WP: Disclosure: Purchaser’s Duty to Inspect

IV. Purchaser’s Duty to Inspect

The purchaser has a duty to conduct a reasonably diligent inspection and inquiry of the property he or she intends to purchase. However, this duty may terminate where the seller affirmatively responds to the buyer’s question regarding a condition of the property.

The seller and his or her agent have a duty to disclose defects not observable or discoverable upon a reasonable investigation. Therefore, a duty remains upon the buyer to conduct a reasonably diligent inspection and inquiry of the property he or she intends to purchase to find the discoverable defects. See Layman, 519 N.E. 2nd at 644. The buyer cannot hold his or her agent liable for defects that the buyer failed to adequately inspect. In Kossutich v.Krann, for instance, the buyer’s agent was not liable for statements that later proved inaccurate. 1990 Ohio App. LEXIS 3449, *7 (Cuyahoga Cty. Aug. 16, 1990). The buyer failed to establish that his agent replied falsely when asked about a stained corner of the basement where leakage later developed. The buyer did not convince the court that the agent had prior knowledge of the condition of the basement such that she would have known that her statement about the stain was inaccurate. Id. at *7. The agent was relieved of liability despite the fact that she did not conduct independent research to verify the accuracy of her statement to the buyer. Id. The court rejected the buyer’s argument that a real estate salesperson is an expert at detecting basement leaks and that the agent, therefore should have known the spot signified a leakage problem. Id. at *8.

The standard by which the purchaser’s conduct should be measured is that of “ordinarily prudent persons of their station and circumstances.” Traverse v. Long, 135 N.E. 2d 256, 259 (Ohio 1956). The average purchaser will be held to a lower standard than a builder, plumber, electrician or real estate professional. As a general rule the purchaser may not rely on representations of the seller or the seller’s agents regarding matters where the true facts are equally available to both parties, such as matters of public record. The purchaser’s duty to investigate may terminate, however, if the purchaser directly asks the seller or the seller’s agent a question regarding a condition of the property and receives an affirmative answer to the question. For example, in Zanko v. Kapcar, the sellers fraudulently represented to buyers that they had completely redone the electronic wiring and that it was up to code. 2002 Ohio 2329, at 31 (Summit Cty. May 15, 2002). There was no evidence that the buyer should have had any reason to question the truth of that representation, and therefore she was justified in relying on it despite the fact that she did not have a professional inspection of the house.

Similarly, in Brewer v. Brothers, the sellers expressly misrepresented the quality of the electrical system they had personally installed. 82 Ohio App. 3d 148, 149-52 (Warren Cty. 1992). The buyer relied on the representations in choosing not to have an electrical inspection conducted. Id. Even without the direct misrepresentation, the doctrine of caveat emptor would not have protected the seller from liability because these defects in the system were not open to observation and could not have been discovered by the average person. Id. at 153.

Additionally, if the seller subsequently becomes aware of material facts not known to the buyer, the seller must communicate this information to the buyer or risk being liable for fraud. Similarly, if a seller or agent makes a statement that is true when made but conditions change, rendering the prior statement false, the buyer must be informed of the change in conditions.

For example, a broker represented to prospective buyers that a house was “solid” and “sound.” The broker subsequently learned the house had termite infestation but did not communicate this information to the buyer. The buyer bought the home, moved in, and almost immediately discovered evidence of the termites. The purchaser sued and prevailed against the broker under a theory of fraud. The Court held that the broker’s non–disclosure, coupled with the hidden nature of the impairment, entitled [the purchaser] to rely upon [the broker’s] prior representation with regard to the overall soundness of the property, and imposed a duty upon [the broker] to disclose to [the purchaser] the existence of the termite infestation.” Miles v. McSwegin, 388 N.E. 2d 1367, 1370 (Ohio 1979). Once the seller or broker makes a representation, he or she is under an obligation to give the buyer all subsequently acquired information on the subject so as to not render the original statement misleading.

In Foust v. Valleybrook Realty Co., 446 N.E. 2d 1122 (Ohio Ct. App. 1981), an Ohio court of appeals affirmed a judgement for plaintiff-purchasers who had been misled to believe that tap-in to a new sanitary sewer system for the home was optional when it was really mandatory. The broker told the purchasers that while the home had a septic system in place, tap-in to a sanitary sewer line was available if they chose to tap in. However, the broker lived in the area himself and was aware of a tentative assessment on his own property for tap-in to the system. He also told the purchasers the cost to tap-in would be around $500, but the purchasers spent nearly $5,000 in charges, fees and interest thereon. Although it was at least conceivable that the purchasers could have independently investigated and discovered whether the tap-in was indeed optional or mandatory, the court nonetheless entered judgement for the purchasers on their cause of action for fraudulent misrepresentation. Defendants argued there could be no fraud because purchasers had no right to rely on Defendants’ oral representation and should have uncovered the truth through a reasonably prudent investigation. Foust, 446 N.E. 2d at 1125. The court rejected the broker’s argument for a number of reasons. First, while it is true Ohio law requires a purchaser who is put on notice as to any doubt of the truth of a representation to investigate before relying on the statement, there was apparently nothing done or said to give the purchasers any doubt as to the validity of the representation. In addition, the court considered this a material fact which was not visible and, therefore, subject to disclosure by the broker. Foust, 446 N.E. 2d at 1125. Finally, and perhaps most importantly for brokers, aside from the general duty of disclosure a broker owes to the purchaser regarding material facts not visible or discoverable upon reasonable inspection, the trial court and court of appeals found the underlying circumstances of the transaction significant: the purchasers were unfamiliar with the area, were from out-of-town, and were leaving the area every weekend apparently to go back home. Under these circumstances, the courts found the purchasers “had a right to rely on the representation of [the broker] and were not under a duty to inquire of others after receiving answers to their questions. Id. This would indicate that facts and circumstances will be a factor in a case, such as this, where it is questionable whether this is something one would normally discover in a prudent, diligent investigation. So, brokers beware! Although a duty does remain on purchasers to do a reasonably prudent inspection of the premises, the burden is falling more heavily than ever on brokers to make sure that purchasers are not buying defective properties.

ILLUSTRATION:

Mr. Smith lives in Ohio and has listed his home for sale with Mr. Brown’s real estate agency. Mr. Smith’s home is located very near a marshy creek. Every spring he has a problem with high water, so he installed two sump pumps in his basement. The pumps are in plain view. Mr. Jones, a prospective buyer, attends Mr. Smith’s open house. He sees the two pumps but does not inquire as to their purpose. Mr. Jones buys the house. The subsequent spring rain is unusually heavy. Mr. Jones’ basement sustains some water damage despite the two sump pumps, which could not keep up with the water. Mr. Jones sues Mr. Smith and Mr. Brown for failure to disclose the water problem. Mr. Jones loses because had he conducted a reasonable inspection and inquiry, he would have uncovered the existence of the problem.