- Introducing 2017 Wis. Act 338
- Sellers Must Now Disclose Restrictive Covenants And Deed Restrictions
- Sellers Now Have To Disclose How Long They Have Owned The Property In Their Real Estate Condition Report
- The New Real Estate Condition Report Expands Required Disclosure Of Unpermitted Work
- Sellers Now Have To Disclose Insurance Claims In Their Real Estate Condition Report
These posts focused exclusively on how Act 338 affects the required content of seller condition disclosure reports used in residential real estate and vacant land transactions. While these reports are the primary focus of this act, Act 338 also affects the required content of home inspection reports.
Wis. Stat. § 440.975(3)(c) used to require home inspectors to submit a written report to the client that describes any conditions detected by the home inspector during the home inspection "that, if not repaired, will have a significant adverse effect on the life expectancy of the improvement or the component of the improvement."
Act 338 repealed Wis. Stat. § 440.975(3)(c) and replaced it with Wis. Stat. § 440.975(3)(cm). This new statute requires home inspectors to submit a written report to the client that does the following:
Describes any defect that is detected by the home inspector during his or her home inspection. A home inspector is not required to use the term “defect” in describing a defect in the written report required under this subsection. A home inspector may not use the term “defect” in a written report required under this subsection unless that use is consistent with s. 440.97 (2m).
Wis. Stat. § 440.97(2m) defines "defect" as follows:
“Defect” means a condition of any component of an improvement that would significantly impair the health or safety of future occupants of a property or that, if not repaired, removed, or replaced, would significantly shorten or adversely affect the expected normal life of the component of the improvement.
This definition of "defect" largely mirrors the definition of "defect" found in lines 449-451 of the WB-11 Residential Offer To Purchase:
"Defect" means a condition that would have a significant adverse effect on the value of the Property; that would significantly impair the health or safety of future occupants of the Property; or that if not repaired, removed, or replaced would significantly shorten or adversely affect the expected normal life of the premises."
To summarize, home inspectors are required to describe any "defects" in their written reports. However, they are not required to use the term "defect." More importantly, they cannot use the term "defect" unless their use is consistent with a new definition of that term that appears to have been imported from the contract between the buyer and seller.
The significance of this change is best understood by considering how home inspectors' written reports are used in most residential real estate transactions.
While the WB-11 Residential Offer To Purchase often grants buyers the right to back out of their purchase through delivering a Notice of Defects with the written inspection report attached, most buyers will not exercise this right. After all, they really want this home. Besides, the real estate agent working with them does not tell them that they have this right. Instead, buyers use written inspection reports to negotiate concessions from sellers, such as the sellers having the conditions described by the home inspector corrected at their expense prior to closing (even when the sellers never negotiated the right to cure defects). Sellers will argue that many of the conditions identified in the written inspection report are not really defects and do not require correction, but they will often agree to have at least some work performed prior to closing. The sale will close, real estate commissions will be paid, and the buyers and sellers will believe that their respective agents went to bat for them.
Everything changes when a home inspector uses the term "defect" to describe a condition that he detected during his home inspection. At least some buyers are smart enough to realize that their offer was contingent on a licensed home inspector inspecting the property and not reporting any "defects" and that their home inspector's reporting of "defects" means that they might not be obligated to close on their purchase. Even if they don't understand the significance of the home inspector's use of the term "defect," they might consult with an attorney who can explain everything to them. Though real estate agents cannot discourage the buyer from retaining an attorney, the last thing that they want is for the buyer to consult with another professional whose advice will not be colored by an expected sales commission. The home inspector has placed the real estate agent working with the buyer in quite an awkward position, especially if the buyer is the real estate agent's client rather than merely a customer.
The bottom line is that real estate agents do not want home inspectors calling a spade a spade. They want home inspectors to describe the conditions that they observe in their written reports, but they want these descriptions to be painted in shades of gray so that it is unclear whether or not the conditions at issue are really "defects." That way, the real estate agents will retain control of the transaction and will look like heroes to their respective sides for winning additional concessions prior to closing.
So what is a home inspector to do? Home inspectors can and should call out "defects" in their written reports, but they need to be ready to explain and defend why these conditions qualify as "defects" based on the standard set forth in Wis. Stat. § 440.97(2m). Assuming that the home inspector is reasonably competent, he should be able to explain and defend the opinions in his written report.
That being said, home inspectors should understand that they could face discipline or even possible liability if they misidentify a condition as a "defect." Violating Wis. Stat. § 440.975(3) could subject a home inspector to professional discipline pursuant to Wis. Stat. § 440.978(2)(m). What about legal liability though? While the real estate agents will be angry about losing their expected sales commissions, Wis. Stat. § 440.977 appears to protect the home inspector from being sued by anyone other than the parties to the transaction for which the home inspection was conducted, namely the buyers and the sellers. The sellers could have a claim against the home inspector for interfering with their contract to sell their property, but such a claim seems unlikely to be viable. Wisconsin law only recognizes a claim for intentional interference with a contractual relationship. Mere negligence by the home inspector will not suffice. The sellers would have to prove that the home inspector acted with the purpose of interfering with the contractual relationship. See Cudd v. Crownhart, 122 Wis. 2d 656, 364 N.W.2d 158 (Ct. App. 1985); Augustine v. Anti-Defamation League of B'Nai B'Rith, 75 Wis. 2d 207, 249 N.W.2d 547 (1977). As long as they do not identify bogus defects with the purpose of getting buyers out of their purchase contracts, home inspectors should not have to concern themselves with such claims.
