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Ohio Broker found liable for failing to disclose a negative inspect (Part II)

By Peg Ritenour, OAR Vice President of Legal Services/Administration

Last week we began to explore a recent Ohio court case that centered on the issue of disclosing a negative home inspection report and the liability of the broker and seller. In Part I we provided detailed background and the impact the court’s findings had on the broker.

In short, the lawsuit involved the sale of property at a lake in southern Ohio. A purchase contract was entered into — with the broker acting as a dual agent. A subsequent home inspection uncovered some issues that the buyer and seller were unable to resolve, resulting in the termination of the purchase contract. The seller began to have some repairs made and the property was again shown by the broker. The broker was, once again, a dual agent with a new purchase contract that contained an inspection contingency and an “as is” clause. The buyer never obtained an inspection. Less than a year after closing, several issues surfaced and the buyer filed suit. In Part I we looked at findings against the broker — both in the initial case and in the appellate court. Click here for a Part I refresher.

Here’s the seller’s story…

Now let’s look at how the seller fared on appeal. The seller argued that the trial court’s decision was wrong for several reasons. First, the seller argued that the “as is” language in the purchase contract and the doctrine of caveat emptor (or “buyer beware”) protected the seller from liability and that the lawsuit should have been dismissed by the trial court. The Fourth District Court of Appeals disagreed, based upon existing Ohio case law that caveat emptor does not apply if a seller engages in fraud. Likewise, the court reaffirmed that under Ohio law an “as is” clause will not protect a seller who engages in active fraud by positively misrepresenting  or concealing a defect.

In this case, the court found that the seller engaged in fraudulent misrepresentation by giving the buyer a Residential Property Disclosure form that did not reflect the findings of the earlier inspection report. Instead, the buyer was given a form on which the seller indicated that she had no knowledge of any movement, shifting, cracks, settling, grading or erosion problems. In upholding the finding of fraud against the seller, the Court stated: “If a seller fails to disclose a material fact on a residential property disclosure form with the intention of misleading the buyer, and the buyer relies on the form, the seller is liable for any resulting injury.”

The appellate court also upheld the trial court’s finding that the seller had engaged in fraudulent concealment. This finding was based upon testimony from a structural engineer that the work the seller did was superficial and was done to hide the structural defects. Although the seller argued that the engineer should not have been permitted to testify as to what the seller knew or that the repairs were done by her to intentionally conceal the defects, the court rejected this argument.

Finally, the seller argued that the lower court erred by finding her personally liable because the property was held in the name of an LLC. Here, the Court of Appeals determined that because the seller had signed all documents related to the transaction in her own name without indicating that she was signing on behalf of the LLC, that she was personally liable.

The seller has filed a notice of appeal with the Ohio Supreme Court seeking reversal on two grounds. First, the seller again challenges the admission of the structural engineer’s testimony as to her knowledge of the defects and whether she purposely misrepresented or concealed these defects. The seller’s second basis for appeal is based on the concept of imputed knowledge. Here the seller argues that because the broker also represented the buyer, the broker’s knowledge of the latent defects is imputed to the buyer. Moreover, the seller argues that the broker’s knowledge that she was acting on behalf of the LLC was also imputed to the buyer.

It is important to note that the Ohio Supreme Court is not required to accept all appeals. We will let you know whether it agrees to take this case. However, even if the Supreme Court accepts this case, the Court will not review the appellate court’s ruling that a broker can be liable for breach of fiduciary duty to a buyer by failing to disclose a negative inspection report, because that issue was not appealed to the Supreme Court. Thus, that ruling stands.

Tags: legal, Legally Speaking