WP: Disclosure: Caveat Emptor/Buyer Beware

II. Caveat Emptor – “Buyer Beware”

Caveat Emptor is a Latin phrase meaning “buyer beware.” Under the doctrine of caveat emptor, the seller is under no duty of disclosure to the buyer. The risk of defect in the property falls squarely on the purchaser. Few states today still adhere to a strict application of caveat emptor. Ohio only applies the doctrine in circumstances where the defect is open to observation or discoverable upon a reasonable inspection, the purchaser has an unimpeded opportunity to inspect the premises, and the seller has not engaged in fraud.

In analyzing the duty of disclosure, one should first look back to the common law doctrine of caveat emptor. Caveat emptor is a Latin phrase which means “buyer beware.” The origins of the doctrine can be traced back to feudal England. Prior to the enactment of the Statute of Uses in 1536, land was not freely transferable as it is today, but rather was nearly entirely held by the monarch or members of the “landed gentry,” and occupied by tenants who worked and lived on the land for the benefit of the landowner. When the landowner died, his property generally passed to his oldest son. Since land was generally transferred either as a gift from the crown as payment for some duty performed, or as an inheritance, and was worked by tenants who lived on the land and built their own dwellings thereon, no one asked whether there was a problem with water in the basement or if the foundation was solid. It simply was not a concern.

After the enactment of the Statute of Uses, landowners were free to transfer their property rights. Subsequently, a buyer’s primary concern was whether the person purporting to sell the land actually had a good title to sell, not the physical condition of the property. The land was still primarily being used for the production of rents for the benefit of the landowner; the tenants who lived on and worked the land were still responsible for erecting and maintaining their own dwellings. Thus, again, no one inquired of the physical condition of the property.

As the use of the land began to change, purchasers became more concerned with the condition of the property itself and not just the title. The seller had no duty, however, to make any disclosures to the buyer. The purchaser was presumed to have inspected the property personally and would not be protected from his or her own ignorance of the condition of the property being purchased. This notion persisted and permeated the common law, where the general rule became that the buyer took the property at his or her own risk. The seller had no duty of disclosure to the purchaser; the responsibility was upon the buyer to know what he or she was purchasing, hence, “buyer beware.” This afforded sellers much protection from purchasers’ claims that the seller did not disclose the true condition of the property; the seller was generally under no duty to disclose anything to the buyer.

Today, however, most states have rejected the strict application of caveat emptor in real estate transactions, making it more of the exception than the rule. Ohio’s position on the doctrine of caveat emptor in real estate transactions is stated in Layman v. Binns, 519 N.E. 2d 642 (Ohio 1988). In Layman the purchasers of a home (the Laymans) brought a cause of action for fraudulent concealment against the sellers (the Binnses), alleging the sellers had concealed a structural defect in the house. Apparently, during the construction of the home, the foundation gave way and caused a bow in one of the basement walls. Steel beams were then put into place to support the wall. When the Binnses decided to sell the house, they informed their agent about the wall and the corrective steel beams. The Laymans viewed the home with an agent and saw the beams, however, as they testified, they believed the beams were just part of the structure.

The purchase contract which was eventually signed contained language to the effect that (1) the contract was the entire agreement between the parties, (2) no representations were made by either party except those contained therein, and (3) the purchasers were relying on their own inspection of the house regarding its condition.

Approximately four years later, the Laymans decided to sell the house. At this time the defective wall was brought to their attention by another agent. The estimated cost to repair the wall was between $30,000 and $50,000. The Laymans subsequently filed suit against the Binnses for fraudulent concealment.

The Ohio Supreme Court decided the case on the basis of the doctrine of caveat emptor, that had been articulated by the Court over thirty years earlier in Traverse v. Long, 135 N.E. 2d 256 (1956). There the Court held that:

The principle of caveat emptor applies to sales of real estate relative to conditions open to observation. Where those conditions are discoverable and the purchaser has the opportunity for investigation and determination without concealment or hindrance by the vendor, the purchaser has no just cause for complaint even though there are misstatements and misrepresentations by the vendor not so reprehensible in nature as to constitute fraud.

Id. at 259.

Summarizing the rule, the Court held in Layman that the following conditions must be present in order to trigger the application of the rule of caveat emptor: “(1) the defect must be open to observation or discoverable upon reasonable inspection, (2) the purchaser must have an unimpeded opportunity to examine the property and (3) the vendor may not engage in fraud.”

Applying the rule to the facts, the Court held that the defect the Laymans complained of was open to observation and discoverable. Although there was conflicting evidence as to how slight or obvious was the bulge in the wall, and though the purchasers testified that they were not aware the steel beams were an indication of a defect, the Court determined that the condition was discoverable upon a reasonable investigation. “The purchasers had a duty to inspect and inquire about the premises in a prudent, diligent manner.” Layman, 519 N.E. 2d at 644. Because Mr. Layman had an unhindered opportunity to examine the walls, he should have inspected the wall more carefully and asked about the beams. Id.

The Court also addressed the issue of whether the sellers committed fraud upon the purchasers. The Laymans claimed the Binnses’ failure to disclose the existence of the bow in the wall amounted to fraudulent concealment. The court disagreed. To maintain an action for fraud, the purchaser must demonstrate that the seller failed to disclose material facts where the seller was under a duty to disclose the information. A seller, however, only has a duty to disclose information regarding latent material defects – those not readily discoverable or available upon a reasonable investigation by the purchaser. Id. Therefore, since the Court concluded that the defect was not latent, but open to observation and discoverable, the seller was under no obligation to disclose any information, and the Laymans’ cause of action failed under the rule of caveat emptor. Id. at 645.

More recently, in Bell v. Perkins, the doctrine of caveat emptor prevented the buyer from rescinding her land installment contract after she discovered that the basement had flooding problems. 124 Ohio App. 3d 539, 542 (Preble Cty. 1997). The flooding did not qualify as a latent defect because the buyer could not show that she did not notice any water damage in the basement during inspection. In fact, the record showed that the buyer was indeed aware of many problems in the basement, including rotting sills, rusting furnace vents, leaks in the walls, crumbling masonry, dry-rotted floor joists, and a damp floor. Id. at 542. The court denied recovery, concluding that a prudent person would have made further inquiry or hired an expert to appraise the situation. Id.

Similarly, in Zanko v. Kapcar, the doctrine of caveat emptor prevented the buyer from recovering damages because the defects in the wood floor were open to observation or discoverable upon reasonable inspection. 2002 Ohio 2329, at 26 (Summit Cty. May 15, 2002). The buyer could have rolled back the rugs to observe the floorboards and could have examined the underneath of the floor from the basement crawl space. Id. Additionally, the buyer failed to reschedule an appointment to inspect the property after the sellers cancelled the first one, and she was unable to demonstrate that the sellers impeded in any way her opportunity to inspect the house. Id. at 27.

Note however that the doctrine of caveat emptor may not protect a seller from liability if the seller concealed or fraudulently misrepresented the defects. Czarnecki v. Basta, 112 Ohio App. 3d 418, 422-23 (Cuyahoga Cty. 1996). In Czarnecki, the buyers were awarded $30,000 toward the cost of the repairs when seller failed to make the buyer aware of extensive water damage throughout the house and affirmatively denied that the roof leaked. The seller intentionally did not tour the buyer through damaged portions of the house and went so far as to hide up to forty air fresheners in the second floor of the house to mask the odor associated with the water damage.

These same caveat emptor rules apply to the cooperating broker who is working with the buyer. For example, in Black v. Cosentino, the buyers sued, in addition to the seller, the real estate agent who had represented them in the sale of their home and assisted them with the purchase of seller’s home as a subagent of the listing broker. The buyers claimed misrepresentation and concealment in the purchase of a home. 117 Ohio App. 3d 40, 42 (Lorain Cty. 1996). The buyers alleged that the cooperating agent and sellers concealed water problems, which resulted in basement and foundation damage, as well as the results of an FHA inspection and the reasons for denial of financing. The buyers’ claim was denied under the doctrine of caveat emptor because the disclosure form had indicated past water leakage in the basement. Id. at 45. This disclosure provided notice of the possibility of problems, and buyers had the opportunity to arrange for an expert inspection. Id. In addition, the conditions evidencing dampness reported by the buyers after they moved in were open, observable, and readily apparent upon inspection. Id. The agent was not liable for fraud because the buyer could not prove that the agent knew or should have known about the condition of the house; the buyers admitted that the agent did not make any representations concerning the property’s condition. Id. at 46.

The doctrine of caveat emptor also precluded the buyers’ claim against the seller with respect to the FHA inspection. Buyers argued that had they known that the FHA report showed items that needed repair, they never would have purchased a home with so many defects. Id. at 46. All of the FHA areas of concern, however, were open and observable and involved minor repairs. Id. Additionally, the buyers admitted that they were aware of many of the same problems that the FHA found. Again, buyers could not provide evidence that the agent had misrepresented the condition of the property.

ILLUSTRATION:

Mr. Smith is the executor of an estate that owns real estate in Ohio. He listed the house with Mr. Brown’s real estate agency. No property disclosure form was required because the property was in an estate. Mr. Smith tells Mr. Brown that his roof leaks and that water stains are visible in the ceiling. Mr. Jones is a prospective buyer. When he comes to the open house, the water stains are clearly visible but Mr. Jones makes no inquiry as to their cause. He buys the house and subsequently discovers the leaking roof. He sues Mr. Smith and Mr. Brown for not disclosing the condition of the roof. Mr. Jones loses because he had an unimpeded opportunity to inspect the house, the defect was observable or discoverable upon a reasonable inspection, and neither Mr. Smith nor Mr. Brown engaged in fraud.