Defect Option in Real Estate Transactions
In agreements concluded between individuals, the parties may include contractual conditions to provide reassurance to themselves or the other party. For an agreement to be valid, any condition included must be lawful. In addition to allowing parties to determine contractual terms, the law also recognizes a right to terminate under specific circumstances.
For example, a contract may be terminated if one party has been deceived, the subject matter of the transaction is defective, or the agreed price significantly deviates from the customary market value.
These legal grounds are commonly referred to as options for termination.
The defect option is one such legal option. This article explains its meaning, the requirements for invoking it, and its application in real estate-related transactions.
Requirements for the Defect Option in Real Estate Transactions
Under the Civil Code, if a defect in the sold item becomes apparent after the transaction, the buyer may choose to accept the item, claim a price reduction as compensation, or terminate the contract.
Accordingly, the defect option is a right of termination that may arise for either the buyer or the seller, depending on the circumstances. For example, if the parties agreed that the subject matter would be sound and, after the contract is concluded, the defect becomes apparent, the buyer may terminate the transaction under the defect option.
Alternatively, the buyer may decide not to terminate the transaction, accept the defective item, or seek compensation from the seller for the defect.
In addition, if the purchase price is not paid in cash and the parties agree that another item will be delivered as consideration, and that item is defective. The seller discovers the defect after delivery, the seller may likewise choose to terminate the transaction, accept the item despite the defect, or claim compensation.
The Defect Option in Real Estate
The defect option is not limited to contracts of sale. It applies to any agreement in which property or goods are exchanged. The general principle is that the subject matter must be sound, and if a defect is discovered later, the right of termination may arise.
This option also applies to transactions involving real estate, including both property purchases and lease arrangements. If a defect in the purchased or leased property becomes apparent after delivery and the buyer or tenant was unaware of it at the time of contracting, they may invoke the defect option.
The Defect Option in Lease Agreements
Under the law, in a lease arrangement, the tenant generally has two choices:
- Terminate the lease due to the defect in the property.
- Accept the defect and pay the rent in full without reduction.
It should be noted that if the landlord remedies the defect by any means, the tenant may no longer invoke the defect option.
If the defect renders the property entirely unusable and the defect cannot be remedied, the lease contract may be considered void.
Terminating a Real Estate Sale Contract Based on the Defect Option
If the property was agreed to be sound, but the buyer receives it with a defect, the buyer may terminate the transaction under the defect option. The following points are essential.
The Defect Must Have Been Hidden at the Time of Contract
This means that the defect existed at the time the contract was concluded and was not apparent to the buyer. It makes no difference whether the defect was intentionally concealed or the buyer failed to notice it due to negligence.
What matters is that the property delivered was defective and the buyer was unaware of the defect at the time of contracting.
The Defect Option Must Be Exercised Promptly
Termination based on defect is subject to prompt action.
The buyer must terminate within a customary and reasonable period after becoming aware of the defect and deciding to terminate.
If the buyer delays beyond the period that customarily indicates abandonment of termination, the right to terminate is generally lost, and the buyer may only pursue compensation.
Frequently Asked Questions About the Defect Option in Real Estate
The defect option is a legal right that allows a buyer or tenant to terminate a real estate transaction if a defect is discovered in the purchased or leased property, or to seek compensation in accordance with the law.
The defect must have been hidden at the time the contract was concluded and the buyer or tenant must have been unaware of it. In addition, termination must be exercised promptly within a customary and reasonable period after discovery of the defect.
No. The defect option may apply in various transactions involving the exchange of property or goods. It also applies to real estate transactions, including both purchase and lease agreements.
A tenant may terminate the lease due to the defect or accept the defect and pay the rent in full. If the landlord remedies the defect, the tenant generally cannot invoke the defect option.
Yes. If the consideration delivered to the seller is defective, the seller may invoke the defect option by terminating the transaction, accepting the defective consideration, or claiming compensation, depending on the circumstances.
If the customary period for prompt termination has passed, or if the buyer or tenant was aware of the defect and accepted the transaction, termination may no longer be available and only compensation may be pursued. What is the defect option in real estate?
What conditions are required to invoke the defect option in real estate transactions?
Does the defect option apply only to real estate sales?
What options does a tenant have under a lease if a defect exists?
Can the defect option also apply to the seller?
When is termination based on the defect option no longer available?
