1. Background
Often much is said about the need for pre-settlement inspections. However, there is often considerable confusion and occasionally disappointment when these inspections are conducted by Buyers, their representatives or Building Inspectors.
For this reason, it is timely to explore exactly what these inspections are or potentially more important what they are not.
2. Pre-settlement are not Pre-Purchase Building Inspections
Firstly, it is important to understand that Pre-Settlement inspections are not Pre-Purchase building inspections, they are substantially different.
In WA, the majority of residential property sale transactions are facilitated on standard REIWA contracts. Where a Building inspection is incorporated into a sale contract, there are generally specific requirements that are normally detailed in a specific pre-purchase building inspection Annexure. This will generally refer to major structural defects. The REIWA Annexure for Pre-Purchase inspections can only be invoked when a pre-purchase building inspection, conducted in accordance with an Annexure, identifies a major structural defect and that report is delivered by the Buyer to the Seller by the due date. These pre-purchase building inspections are often prepared well before settlement, such that if there are major structural defects identified they can be remediated by the Seller.
Pre-settlement inspections are generally inspections conducted just days prior to settlement. The purpose and scope of these inspections are subject to some conjecture.
3. Pre Settlement Inspections
The right to conduct a Pre-Settlement inspection is contained in the Joint Form of General Conditions For The Sale Of Land produce jointly by the WA Law Society and REIWA. The 2022 version states:
5.1 Right to inspect
- (a) Subject to clause 5.2 and subclause (b):
- (1) the Buyer is entitled to inspect the Property to check that the Seller has complied with the Seller’s obligations under the Contract; and
- (2) the Seller must grant access to the Property to enable the Buyer to inspect the Property for that purpose, on 1 occasion within 5 Business Days before the Possession Date.
So the key item above, is that a Pre Settlement inspection can generally only be conducted to enable the Buyer to inspect that the Seller has complied with the Seller’s obligations under the Contract. If there is no obligation for the Seller to undertake work under the Contract, then there is generally no right to conduct a pre-settlement inspection.
Additional key references in the General Conditions include:
- 6 Possession and Rent
- 6.1 Entitlement to possession
- (b) (1)
- (2) the Seller must remove from the Property before the Possession Date, all vehicles, rubbish and chattels, other than the Property Chattels.
The above requires that all rubbish be removed and the following creates the Sellers warranties:
- 9 Seller Representation and Warranty
- 9.1 As at Contract Date and Possession Date
- (f) subject to clause 6.1(b), the Property will be in the same state and condition it was in immediately before the Contract Date; and
- 9.3 Breach or non-satisfaction of warranty
If the Seller is in breach of a representation or warranty in clause 9.1, 9.2 or 10.2, then, unless the Parties otherwise agree, the Buyer has no right to terminate the Contract or defer or delay Settlement or withhold any part of the Purchase Price, however:
- (a) if the breach unreasonably affects the proposed use of the Property by the Buyer or materially affects the value of the Property, the Buyer may exercise its rights arising at law; and
So the above creates clear expectations but they do not necessarily entitle the Buyer to a Pre-Settlement inspection.
So, the first challenge is if there are no obligations that the Seller’s has to comply with under the Contract there may be no actual right to conduct a pre-settlement inspection under the obligations of the Contract. However, generally, Agents and Sellers will generally allow
Buyers to access the property to conduct a pre-settlement inspection to confirm that the property was in the same condition that existed at the time the offer to purchase was made.
4. As is where is
It is important to understand that the REIWA Contract (without Annexure) facilitates an essentially as is where is property transaction, subject to any specific conditions or annexures which are added to the contract. Without the additional specific conditions or annexures, Buyers may have very little to claim back from the Seller.
The key point here to note that the Buyer is generally agreeing to purchase the property as is where is (subject to conditions and or annexures) as at the date the Offer to purchase is made and accepted. The real challenge is that it would be exceptionally rare for Buyers to document the condition of a property at the point they make an offer to purchase, especially as they may not know if their offer will be accepted.
5. Sellers Warranties
As a general rule, Sellers are not required to provide any warranties as to the condition of the property, or any equipment thereon, when selling a property unless specific disclosures or warranties are provided. As we have seen above, the Sellers warranty is limited to ensuing that the property is in the same state and condition it was in immediately before the Contract Date. So, if the property had a multitude of issues including a number of items that were not in good working order at the immediately before the Contract Date, then the Seller may have no obligation to remediate any of these items.
6. Good Working Order
Given some of the limitations on identified above, a “Good Working Order Annexure” relating to plumbing, gas and electrical items is added on occasions to REIWA offer to purchase contracts. While these are key elements of a residential building, it could be argued that good working order should be extended to items such as doors, windows, gates, roof plumbing, water ingress and similar. The intent of a Good Working Order Annexure should be to provide the Buyer with confidence that selected items are in good working order at the time of settlement. While the intent is positive, the challenge is in the detail.
REIWA does not provide a comprehensive Good Working Order Annexure and as such Agents, Sellers and Buyers often left to draft their own annexure. The following summarises some of the complexity which may be encountered:
- a. Working Order
- What does “good working order” mean? As new working order, fair working order given its age, still does the job but is substantially worn? Only does the job the Seller used it for?
- b. How do you determine Working Order?
- How do you determine the working order? How do you resolve differences of opinion? Do you engaged third parties to determine Working Order? What about the limits on the number of people who can attend the Pre-Settlement Inspection? Only Electricians, Plumbers and Gas Fitters can truly test electrical, plumbing and gas items under WA Laws. Also important to note that the Pre Settlement inspection can only be attended by the Buyer who can only be accompanied by 2 persons!
- c. What’s included in a Good Working Order Clause
- What exactly is covered by the clause and what is excluded? Is it simple?
- i. Electrical
- a. Electrical appliances (ovens, grills, stoves, dryers, dishwashers, coffee machines, micro waves, fridges, freezers,
- b. Air Conditioners and Evaporative Air Coolers and associated remotes
- c. Exhaust fans and ceiling fans
- d. Intercoms, alarms, CCTV
- e. Ducted vacuum system
- f. Spas and pools and associated equipment
- g. Electric entry gates and garage doors
- h. Lifts, car stacker’s
- i. GPO’s lights wiring, smart wiring, internet cabling, NBN equipment
- j. BBQ’s and outdoor kitchens
- k. Smoke alarms and RCD’s
- l. Built in TV’s surround sounds and associated remotes
- m. Miscellaneous remote controls
- n. Smart Home system controllers
- o. Wiring, Meter Boards and or Sub Boards
- ii. Plumbing and Gas
- a. Taps, toilets, bidets, baths, shower heads
- b. Grey and Black water drains
- c. Storm water drains
- d. Secondary (sewage) treatment systems
- e. Aerated Wastewater Treatment Systems
- f. Gas bayonets
- g. Hot water systems
- h. Water filters, chillers, sparkling water supplies
- i. Vent pipes
- iii. Reticulation
- a. Controllers, solenoids, valves
- b. Bores
- c. Sprinklers
- iv. Building
- a. Doors including locks and keys
- b. Windows including locks and keys
- c. Flyscreens and security screens
- d. Chimneys
- e. Council bins
- d. If it can be established that the item does not meet the working definition (as defined and agreed) and this is only established 2 days prior to settlement?
- i. Do you just attempt to negotiate an agreement amount? What if you cannot agree an amount?
- ii. Can you defer settlement – what are the impacts or penalties. What if there are multiple Settlements all contingent on each other?
- iii. Can you withhold monies if so how do you determine the amount?
- iv. If monies are withheld who holds and releases the monies?
- e. Because these clauses are not drafted by REIWA, or provided in a standard Annexure, there is a lack of consistency in drafting, which leads to a greater risk of disagreement between Buyer and Seller.
7. Need More Info
The Industry Association of Building and Property Inspectors in WA Inc has explored this issues in more detail. You can read their paper by following this Link.
8. Summary
A residential building may have literally thousands of working parts that need to be in good working order. However, individually these working items could represent a rounding number in the context of the overall valuation of the property. Conversely some items could cost several thousands of dollars to remediate if the items are not in good working order. While Working Order clauses appears to be a good idea, the devil will be in the detail.
Property Buyers and Sellers should carefully consider what is I really important and seek assurances that these items are in good working at the time of settlement and ensure that there are appropriate mechanisms in place to validate this position and resolve the position where good working order validation cannot be confirmed.
9. Important Note
The above general information was considered correct in Aug 2023. Circumstance will change over time. The issues are very complex and legal guidance may be required. It is recommended that all readers seek their own professional and or legal advice prior to acting on the information contained in this note.
Build, Buy, Invest in property with confidence.
Email: enquiry@houspectwa.com.au
