Building inspection and the responsibilities of the real estate broker

Building inspection is an essential step when purchasing a house. In accordance with the ethical rules applicable in all circumstances, the real estate broker must recommend to the person proposing to acquire an immovable that the person have a full inspection performed by a professional or a building inspector who:

has professional liability insurance covering fault, error or omission
uses a recognized inspection service agreement
performs inspections according to recognized building inspection standards
submits a written report to the party that requested the inspection services

The broker can also provide a list of professionals or building inspectors who meet these requirements. However, the list must contain more than one name.

REAL ESTATE BROKERS’ RESPONSIBILITIES RELATING TO BUILDING INSPECTION

The real estate broker must know how to intervene in building inspection matters at each step of the transaction and in different cases.

Seven situations are presented below explaining real estate brokers’ responsibilities.

The seven situations are:

WHEN TAKING THE BROKERAGE CONTRACT

As soon as the brokerage contract is taken, the broker has an ethical obligation to undertake all steps to discover unfavourable factors related to the immovable.

Declarations by the seller of the immovable

The real estate broker must complete the Declarations by the seller of the immovable form
with the seller when taking up the brokerage contract.

The Declarations by the seller of the immovable form is a mandatory annex to any brokerage contract concluded for the sale of a chiefly residential immovable containing less than five dwellings by a natural person, whereas the Declarations by the seller of the immovable – Divided co-ownership form must be used by any natural person for the sale of a divided co-ownership property. Using these forms is strongly recommended in other cases, including when selling a chiefly residential immovable containing less than five dwellings by a legal person.

By using these forms, the seller discloses all relevant information on the immovable, thus protecting the parties to the transaction. These forms, which should be annexed to any promise to purchase received, help avoid late discovery of adverse factors relating to the immovable, which may lead to re-negotiations, cancellation of the promise to purchase, legal action to obtain compensation or even cancellation of the transaction.

If a client refuses to complete the Declarations by the seller of the immovable form, the real estate broker will not be able to complete the brokerage contract to sell signed with the client.

Pre-sale inspection

A good practice is to recommend to the seller to have a pre-sale inspection conducted. This inspection will enable him to have an idea about the state of his immovable before putting it on the market and to identify the necessary repairs. The real estate broker should also inform his selling client that a recommendation will be made to any buyer to have a pre-purchase inspection of the immovable conducted and that any repairs, which are not made, will probably be raised again.

If the real estate broker provides a list of professionals or building inspectors to the seller, he must ensure that they meet the four requirements stated above.

The fact that the seller has obtained a pre-sale inspection report does not release the broker from his obligation to advise the buyer to have a pre-purchase inspection conducted.

Inspection prior to the promise to purchase

The existence of any previous report must also be reported in the Declarations by the seller of the immovable form. The seller must provide it to the buyer upon request, whether it is a pre-sale report, a report prepared at the request of a previous buyer or one that led to the cancellation of a previous promise to purchase on the property.

A full copy of the report should be given to the buyer, with all personal information redacted (e.g. mailing address, email address, telephone number, etc.). The decision to disclose certain important extracts and not to disclose certain apparently minor defects, according to the seller or his broker, could be misleading for the buyer who might consider them important. Submitting the full report ensures the transparency of the seller's declarations by removing the subjective assessment of the importance of the defects found by the inspector.

If the remittance of the previous report is impossible in whole or in part, the broker must inform the buyer about its existence and content.

Should negative factors be raised in the report, the seller’s broker shall obtain from his client information about remedial work performed, along with relevant supporting documents (e.g.: repair invoices), and inform prospective buyers via the Declarations by the seller of the immovable form.

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SALE OF A NEW PROPERTY

Although the purchase of a new building may be covered by a guarantee plan for new residential buildings, this does not mean that the property is necessarily fully completed.

An inspection with the contractor (or a ‘pre-acceptance inspection’) may be required before moving in. The aim of this inspection is to examine the building's systems and components to detect any work that needs to be completed, any apparent defects and poor workmanship, and any significant construction defects, while indicating to your contractor the elements to be corrected and the deadlines. The broker should then advise the buyer to be accompanied by an independent building professional during this crucial step to protect himself.

SALE OF A PROPERTY WITHOUT LEGAL WARRANTY OF QUALITY

The broker must warn the buyer who wishes to buy a property without legal warranty of quality. He must inform him of the impact on his future rights in the event a defect occurs after the purchase, more specifically that:

This is an exception to the protection offered by the Act
It deprives the buyer of remedies for latent defects against the seller
The exclusion of the warranty of quality does not protect the seller from legal action if he deliberately conceals from the buyer a defect affecting his immovable at the time of sale
The total warranty exclusion clause (“at the buyer’s own risk”) should be reserved for exceptional situations, such as a succession, a repossession, a building to be demolished, or a change of use
It can have a downward impact on the selling price.

If a buyer still wishes to buy a immovable without the legal warranty of quality, the broker must insist on the necessity of having a detailed pre-purchase inspection conducted. The inspector must be notified of the exclusion of warranty.

The drafting of legal warranty exclusion clauses is an exercise that must be done with care to accurately reflect the intention of the parties and not prejudice their rights. It must be clear and unequivocal although it can be modulated according to the intentions of the parties (see standard clauses 3.5.1 to 3.5.3).

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WHEN MAKING THE PROMISE TO PURCHASE

Pre-purchase inspection

The broker must recommend that the buyer have a thorough inspection done by a professional or a building inspector who meets the requirements set out in the regulations:

Liability insurance;
A recognized inspection service agreement;
Practice standards recognized by the OACIQ;
A written report.

The fact that a residential building inspector is a member of one of the following organizations leads to the assumption of such compliance, namely:

Quebec Association of Building Inspectors (QABI)
Association des thermographes en inspection de bâtiment (ATIB)
Association professionnelle de la construction et de l’habitation du Québec (APCHQ)
Régie du bâtiment du Québec (R.B.Q.)

If the broker wishes to submit the names of inspectors who are not affiliated with an association recognized by the OACIQ or certified by the R.B.Q., he must first verify compliance with the four requirements and keep a copy of the required documents on file (proof of insurance, standards, service agreement, sample report). He must then obtain a written commitment from the selected persons to inform the broker if they are no longer able to meet the regulatory requirements.

1. Liability insurance
The broker must ensure that the inspector or professional has valid professional liability insurance against fault, error and omission. This coverage will enable the inspector to compensate his client if he commits an offence in the course of a building inspection.

2. A recognized inspection service agreement
The broker must verify that the inspector or professional uses a recognized service agreement that specifies the nature, extent and limits of the inspection services provided, as well as their costs. The agreement may also include a clause requiring the buyer to read the inspection report attentively and ask the inspector questions to clearly understand its content.

3. Practice standards recognized by the OACIQ
The OACIQ recognizes certain practice standards that provide minimum guidelines, define certain specific terms and standardize the presentation of pre-purchase residential building inspection reports:

4. A written report
The inspector or professional must submit a written report, which is essential for obtaining an assessment of the condition of the desired property and thus helping clients make an informed decision. If some elements are more serious or important, they should be clearly stated in the report. In addition, if certain findings require further testing, the inspector should advise the buyer to have an expertise performed by the appropriate expert.

Can a real estate broker offer to pay the building inspector?

Due to the conflict of interest that may appear when real estate brokers pay professional fees, brokers must not offer to pay building inspectors directly.

Indeed, as part of a real estate transaction, the payment by the broker of the professional fees related to the transaction may give the impression that the actions of the professional are influenced by the broker ''work provider.''. Should there be any problem with the inspector’s work, the parties involved in the transaction or a third party could believe, rightly or wrongly, that there were illegal schemes to facilitate the transaction in complicity with the real estate broker. The real estate broker could, however, offer a refund to a client who has chosen his own professional or building inspector.

During the pre-purchase inspection

The inspection must take place within the time period specified in clause 8.1 of the Promise to purchase form. The indicated time period starts to run the day following the signing of the acceptance of the promise to purchase and is always calculated in consecutive calendar days, i.e. from midnight to midnight, including Saturdays, Sundays and statutory holidays. The day the promise to purchase is accepted marks the starting point but is not counted, whereas the last day is. It is therefore important to allow sufficient time for the inspection to take place according to the context (e.g. overlapping statutory holidays, buyer’s occupation, availability of inspectors), which will help the buyer avoid asking for an extension of the time period which can be refused by the seller.

It is important for the buyer to attend the inspection so that the building inspector can inform him of some material elements that deserve attention or correction. These comments must be included in the inspector’s written report.

The buyer’s broker must also be present at the inspection to be able to advise his client properly based on the results of the inspection (e.g. negotiate a price reduction).

The seller’s broker must show discretion and let the inspector carry out his work in the company of his buying client.

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THE FOLLOW-UP OF THE BROKER AFTER INSPECTION

The broker must allow the buyer to take time to carefully examine the report and obtain, if necessary, clarifications from the inspector or any other qualified person. To this end, the broker must recommend seeking the assistance of a recognized expert when the protection of the interests of a party to a transaction so requires.

If the buyer has an excellent understanding of the elements mentioned in the inspection report and that he is totally satisfied with them, the broker representing him can complete with him the Notice and follow-up on fulfilment of conditions form (clause AV4.3) to fulfill the inspection condition before the expiry of the deadline indicated under clause 8.1 of the promise to purchase.

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THE BUYER WISHING TO CANCEL

It is up to the buyer to assess the inspector’s report to see if it unveils the existence of factors that might affect the purchase of the property. Under the generally used inspection clauses, if the buyer no longer wishes to purchase the immovable due to such factors, he must send the seller a notice to this effect, along with a copy of the inspection report within the specified period.

The broker must complete the Notice and follow-up on fulfilment of conditions form with his buying client and send it to the seller. The broker must keep proof of receipt of the notice and report by the seller within the time limit, as it is the seller's receipt of this notice that will render the promise to purchase null and void. All means proving receipt can be used. The buyer’s broker may also contact the seller’s broker to agree with him to have the acknowledgment of receipt of the notice signed by the seller. When the deadlines are almost expired, the broker may suggest that the buyer send the notice by bailiff to obtain a report from the bailiff and avoid a dispute.

The parties must act in good faith at all times, including when the inspection condition is fulfilled. The buyer should not send a notice to the seller if the inspection report unveils only minor defects that have little impact on the value of the immovable. In other words, the inspection must not serve as a pretext for the buyer to withdraw without reasonable grounds.

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THE BUYER WISHING TO RE-NEGOTIATE THE CONDITIONS OF HIS PROMISE TO PURCHASE

Since the buyer must act in good faith under all circumstances, his real estate broker must advise him not to offer a price higher than what he wishes to pay to obtain priority to purchase the property during the period of fulfilment of the inspection condition. In the same way, the broker must advise the buyer not to ask for a price reduction systematically without a serious reason.

In general, the analysis of the Declarations by the seller of the immovable form (or the Declarations by the seller of the immovable – Divided co-ownership form) helps detect in advance any problems with the immovable and set the price and conditions of the promise to purchase accordingly.

However, if significant new problems are identified by the inspector, the buyer may decide to send the seller a copy of the inspection report informing the seller of the problems revealed so as to renegotiate certain conditions of his promise to purchase. Where appropriate, the inspection report should be sent with a notice clearly stating the reasons to prevent the seller from interpreting it as a cancellation of the promise to purchase.

The seller will have the option to:

Agree to a price reduction or to carry out the repairs himself
Agree to extend the deadline to give the buyer time to have more in-depth testing done
Pursue negotiations; or
Refuse the buyer’s requests

If the factors are significant, the buyer is prepared to purchase the immovable at a reduced price, and the seller is willing to grant such reduction:

The broker must record this agreement in writing on the Amendments form
This form must then indicate that it is after inspection that the parties agreed to amend the promise to purchase and must be signed by both parties within the time period provided for the inspection condition
This form will become an integral part of the promise to purchase and must also be forwarded to the mortgage lender.

In fact, once the deadline is expired, the inspection condition indicated in the promise to purchase forms provides that the buyer is deemed to have waived it, and failure to obtain an amendment, the buyer shall make the purchase according to the original terms of the promise to purchase.

The broker may use standard clause 4.2 Price reduction which provides in particular that the buyer acknowledges, in this situation, that the legal warranty of quality shall not apply to the subject of the price reduction.

The parties should always opt for a price reduction rather than having the seller carry out certain work within a given timeframe. This could be difficult to enforce and could lead to a dispute between the parties (e.g. the seller does not fully carry out the work or does so inappropriately).

What's more, even if the client so wishes, the real estate broker must not agree to draft the amendment form to provide for a discount at the notary's office in the form of a sum of money granted by the seller for work.

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