McLellan v. Yeager: Seller's Statements on Property Condition Disclosure Form Can Constitute a Warranty

A Kentucky appellate court has considered whether a contract provision could turn a property condition disclosure form into a warranty, even when the state's property condition disclosure statute makes it clear that the disclosure form is not a warranty.

Michael and Irene Yeager ("Sellers") listed their home for sale. Kentucky law requires sellers of residential property to complete a property condition disclosure form. The Kentucky statute states that the disclosure form does not create a warranty by the seller. The Sellers completed the property condition disclosure form ("Form"). On the Form, the Sellers checked "yes" next to the question about basement leaks, and wrote that the basement had leaked in "March 1989 and 1997". The Sellers also checked "no" in the box which asked whether the leak had been repaired.

Christine McLellan ("Buyer") entered into a purchase contract ("Contract") for the property with the Sellers. The Contract stated that the "Seller represents and warrants to Buyer...that the information provided in the [Form] is true, accurate and complete to the best of their knowledge." The Contract also allowed the Buyer to request that the Seller repair any "substantial defect" discovered during an inspection of the property. The Buyer hired an inspector and received a report from the inspector which noted cracks on the basement wall and suggested further inquiry into this potential problem. The Buyer took no further action on the inspector's report, and the transaction closed.

After moving onto the property, the Buyer experienced basement leaking. She eventually filed a lawsuit against the Sellers, alleging breach of contract/warranty, claiming that the Sellers had misrepresented the condition of the basement in the Form. During the discovery phase of the lawsuit, one of the Sellers testified that the drain in the basement backed up every time there was a heavy rain and also that the windows in the front bedroom had leaked twice before, due to clogged gutters. The trial court ruled in favor of the Sellers, on the grounds that the Kentucky property condition disclosure statute specifically stated the property condition disclosure form does not constitute a warranty. The Buyer appealed.

The Court of Appeals for the Commonwealth of Kentucky reversed the trial court and sent the case back to the lower court for further proceedings. The Buyer argued that the Sellers' statements in the Form constituted a warranty due to the language in the Contract. The court found that nothing in the property condition disclosure statute prevented the parties from entering into an agreement that made the statements in the Form into a warranty. Since the contract provision in question did not violate any laws or was in any way illegal, the court ruled that the parties were free to include such a provision in the Contract. The court also ruled that the Contract had converted the statements in the Form into a warranty. The court found that there was a factual dispute which needed to be resolved by the trial court, as it was unclear whether the deposition testimony by one of the Sellers demonstrated a breach of the warranty. Thus, the court reversed the judgment in favor of the Sellers and sent the case back to the trial court for further proceedings.

One judge dissented, arguing that both the Form and the inspector's report indicated that the property had leaks. Even if the Sellers had improperly stated the extent of the leaking, the dissent argued that the Buyer had received information which adequately revealed the condition of the property and so was barred from bringing a lawsuit over subsequent leaking on the property.

McLellan v. Yeager, No. 2001-CA-002506-MR, 2003 WL 354407 (Ky. Ct. App. Feb. 14, 2003). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].

Editor's Note: NAR Legal Affairs would like to thank Daniel Lindblade of the Kentucky Association of REALTORS® for alerting us to this decision.

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