Property Condition Disclosure Highlights: 1Q 2015

A. Cases

This section examines two new cases involving the merger doctrine and a merger clause. One case deals with structural issues in a home’s foundation (Schoembs), while the other concerns a bat-infested apartment (Katethis). A third case discusses whether a real estate licensee has a duty to investigate the seller’s representations (PH West Dover Props).

1. Schoembs v. Schena (Massachusetts Superior Court, Jan. 23, 2015)

• The merger doctrine does not bar a claim that a real estate salesperson negligently failed to check qualifications of an inspection company the salesperson hired on behalf of the buyer.

In Schoembs,¹⁴ the disclosure statement for the house the buyers were considering stated there had been “a major settlement” of its foundation years earlier.¹⁵ Plaintiff’s real estate salesperson offered to contact an inspection company and attend the inspection himself, as the buyers were unable to attend. The inspector noted slanting in the floor and cracking in the foundation, but was unable to inspect part of the foundation because he could not access the entire foundation. The salesperson recommended that the buyers consult with a structural engineer if they wanted the cracks and slanting floors investigated further. The buyers did not consult anybody else and bought the house. They later noticed cracks in the foundation, and, six years after closing, sued the salesperson, his broker, the sellers, the seller’s salesperson and broker, and the inspector and his employer.

The claims against the buyer’s salesperson were based on his recommendation of the inspection company. The salesperson contended that the merger doctrine precluded the claims. The merger doctrine bars claims based on the provisions of a purchase agreement after the deed has been conveyed, unless those provisions are included in the deed.¹⁶ However, the court held that since the purchase agreement compensated the brokers for their services, the negligence claims against the salesperson could survive because of his alleged failure to check the inspection company’s qualifications.¹⁷ The court dismissed the claims against the buyer’s salesperson based on intentional misrepresentation because the salesperson did not prepare the inspection report.

2. Katehis v. Sovereign Assocs., Inc. (New York Superior Court, Aug. 11, 2014)

• Renter’s lawsuit alleging brokerage’s negligence, among other claims, was dismissed because brokerage had no duty to find renter a habitable apartment.

In Katehis,¹⁸ the plaintiff rented an apartment “as is” and “not sanitized” with the assistance of a real estate salesperson. She spent about 45 minutes inspecting the apartment before signing the lease and asked the salesperson about rodents and pests. The salesperson testified that he responded by saying, essentially, “this is New York,” and told her that monthly exterminator service was provided without charge. Two days after moving in, she saw a bat flying in the apartment. The building superintendent removed the bat and assured her that bats were not common. Four days later, a bat scratched the plaintiff’s head. She promptly left the apartment and went to the emergency room for rabies shots. The physician treating her noticed additional marks and scratches on her that may have been caused by a bat.

The plaintiff sued the real estate broker, contending that it failed to disclose the bat infestation. She also brought a claim for breach of contract, contending that the defendants had undertaken to find her a “habitable” apartment. The trial court disagreed, finding that the contract did not require the salesperson to find a habitable apartment for her and that the contract contained a merger clause that superseded any oral promises made before the agreement was signed. The plaintiff’s fraud- and negligence-based claims also were also dismissed because the plaintiff took the apartment “as is”.

3. PH West Dover Props. v. Lalancette Eng’rs (Vermont Supreme Court, Mar. 20, 2015)

• A broker does not have a duty to verify a seller’s representations about the condition of the property unless the broker is aware of facts to put him or her on notice that the seller’s representations are not accurate.

In PH West Dover Properties,¹⁹ the seller’s disclosure statement for an inn stated that the seller was not aware of any current problems with the roof and there were no problems with flooding, drainage or grading. When the broker secured the listing, however, she called an earlier prospective purchaser to see if she wanted to talk about buying the inn. The person allegedly told the broker she had seen flooding in the parking lot and the roof had major problems and could collapse. An inspection report stated that the roof showed signs of wear and should be kept under observation. The report also made specific recommendations about the roof.

A buyer eventually purchased the property and a few months after the closing, the buyer sued the broker alleging that she had misrepresented the condition of the property. The trial court ruled that the statements from the prior potential purchaser were too vague to provide notice to the broker, and the buyer already knew the roof needed work and should have inquired further.²⁰

In affirming the trial court, the Vermont Supreme Court noted that a real estate licensee does not have a duty to independently verify the seller’s representations about the property unless the licensee is aware of facts indicating the seller’s representations are false.²¹ The prior purchaser’s reasons for not buying the inn were insufficient to put the salesperson on notice because they were too vague. According to the court, “[t]o require the [licensee] to relate every nonspecific and unattributed rumor to subsequent buyers would be unreasonable.”²² Because the buyers knew that the roof needed replacement within a few years and that leaks around the chimney needed immediate attention, they could not recover damages from the broker.

B. Statutes and Regulations

1. Virginia

Virginia added language to its property condition disclosure form stating that the seller makes no representations about whether the property is in a special flood hazard area. The disclosure form also states that the buyers should do their own due diligence about flood zones before closing the transaction.²³

C. Volume of Materials Retrieved

Property Condition Disclosure issues were identified seven times in five cases. (See Table 1; some cases addressed more than one Property Condition Disclosure issue.) Three of the cases addressed Boundary issues, which includes disputes over square footage, access, easements, and similar situations involving the size of the property or its rights. Additional issues addressed include Structural Defects, Roof, and Insects and Vermin. (See Table 2.) One statute and one regulation addressing Property Condition Disclosure issues were retrieved.

¹⁴ Schoembs v. Schena, No. MICV2013-026690-F, 2015 Mass. Super. LEXIS 19 (Jan. 23, 2015).

¹⁵ Id. at *3.

¹⁶ Id. at *7.

¹⁷ Id. at *8.

¹⁸ Katehis v. Sovereign Assocs., Inc., 44 N.Y. Misc. 3d 1220(A), 2014 N.Y. Misc. LEXIS 3547 (S. Ct. Aug. 11, 2014).

¹⁹ PH West Dover Props. v. Lalancette Eng’rs, No. 13-157, 2015 VT 48, 2015 Vt. LEXIS 28 (Mar. 20, 2015).

²⁰ Id., 2015 VT 48, ¶¶ 2–8.

²¹ Id., 2015 VT 48, ¶ 10.

²² Id., 2015 VT 48, ¶ 13.

²³ Va. Code § 55-519(B)(10) (2015) (Chs. 79, 269 (2015); SB 775, HB 1642).