1,000,000 purchase would attract a cooling off penalty of $2,000.

Agents usually ensure that they receipt at least 0.2% of the purchase price in the initial deposit, for this reason.

Secondly, the buyer needs to ensure that not only does the builder complete the inspection in this timeframe, but they complete the report and allow the buyer adequate time to digest it.

Building and pest inspection clauses aren’t as straight forward as many buyers would believe. Reading the clause carefully and understanding the limitations, the timeframe and the required steps to exit is critical.

Just because the wording is in the contract doesn’t mean it can’t be changed and agreed to by all parties.