Let the Buyer Beware!

Let the Buyer Beware!

Is Caveat Emptor Alive and Well?

By Alexander M. Andrews, Esq. and Matthew C. Krejci, Esq., Ulmer & Berne LLP, Attorneys at Law, Columbus Ohio

History

The longstanding doctrine of caveat emptor, or "let the buyer beware", was first adopted by the English court system in the early 17th century. The doctrine proposed that a "seller bore no responsibility at all for the quality of the product he was selling unless he expressly guaranteed it or gave a warranty to the buyer." The doctrine was established in 1603 after a goldsmith sold a stone affirming that it was a "bezar stone," more commonly known as the gallstone of a goat, which at the time held medicinal value. The buyer claimed that the seller had falsely represented the value of the stone. The Court held that the "bare affirmation that it was a bezar stone, without warranting it to be  

so, is no cause of action." The Court correctly stated that every seller will say that his wares are good to a potential buyer when trying to consummate a sale.

It was not until the early 19th century that the doctrine of caveat emptor made its way across the Atlantic to American courts. A disgruntled buyer was told that the wood he was purchasing was a valuable grain known as "brazilletto." Unbeknownst to both the buyer and seller, the wood turned out to be the less valuable "peachum." The buyer filed suit for the refund of the price and the Court held in favor of the seller because no warranty was made.

Application to Real Property The post-World War II increase in housing produced a building industry revolution and growing awareness of the comparative powerlessness of would be home owners in the face of inferior or deficient quality. Because the builder/seller holds a superior position and is the only one who can prevent the occurrence of major defects, courts often placed the liability on the party best able to prevent and/or bear the loss. Two hundred years after its introduction into the American court system, the doctrine of caveat emptor remains strong.

Caveat Emptor in Ohio

The Ohio Supreme Court adopted caveatemptor in the 1950's:

The principal 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.

The Supreme Court of Ohio reaffirmed the doctrine in a 1988 case when purchasers claimed that the sellers of a home fraudulently concealed a structural defect in the house, namely a bow in a basement wall. Steel i-beams had been installed to support the wall. The seller informed his REALTOR® of the bowed wall, but did not mention the bowed wall to the potential buyers or their agent. The buyer saw the i-beams, but did not question their purpose. Of course, the defect was brought to their attention after the buyers had been living in the house for a few years. Using caveat emptor, the Court held that because the defect was open to observation (the basement wall was bulging), and because the purchasers had an unhindered opportunity to examine the basement, the purchasers were barred from recovery.

Fraud Claims

Often in building defect cases, a fraud claim will also be made against the seller. An action for fraud may be based on a seller's failure to fully disclose facts of a material nature where there exists a duty to speak. A seller has a duty to disclose material defects which are latent, or are not readily observable or discoverable through a purchaser's reasonable inspection. The doctrine of caveat emptor bars recovery in an action by the purchaser for a structural defect in real estate where 1) the defect is open to observation or discoverable upon reasonable inspection; 2) the purchaser had a full and unimpeded opportunity to examine the premises; and  3) there is no evidence of fraud on the part of the seller.

Today, under the doctrine of caveat emptor, a seller has an obligation to disclose only those defects known by the seller that could not be readily discoverable by reasonable inspection. With the statutory requirement that a seller of residential property complete and deliver to each prospective purchaser a residential property disclosure form disclosing various "material matters relating to the physical condition of the property" and "any material defects in the property that are within the actual knowledge of the transferor," it is increasingly difficult for the buyer to prove that he/she was unaware of a particular problem. A finding of fraud requires proof that the seller had actual knowledge  of the alleged defect and purposely misrepresented or concealed it.

In addition to the residential disclosure form, buyers often hire their own professional inspectors to look closely at the home and prepare a written report. This is even recommended on page one of the disclosure form in indiscreet capital letters. The courts hold that, "once alerted to a possible defect, a purchaser may not simply sit back and then raise his lack of expertise when a problem arises." When a purchaser becomes aware of a possible problem, he or she has a duty to either 1) make further inquiry of the owner, who is under a duty not to engage in fraud, or 2) seek the advice of someone with sufficient knowledge to appraise the defect. Courts have held that even when structural defects are described in less severe terms than what is actually true, notice to the buyer of the defect precludes claims of fraud and misrepresentation. In the recent Kramer v. Ratterman case, the evidence established that the sellers had disclosed that the retaining wall in their backyard had been built to solve problems with settling. The buyers chose not to have an expert inspection of the property where one was clearly warranted. Five years after the buyers purchased the home, the retaining wall collapsed and the backyard fell into a ravine, prompting the lawsuit. The purchasers were found to have had ample notice of the erosion and slippage in the backyard. They were not  impeded in their inspection of the property and had even had a civil engineer (the buyer's brother in law) give his opinion on the adequacy of the retaining wall. The court held that the sellers disclosed the defects as required by law, and therefore the buyers could not claim justifiable reliance on any representations made by the sellers.

Can a Buyer Ever Recover?

There are certainly cases in Ohio where a seller's conduct has enabled a buyer to recover, i.e., intentionally painting over a defect so a buyer or a buyer's inspector would not find it. There are also cases in which sellers have not been completely honest when completing the disclosure form and the buyers were able to prove intent to mislead. However, in a great many cases, the doctrine of caveat emptor prevents recovery by the buyer and courts find in favor of the seller. With the advent of residential disclosure forms and the prevalence of professional inspectors hired by buyers, there is no reason to believe that this trend will change.

"As Is" Contracts

Occasionally, buyers will agree to enter into contracts for homes in an "as is" condition. Ohio courts have noted that there are three types of fraud in real estate transactions: fraudulent misrepresentation, fraudulent concealment and fraudulent nondisclosure. When property is

accepted in an `as is' condition, the seller is relieved of any duty to disclose. Thus, the seller in an "as is" transaction cannot be liable for fraudulent nondisclosure. However, while an `as is' clause bars a claim for fraudulent nondisclosure, it does not preclude recovery for fraudulent misrepresentation. If a jury determines that a seller was aware of a more serious problem than he represented to the buyer, or if he purposely concealed the condition, the seller could still be held liable for fraud.

Conclusion

Caveat emptor stands for the proposition that purchasers must examine and judge property for themselves before purchasing it. The doctrine applies to all conditions that have been disclosed by the seller. Caveat emptor does not apply if the condition complained of is a latent defect. A defect is open and observable, and not latent, if an ordinary prudent person would discover it upon reasonable inspection. So, whether you are selling a goat's gallstone or a home, err on the side of caution. Disclose as much as you know to the potential buyer. This may avoid a lawsuit down the road.

Alexander M. Andrews is Partner-In-Charge of the Columbus office of Ulmer & Berne LLP where he focuses on complex business and real estate litigation. He can be reached at 614-229-0000 or aandrews@ulmer.com. Matthew C. Krejci is an associate attorney in the firm's Columbus office.