In the 1986 comedy “The Money Pit” starring Tom Hanks and Shelley Long, a young couple purchases an attractive mansion from an elderly widow at a price that seems like a bargain. Soon after closing, however, major flaws surface and the house deteriorates in rapid and slapstick fashion. The strain on the couple’s relationship increases with each crumbled stairway, collapsed floor, failed electrical and plumbing system, and contractor who promises to finish repairs in “about two weeks.”
While “The Money Pit” illustrates an extreme example, real estate buyers in any sale face the risk that they will first learn of major defects in their newly acquired property (and often single largest investment) after closing. What legal recourse do buyers have in this situation? As this article discusses, the answer is often complicated.
Modern court decisions recognize a variety of theories by which sellers (and often their real estate agents or brokers) can face liability for undisclosed defects or misrepresentations about the property. A buyer seeking to recover money damages or cancel the sale based on one of these theories, however, will often have to contend with an “as is” or similar disclaimer clause now inserted in most contracts. Further, in many residential property sales, the seller will have provided a statutory Seller’s Property Disclosure Statement, and the buyer’s case could turn largely on how the seller answered the questionnaire.
Up until the last half of the twentieth century, courts adhered to the long-standing principle of “buyer beware” when buyers sued sellers for a defect. Courts concluded that a buyer had the burden to investigate a property and determine its suitability. Except in the case of seller fraud, a buyer would have little recourse for undisclosed defects. As views about modern real estate transactions shifted, however, courts began recognizing expanded theories of seller liability.
The main theories of seller liability include:
Misrepresentation by the Sellers: A seller who induces the buyer’s agreement to the sale through a misrepresentation may have liability or, in some cases, give the buyer the right to rescind the sale. The traditional misrepresentation claim requires the buyer to prove the seller’s representations were in fact false, the seller knew at the time they were false, and the seller made them with the intent to induce the buyer’s agreement to the sale. Additionally, the buyer must prove that the buyer actually relied on the misrepresentations and did so justifiably.
Buyers who can prove all the elements of traditional misrepresentation claim may either rescind the sale (if they act quickly enough following discovery of the misrepresentation) or keep the property and sue for damages.
A buyer in some circumstances may also have recourse even when the seller’s misrepresentation was merely “innocent” or “negligent” because the seller honestly believed the accuracy of the representation. The buyer’s remedy in this case is generally limited to cancellation of the sale.
Failure to Disclose: Sellers can also have liability for staying silent in some circumstances. Courts recognize a duty of full disclosure, for instance, when the seller or the seller’s agent has a “fiduciary duty” or “confidential relationship” obligating the seller or agent to act in the buyer’s best interest. The fiduciary duty or confidential relationship often stems from the professional obligation of the seller or the seller’s agent. Buyers often invoke the principle of a special duty of disclosure in bringing claims against a real estate agent who learned of a defect but did not disclose it to the buyer.
Courts also do not permit sellers to state “half-truths.” Sellers who make a representation about some aspect of the property assume a duty to disclose all the relevant facts. Similarly, courts treat a seller’s active concealment (as opposed to just non-disclosure) of a material fact as the equivalent of an affirmative misrepresentation.
Finally, courts may sometimes recognize a duty of disclosure based solely on the significance of the defect. If a problem is serious enough, courts have found silence to constitute fraud even when the seller did not otherwise have a duty of disclosure, state a half-truth, or actively conceal the defect.
Breach of Warranties: Many real estate sales contracts contain express warranties and representations by the seller. A buyer can recover damages in the event the property does not conform to the warranty.
The scope and subject of warranties are determined by what the parties negotiate, or, in many cases, what warranties happen to be in the contract form that the parties use. Common warranties include that the property has not been used for storage of hazardous materials, that the structures have no known material defects, and that the plumbing, electrical, heating and cooling, and wiring systems are in good working order.
In addition to express warranties, Oregon courts have in some situations inferred an implied warranty by the seller. For instance, a home builder who then sells a residence directly to a buyer is deemed to have made an implied warranty that the residence is constructed in a reasonably workmanlike manner and fit for human habitation, even if the seller never expressly makes such a warranty in writing.
Covenants of Title: Buyers also want to make sure that they are acquiring the property free from any other claims of ownership, liens, easements, or similar issues. In Oregon, a buyer’s legal recourse for these so-called “title defects” typically depends on the form of deed the seller uses to transfer the property. A set of Oregon statutes now provides four forms of deeds, and a seller automatically makes certain covenants and warranties of title by transferring property through one of the deed forms – warranty, special warranty, bargain and sale, and quitclaim.
The statutory warranty deed represents the usual and, from the buyer’s perspective, most preferable option. In a transfer by warranty deed, the seller warrants that the property is free from any title defects or encumbrances expect for those specifically listed as exceptions. A quit claim deed falls on the other end of the spectrum. It operates to transfer only whatever interest in the property the seller has at the time; the grantee has no guaranty that he or she is even getting the full interest described.
To help counter the risk of liability, sellers often use contracts that contain an “as is” clause or similar disclaimer language. A typical clause will specify that, except for any warranties or representations expressly agreed to in the contract, no other representations have been made about the character and condition of the property and structures on it, zoning and permitting matters, environmental issues, or any other aspects of the property. In addition, an “as is” clause may ask the buyer to certify that the buyer has relied on an independent investigation.
Oregon courts have held that an “as is” clause will bar a buyer’s claim in many circumstances but not when the seller has made a deliberate misrepresentation. A seller who purposely misrepresents some aspect of the property or transaction, or whose silence is deemed the equivalent of a purposeful misrepresentation, cannot rely on an “as is” clause as a defense. An “as is” clause can nevertheless provide the seller important protections (and deny the buyer recourse) in many other situations.
At the urging of real estate agents, the Oregon legislature in 1993 enacted a set of statutes aimed at reducing litigation in home sales and adding certainty to transactions by requiring more upfront disclosure. Those statutes (ORS 105.462 - 105.490), require the seller in most residential property sales to complete the Seller’s Real Property Disclosure Statement. The multi-page form asks a lengthy set of questions about aspects of the property ranging from title and zoning issues, water systems, and building materials, to the existence of any covenants, conditions, and restrictions. The seller must simply check “yes,” “no,” or “unknown” next to most questions, but some questions also ask the seller to explain further or provide documentation.
The seller must complete and deliver the disclosure statement any time a buyer makes a written offer for the property. A dissatisfied buyer has five days after delivery of the statement to revoke the offer and have any earnest money or other deposit returned. If a seller fails to provide the disclosure statement, the buyer may revoke the offer at any time prior to closing and have any earnest money or other deposit returned.
The disclosure statement requirement applies only to sales of residential properties that the buyer or the buyer’s spouse, parent, or child, intend to use as a residence. Sales of commercial properties fall outside the disclosure statement requirement. Also excluded are the first sale of a home never occupied and sales by government agencies, financial institutions in most instances, and court-appointed receivers, trustees, personal representatives, conservators, or guardians.
The disclosure statement statutes also make clear that they do not alter the legal principles of seller liability developed through court decisions. When the seller provides a disclosure statement, the buyer’s recourse for any defects still ultimately turns on whether the seller’s representations or nondisclosures – either in the disclosure statement or otherwise – fits within one of the legal theories of seller liability.
In a case in which the seller has completed a disclosure statement, however, the statement will likely carry significant weight because it contains representations of the seller in black and white. The parties cannot argue about what the seller actually represented. Still, the ultimate goal of the disclosure statement requirement remains keeping parties out of the courtroom.
The current legal framework leaves both sellers and buyers with risk. To help avoid a lawsuit and potential liability, sellers must carefully disclose material defects and accurately represent the condition of the property. At the same time, the buyer has no assurance of legal recourse in any given situation, especially if contending with an “as-is” clause. The buyer, therefore, cannot let the potential of legal recourse act as a substitute for due diligence in inspecting the property and determining its suitability prior to closing.