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Phillip C. Querin
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
Trust but Verify
[July 2004]
Generally. In the vast majority
of residential transactions, sellers strive to give complete and
truthful answers to the property disclosure form. Similarly, in
the vast majority of cases, listing agents encourage their sellers
to give complete and truthful answers to the property disclosure
form. However, all the good faith in the world will not eliminate
the need for buyers to independently verify some of the information
that is disclosed on the form.
The Reasonable Person Test. What information
may a buyer regard as reliable – i.e. unnecessary to independently
verify - versus that which should be verified or investigated further?
The answer, as most lawyers know, depends upon the reasonable person
test, i.e. what would a reasonable person do under similar circumstances?
Whenever a judge, jury or arbitrator evaluate conduct, they must
do so in light of what a reasonable person would do. The hypothetical
“reasonable person” would be another buyer faced with
a similar set of facts. They need not be an expert, a sophisticated
investor, or a college graduate – just a “reasonable
person.” If a reasonable person would have conducted themselves
differently, e.g. acted with more diligence when faced with similar
facts, then that is the standard by which the buyer will be judged.1
Factors to Consider. Here are some factors
for Realtors® to use in advising their client whether to secure
a professional opinion about the information (or lack of information)
provided by the seller.
- Information Deemed Reliable. Certainly, buyers
have the general right to believe their seller when he or she
says that the home has never had a water or moisture problem.
Absent the existence of reasonable evidence suggesting otherwise,
the buyer has a right to rely upon this information as truthful.
But if the buyer’s professional home inspection reveals
evidence along the basement walls suggesting water intrusion,
the buyer is now on notice that the seller’s information
may be incorrect. This does not mean that the seller
“lied” when they said there had been no moisture in
the home, but merely that it may not be accurate. Remember, the
property disclosure form is not a warranty or guarantee. It is
based solely upon the seller’s actual knowledge at the time
the form is completed. It is entirely possible that the seller
has no knowledge of prior leaking, since it may have occurred
before they acquired the property and their inspector may not
have called the problem out.2
- Information Not Deemed Reliable. Under the
reasonable person test, if the buyer is presented with subsequent
information, say in his or her inspector’s report, contradicting
a statement in the seller’s disclosure form, the seller’s
answer on the form is now suspect and should not be relied
upon without further investigation. (For example, the property
disclosure form reports no moisture problems, but the buyer’s
the inspection report notes evidence of water intrusion.)
- The Absence of Negative Information. Sometimes,
the issue is so material, that under the reasonable person test,
it begs to be investigated or inspected further. For example,
say that the home is constructed with a material that Realtors®
know has been the subject of controversy and/or litigation,
e.g. EIFS cladding or LP siding. In such cases, even though the
seller has no negative information about the product, the buyer
should be encouraged to have it investigated further as a part
of the inspection contingency. Thus, even though the buyer has
the general right to rely upon the seller’s statement that
he or she has no knowledge of a problem with the siding, the catastrophic
cost of remedying a siding problem can be so significant, that
in many circumstances it should be investigated just to verify
the absence of any problem.
- Accepting the Seller’s Explanation – Half
Truths. Do buyers have the right to rely upon a seller’s
explanation about the scope of a problem or the remedial steps
taken to cure it? Yes. But should they do so blindly, without
seeking to verify for themselves that the seller is giving a complete
answer? No. It’s like having your mother testify in court.
Of course she’s going to say you were a good child. In other
words, buyers should trust but verify what the seller says. Buyers
should not accept everything at face value, since they - not the
seller - will have to live with the problem after closing. If
the property disclosure form honestly states that the home had
been repaired to remedy a pervasive water problem and “it
has never leaked again,” buyers may not want to stop there.
They should consider having their own independent expert verify
the nature of the problem and the adequacy of the remedy.
When Both The Seller And Buyer Fail To Act Reasonably.
Frequently, the law is called upon to make a choice between two
types of conduct that might not have met the reasonable person test.
For example, say the seller discloses that the home has leaked water
in the past, but the problem was localized and fixed, and it has
not leaked again. The seller presents the buyer with a copy of a
report verifying all of this. But what the seller does not disclose
is that he or she actually has, in their possession, another
report stating that the real problem was structural and widespread,
and over time, the failure to fix it would result in severe and
more costly repairs in the future. The buyer accepts the seller’s
first report3
and does not have their own expert investigate the nature of the
problem or adequacy of the remedy. In this case, both seller and
buyer did not act reasonably. The seller “hid the ball”
and the buyer conducted no independent verification. May the seller
escape liability by now arguing that even though he or she did not
tell the entire story, they gave the buyer enough
information that they could have found out had they hired their
own expert? On the one hand, the Sale Agreement arguably contains
fair warning to buyers to conduct their own investigation. On the
other hand, the property disclosure form contains an affirmative
representation that the seller knows of nothing else about the property
or its value that a buyer would want to know. Although all cases
are different, the general rule is that the law will protect the
buyer, even though he or she failed to act entirely reasonably.
This is because the law in Oregon, as elsewhere, is that a seller
may not “hide” behind an AS-IS clause in the Sale Agreement,
in order to perpetrate a fraud.4
The Role of Realtors®. The above
discussion has concentrated primarily upon the standard of care
for buyers based upon a reasonable person analysis. However, what
cannot be ignored is the role of the listing and selling agents.
As most Realtors® know, clients frequently make decisions to
forego inspections in order to save money. While this is not uncommon,
agents should avoid the appearance of ever condoning the waiver
of inspection rights. Clients can have short memories. In the example
above, the most likely scenario is that the buyer would argue that
the seller committed fraud, and their agent breached their
fiduciary duty in not encouraging them to obtain the necessary inspections.
For this reason, Realtors® should actively encourage their clients
to obtain inspections – even if they know the advise will
be ignored. More is better than less. If the buyer elects to ignore
their agent’s recommendation, the Realtor® should place
a note in the file that they discussed the issue and the buyer elected
not to have the recommended inspection. This will go a long way
in helping protect the Realtor® from a claim that they concurred
in the buyer’s decision not to learn more about a potential
problem.
FOOTNOTES
1
Caveat: Since real estate brokers are charged with certain
fiduciary duties in the representation of clients, the analysis
changes dramatically. The question becomes what would a reasonable
agent do under similar circumstances? The answer to this test will
be based upon the standard of care that agents have in the geographic
area in which they practice. This is why, when Realtors® are
charged with a breach of the applicable standard of care, which
is the essence of an E & O claim, that the plaintiff is usually
required to introduce testimony from an expert, normally (but not
always) a Realtor® themselves, to say that the defendant failed
to meet the applicable standard of care.
2
However, sellers may not close their eyes to the obvious. If the
evidence of water intrusion is clear and unmistakable, even though
it did not occur during the seller’s ownership, answering
“no” to the question about moisture may not be a completely
honest answer.
3
When presented with a report or other written information explaining
a problem and the remedy, buyer agents should asked the seller or
listing agent whether this is all of the information they
have on the subject. The buyer should endeavor to obtain copies
of everything the seller has so the buyer’s expert can conduct
a fully informed and complete investigation.
4
See, Wilkinson v. Carpenter, 512 Or 311 (1976).
© Copyright 2004. Phillip C.
Querin, Davis Wright Tremaine. No part may be reproduced without
the author’s express written consent.
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