Pre-settlement inspection
The pre-settlement inspection is one of the final hurdles before settlement day. Most inspections occur without a hitch. The oven is still there, the heat pump works. But what should you do if that’s not the case?
Why is there a right to a pre-settlement inspection?
The right to a pre-settlement inspection comes from clause 3.2 of the ADLS Agreement for Sale and Purchase (or 5.2 in the Auction and Tender versions). If a property is sold with vacant possession, this clause gives the purchaser the right to check the state of the property, chattels and fixtures.
This clause interplays with clause 5, regarding damage to the property before settlement, and the warranties in clause 7.3, in that it allows the purchaser to check that no damage has occurred, and that the chattels and fixtures are in reasonable working order.
If a property is tenanted (but will be vacant on settlement), you will obviously need to arrange any inspection with the current tenants. There is no right to a pre-settlement inspection if a property is sold subject to a tenancy.
Is there an issue?
Different people have different standards they expect of a property. If a purchaser finds an issue, it will need to be one that comes within clauses 5 or 7 mentioned above if they want the vendor to take it seriously. For example, the stove not working is likely a valid complaint. That the lawns have not been mown – maybe less so.
However, an agent is not expected to make that call. The vendor and purchaser should always be referred to their lawyers.
What happens if there is an issue?
If the purchaser finds an issue with the property, there are a range of options, both legal and more practical. Some of the most common options are:
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The vendor can agree to fix the problem before settlement. But be careful before telling a purchaser “don’t worry, I’ll sort that before settlement”. Will you actually be able to? Have you got the vendor’s authority to agree to that? If the vendor agrees to fix the issue before settlement, the purchaser can inspect the property once more to double check it has been done (clause 3.2(2)).
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The vendor and purchaser can agree to a retention where their lawyer holds some money back at settlement. This is then released once the vendor fixes the issue. This needs to be formalised between their lawyers, to agree where the funds will be held, and when they will be released. This as a good option where the value of the work to be done is substantial. Where the value of the work is low, this can be a hassle for both vendor and purchaser and there’s little financial incentive for the vendor to get the work done and access to the property for the vendor (or their tradesperson) has to be organised following settlement.
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The vendor and purchaser can agree to a reduction in the purchase price to compensate the purchaser for the issue. This will be taken off the purchase price on settlement. This is a good option where the value of the work is low.
If the purchaser wants to request a price reduction or retention, there is a whole process set out for giving notice of a claim for compensation in clause 10.3(1)). If the purchaser and vendor agree on an amount for compensation, great. If they cannot agree, there is a complicated process where an experienced property lawyer is called in to determine the issue (clause 10.6(2)). Their fee will be payable by the party whoever loses the argument. The extra costs and complication mean this process is rarely used. However, the purchaser’s lawyer should still follow the notice of claim procedure to protect their client’s position.
The procedure requires the purchaser’s lawyer to give notice the day before settlement at the latest, so we recommend that clients don’t leave their pre-settlement inspection to the night before settlement! That would also leave you very little time to fix even a minor issue.
Pre-settlement inspections can cause some of the most contentious situations of the entire property sale process. Setting client expectations as to the issues to can raise, organising inspection dates early (and not the night before settlement) and referring the clients to their lawyers at the first sign of trouble are the simplest way to make for a smooth settlement.
As always, feel free to get in touch if you have any questions about the process or need a second opinion on an issue.