Property Condition Disclosure Highlights: 4Q 2016

The Property Condition Disclosure cases retrieved this quarter address a wide range of disclosure topics. In one case, the Idaho Supreme Court considered the interplay between contract provisions that attempt to limit a licensee’s disclosure duties and the duties imposed on licensees by statute. In other cases, the courts considered whether a transaction broker could be liable for failure to disclose defects, whether licensees could be liable for failing to disclose the existence of holes drilled into the kitchen floor by the seller and the presence of pet feces and urine, and whether licensees could be liable for misrepresenting the amount of lakeshore and the enforceability of a covenant on the property.

1.         Beckman v. Wells Fargo Bank, N.A., No. A15-1819, 2016 WL 5640664 (Minn. Ct. App. Oct. 3, 2016)

The listing for a property indicated that the property had 1500 feet of lakeshore across the road. After the purchasers questioned the amount of lakeshore, the seller’s representative sent a parcel map showing 900 feet of lakeshore obtained from the county’s website, and also told the buyers there was an additional 600 feet of shoreline on a flowage. After closing, purchasers allege that they discovered a number of defects on the property, including mold, urine and water-stained walls and carpet, dead animals, water damage, and fire damage. The purchasers also discovered that they owned less than 900 feet of lakeshore. The purchasers sued the seller, seller’s representative and broker, and their real estate representative and broker for fraud. The purchasers were required to resolve their claims against their representative and broker through arbitration. The court granted summary judgment for the seller, seller’s representative and seller’s broker.

The appellate court affirmed summary judgment. There was no evidence that the listing representative knew the property contained less than the stated amount of lakeshore. The representative relied on the parcel map from the county website that showed 900 feet of lakeshore, and there was nothing to suggest the representative had reason to doubt this information. The “as-is” clause in the agreement did not bar a claim for failure to disclose known defects. However, there was no evidence that the licensee made misrepresentations or had any knowledge of problems at the property.

2.         Moon v. Barr, No. 33614-0-III, 2016 WL 7106371 (Wash. Ct. App. Dec. 6, 2016)

The purchasers of a home sued the seller, seller’s representative, and seller’s broker for alleged concealment of pet feces and urine in the home. The trial court granted summary judgment in favor of the defendants. On appeal, the court affirmed dismissal of the misrepresentation and breach of contract claims, but reversed dismissal of the fraudulent concealment and Consumer Protection Act claims.

The appellate court determined there was no direct evidence that the seller’s representative knew of the animal feces and urine. However, there was circumstantial evidence that the licensee had knowledge of the pet feces and urine because the licensee described the house as trashed, would have smelled the strong odor when she was in the house, and used a lot of air freshener when she was at the house. Based on that evidence, a court or jury could find that the licensee had knowledge of the condition. When the purchaser’s daughter raised the issue of the odor with the seller’s representative, the representative was required to disclose her knowledge of the defect. The alleged fraudulent concealment occurred within the course of the licensee’s business, and the property was advertised to the public, so the purchaser sufficiently stated a Consumer Protection Act claim for unfair business practices. The negligent misrepresentation claim failed because the licensee did not represent the purchaser.

3.         Ries v. Curtis, No. 15-1524, 2016 WL 6871890 (3d Cir. 2016)

After closing on a home, the purchasers discovered small holes drilled into the kitchen floor. The sellers later admitted that they drilled the holes in order to drain water into the basement, but did not tell the purchasers or their real estate representative about the holes. A doormat concealed the holes during the selling process. The purchasers settled claims against the sellers, and brought claims for fraud, deceptive trade practices, and violation of real estate disclosure laws against seller’s real estate representative and broker, alleging that they had concealed the holes and an improperly graded patio. The trial court entered summary judgment for the real estate representative and broker.The purchasers could not prove that the representative or broker had actual knowledge of the defects. The purchasers’ argument that the representative should have seen water or the holes during an open house or showing was not enough to establish the licensee’s knowledge. The appellate court affirmed the summary judgment for the real estate representative and broker.

4.        Troja v. Pleatman, Nos. C-160447, C-160460, 2016 WL 6672760 (Ohio Ct. App. Nov. 10, 2016)

After signing a contract to purchase a home, the purchasers learned that a man who had stabbed a girl in the neighborhood lived next door to the home they were going to purchase. The purchasers then refused to buy the home, and the seller brought this action to enforce the agreement. The purchasers filed a third party claim against the licensee and broker who represented them in the transaction. The purchasers allege that the licensee and broker breached their fiduciary duties by failing to tell the purchaser about the crime, misrepresented information when asked about criminal activity in the neighborhood, and engaged in a conspiracy to defraud the purchasers. The purchaser and seller settled their claims out of court.

The trial court granted summary judgment for the licensee and broker. The appellate court concluded that the crime was not material to the transaction. Therefore, the licensee did not have a duty to disclose the crime because it was a nonmaterial fact that was not related to the condition of the property. The buyers could have easily discovered the information themselves, and there was no evidence that the real estate representatives had any knowledge of the crime. The court affirmed summary judgment in favor of the real estate professionals.

5.         Stauff v. Bartnick, No. 113507, 2016 WL 7323324 (Okla. Civ. App. Dec. 14, 2016)

The purchaser of a home sued the seller, the broker who served as transaction broker, and the home inspector for negligence and violations of the Residential Property Condition Disclosure Act. The purchaser alleges that the defendants failed to disclose numerous defects in the home, including termites, water issues, and defects in the air conditioning system, ducts, and venting for the hot water system. The buyer argued that the broker had knowledge of defects on the property due to its involvement in the sale of the same property several years earlier, when the seller purchased the property.  Although a different licensee assisted in that transaction, the previous disclosure statement and various inspection reports were retained in the broker’s transaction file.  The prior disclosure statement indicated flood damage and other reports discussed termite issues.  The broker testified that privacy concerns had caused the firm to create a policy where files from prior were not shared with other licensees.The trial court entered summary judgment in favor of the defendants. The appellate court found that there were disputed questions of fact regarding whether the sellers and the broker had actual knowledge of the alleged defects, which precluded summary judgment. A judge or jury could conclude that the disclosure statement and inspection reports from the prior transaction provided the broker with knowledge of the defects.  The court also found that the broker’s policy prohibiting the sharing of transaction files to be contrary to the purposes of the property condition disclosure law.  Therefore, the appellate court reversed summary judgment for the seller and the broker.

6.         Path to Health, LLP v. Long, No. 42313, 2016 WL 6473015 (Idaho Nov. 2, 2016)

The purchaser of property sued his real estate representative and broker for breach of contract, negligence, violation of the Consumer Protection Act, breach of duty of good faith and fair dealing, and misrepresentation. The purchaser claims that the real estate representative misrepresented that the property was zoned for commercial use when it was actually zoned for residential use.  According to the allegations of the complaint, the purchaser’s owners asked the licensee about zoning for the property and the licensee indicated that he had checked the zoning and assured them that the zoning would not be a problem. The trial court granted summary judgment for the licensee and broker. The trial court concluded that the licensee and broker could not be liable because the Representation Agreement between the parties stated that the licensee and broker had no duty to investigate zoning issues.The appellate court affirmed summary judgment on the negligence claim, but reversed summary judgment on the contract and misrepresentation claims. Although a real estate licensee is not required to conduct an independent inspection or to independently verify a statement about the property, a licensee still owes a statutory duty to disclose all material facts known or that they reasonably should have known. The statutory duties imposed upon licensees are assumed to be written into the Representation Agreement. Even though the broker did not have a duty to investigate zoning issues, a broker may not provide false information and mislead clients.  The court concluded there was sufficient evidence to allow the claims to proceed because a judge or jury could conclude that the real estate representative’s statement that the zoning of the property was consistent with the purchaser’s requirements was a misrepresentation.
7.         Cobb Simmons v. Gammon, Nos. 32,936, 32,945 & 32,953, 2016 WL 6082126 (N.M. Ct. App. Oct. 14, 2016)

The purchasers bought a property subject to a covenant creating a minimum lot size for the property. The purchasers allege that the real estate representative negligently misrepresented their ability to enforce the covenant against adjacent property owners. The trial court ruled against the real estate firm, and awarded $123,000 in damages to the purchasers.

Evidence presented at trial showed that the real estate firm should have disclosed the waiver of the covenant signed by the sellers, and that the firm was aware of the adjoining property’s covenant violation. The appellate court determined there was substantial evidence to support the decision and affirmed the award against the broker. The appellate court remanded the case to the trial court for a determination of a reduction in the commission earned by the broker and the amount of attorneys’ fees.

B.         Statutes and Regulations

California

California amended its statute regarding the disclosure of a death on a property for sale. The following facts are considered nonmaterial facts that do not require disclosure: (1) the death of an occupant; (2) the manner of death of an occupant more than three years ago; and (3) the occupant was living with HIV or died from an AIDS-related complication.[1]

Delaware

Delaware amended the Buyer Protection Act to make it applicable to transfers of vacant land zoned for residential use and marketed as appropriate for the construction of a dwelling for 1-4 families. [2]

Kentucky

Kentucky amended its Seller’s Disclosure of Property Condition form to include disclosures regarding (1) whether the property is located within a special flood hazard area, (2) contact information for a homeowners’ association, and (3) notice of a written disclosure of methamphetamine contamination.[3]

Louisiana

The Louisiana Real Estate Commission issued a revised Property Condition Disclosure form requiring disclosures regarding contaminated flooring, solar panels, and the length of seller’s ownership of the property.[4]

Nevada

An Informational Bulletin issued by the Real Estate Division of the Nevada Department of Business & Industry provides guidance regarding open range disclosures.[5] The seller of a property adjacent to open land must inform the purchaser that livestock grazing on the open land may be permitted to enter the property, and that the property may be subject to government rights of way.[6]  A listing representative who lists property adjacent to open range land must investigate county or state records, or tell the seller to do so, to determine if the open range disclosure is needed.

Oklahoma

The Oklahoma Real Estate Commission issued a revised Residential Property Condition Disclosure Statement that includes a disclosure regarding whether a propane tank on the property is owned or leased.[7]

C.         Volume of Materials Retrieved

Property Condition Disclosure Issues were identified 59 times in 48 cases collected during 2016 (see Table 1). Mold and water intrusion continues to be addressed frequently in the cases, along with Structural Defects, Sewer/Septic, and Other disclosures (see Table 2). Several other issues were encountered as well. Three statutes and six regulations were retrieved. The volume of cases and the number of statutes and regulations increased from 2015 (see Tables 4 and 6.)