Caveat Emptor Revisited

A thorough buyer inspection is warranted, even in states with rigorous property disclosure requirements.

January 21, 2014

Back in 2007, a Canadian couple in the market for a second home looked at a property in Blaine, Wash., that showed a small amount of rot, according to an inspection report filed by an engineer the buyers had hired. Based on what he could see, the engineer said the rot didn’t pose a structural problem, and the couple bought the home without raising the issue with the sellers.

Not long afterward, though, the couple noticed a damp smell, the presence of potato bugs, and the ceiling tiles separating. They had the home reinspected and this time the inspector found serious structural mold, rot, and pest damage. The extent of the damage hadn’t been easily discovered the first time they had the house inspected, because new siding, trim, and insulation had been installed.

With the new inspection report in hand, the couple determined with the help of a contractor that it would cost more to repair the property than to rebuild, so they sued, charging the sellers with fraudulent concealment and negligent misrepresentation. The trial court found in their favor, but the couple lost on appeal last year to the Washington State Court of Appeals, which rejected the claim, because the buyers were made aware of a potential rot problem when they first had the home inspected but never followed up to learn how extensive it was.

As a result, they could not bring a claim, despite what the court called “egregious nondisclosure and concealment” by the sellers. The appeals court clearly took a strict approach to the rule of caveat emptor, and that’s something buyers need to keep in mind if they have reason to believe a home might have a problem.

But many states, such as New York, Ohio, Indiana, and Alabama, soften the rule of caveat emptor through the use of common exceptions. For example, where the defects are not discoverable by reasonable inspection or when the seller has engaged in fraud, the seller will often not be protected under caveat emptor should there be serious defects in the property. For these reasons, courts that soften the rule of caveat emptor may view such concealment by the sellers as fraudulent and rule for the buyers.

What’s more, the majority of states have enacted disclosure laws requiring sellers to answer a series of questions about the property. Although the courts are just beginning to interpret these laws, they don’t seem to reduce the buyer’s duty to conduct a reasonably diligent inspection. If something unusual is disclosed by the seller, such disclosure may even raise the standard of inspection that a purchaser is obligated to perform.

Although some states do try to soften the rule of caveat emptor, the safest route for a buyer to take, as this case shows, is to have the home properly inspected and to follow up if necessary. As a real estate professional, if you’re representing the buyer, the takeaway for you is to advise your clients to be diligent when having an inspection done and to follow up on any questionable results. If you’re representing the seller, you must know your state and local laws regarding disclosure obligations. For example, in New York, a real estate licensee who is representing a seller has a duty to disclose to the purchasers “all facts known to the agent materially affecting the value or desirability of [the] property, except as otherwise provided by law.”

Mold, bedbugs, rot damage: What do owners of residential real property have to disclose to purchasers when they sell? The answer to this question depends on your state. But as this case shows, if buyers aren’t diligent, they could end up with a damaged property whether or not the sellers withheld critical information.

Neil Garfinkel

Neil B. Garfinkel is the managing partner of Abrams Garfinkel Margolis Bergson, LLP (“AGMB”), a full service law firm which he founded in 1995.  He serves as the partner-in-charge of the real estate and banking practices of AGMB, which has offices in New York and California.    
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