Building and Pest Inspections: Your Rights Under a Victorian Property Contract

Purchasing a home is one of the most significant financial decisions you will make.

For buyers of residential property in Victoria, a building or pest inspection is a critical step in the due diligence process.

But what happens when the results are unsatisfactory? Can a purchaser walk away from the contract?

The answer depends on the terms of your contract and how the relevant conditions are drafted.

This article provides a general overview for both buyers and sellers of residential property in Victoria regarding building and pest inspection clauses and the circumstances under which a purchaser may be entitled to end a contract.

How Building and Pest Inspection Conditions Work

Most contracts of sale for residential property in Victoria include a condition allowing the purchaser to obtain a building inspection, a pest inspection, or both, within a specified timeframe.

If the inspection reveals unsatisfactory defects, the condition may entitle the purchaser to terminate, provided they follow the correct procedure and act within the required timeframe.

The key elements of a building or pest inspection condition typically include:

• a defined inspection period during which the purchaser must arrange and receive the inspection report;
• a requirement that the purchaser provide written notice to the vendor if they wish to rely on an unsatisfactory report; and
• a mechanism for what follows, which may include a right to terminate outright or a negotiation process before termination is available.

When Can a Purchaser Terminate?

A purchaser may be entitled to end the contract on the basis of an unsatisfactory building or pest inspection in the following general circumstances.

First, the inspection must be conducted and the report received within the timeframe specified in the contract.

If the purchaser fails to obtain the report or provide notice within the required period, they may lose their right to rely on the condition, and the contract may become unconditional.

Second, the purchaser must genuinely be dissatisfied with the inspection results.

Depending on the contract version, this may be assessed subjectively (that is, in the purchaser's own opinion) or may require the dissatisfaction to be reasonable.

The distinction matters.

A subjective satisfaction clause gives the purchaser broad discretion, while an objective reasonableness standard means a purchaser cannot terminate over trivial or inconsequential matters.

Third, the purchaser must give proper written notice in accordance with the contract.

This is typically served on the vendor or their representative within the stipulated timeframe, often accompanied by a copy of the inspection report or a summary of the defects identified.

If all these requirements are met, the purchaser will generally be entitled to terminate and have their deposit refunded.

The Seller's Position

Sellers should be aware that a building or pest inspection condition is not simply a free option for the buyer to walk away for any reason.

The condition must be exercised genuinely and in accordance with the contract.

If a purchaser attempts to terminate outside the inspection period, fails to provide proper notice, or relies on matters that do not fall within the scope of the condition, the seller may be entitled to insist that the contract remains on foot.

Sellers should also understand that some contracts include a negotiation mechanism allowing the parties to negotiate a resolution before the purchaser gains the right to terminate.

This may include:

• a price reduction; or
• an agreement by the seller to carry out repairs.

Sellers willing to negotiate may save a transaction that would otherwise fall through.

Know Which Version of the Contract You Are Signing

Both buyers and sellers should pay careful attention to which version of the Law Institute of Victoria (LIV) standard form Contract of Sale of Real Estate they are entering into.

The LIV contract has been revised and updated over time, and different versions contain different provisions regarding building and pest inspections.

The scope of the inspection condition, the timeframes for exercising rights, the standard of satisfaction required, and the process for termination or negotiation may all differ between versions.

If a party assumes their rights are the same as those under a previous version they have used before, they may be caught out by a changed procedure or a narrower entitlement.

Both buyers and sellers should confirm which edition of the LIV contract is being used and seek legal advice on how the building and pest inspection condition operates under that specific version.

'Major Structural Defect' vs 'Major Defect'

Buyers and sellers should be aware of the important distinction between a "major structural defect" and a "major defect" as these terms may appear in building inspection clauses.

A "major structural defect" typically refers to a defect in a structural element attributable to defective design, workmanship, or materials that results in, or is likely to result in, the building being unable to be used for its intended purpose.

A "major defect" is a broader term encompassing not only structural issues but also significant non-structural defects such as:

• serious waterproofing failures;
• major electrical faults; or
• substantial plumbing deficiencies.

The definition used in your contract will determine the threshold a purchaser must meet in order to terminate.

A contract permitting termination only for "major structural defects" sets a higher bar than one allowing termination for "major defects" more broadly.

Understanding which term applies in your contract is essential to knowing your rights.

Practical Tips for Buyers and Sellers

Buyers should arrange their building and pest inspections as early as possible within the inspection period to allow time to review the report and provide notice if necessary.

Do not wait until the last day.

Sellers should ensure they understand the terms of any inspection condition before signing.

They should also seek advice on whether the condition is drafted in a way that exposes them to the risk of a purchaser terminating for minor or cosmetic defects.

Seek Legal Advice

This is general information only and is not a substitute for legal advice tailored to your specific circumstances. If you are buying or selling residential property in Victoria and have questions about your rights regarding building or pest inspections, we encourage you to contact our office for guidance before signing.