June 22, 2017

‘Trust Me, You'll Love It': Caveat Emptor in Real Estate Transactions

Many people are familiar with the phrase “buyer beware,” or its Latin version, “caveat emptor.” In the sale of real estate, caveat emptor means that (absent contract language or terms to the contrary) a buyer purchases the property as-is, without warranties of title or of condition of the property. This also means that the seller ordinarily would not have a duty to disclose any adverse conditions that may exist regarding the property. 

The doctrine particularly applies to commercial real estate, where courts often presume that sophisticated purchasers will conduct their own due diligence. In most instances, caveat emptor does not impose any affirmative duty to disclose information regarding the condition of commercial real property. Inadequate due diligence, or the failure to discover material issues with regard to a property prior to purchase, can leave an unwary commercial real estate buyer with a property that has substantial and unforeseen defects. 

There are limits to the doctrine, however. For instance, in some jurisdictions, a seller may be obligated to disclose issues that materially impact health and safety. A seller may even be required to disclose a material defect or damage to property that occurs shortly prior to closing when due diligence is complete and a buyer has no other means of discovering the issue on its own. A seller’s failure to disclose information in these situations could be grounds for fraud and/or rescission of a purchase contract. 

Affirmative actions by the seller can create extra-contractual liability, however. Mere silence about a defect does not give rise to an actionable fraud claim, but that changes if the buyer makes inquiries about a condition, quality or characteristic of the commercial real estate. At this point, if the seller undertakes to disclose facts about the condition of the property, then the seller has to disclose the whole truth without concealing material facts. Once the seller begins to address the specific condition of the real property, the seller has to take care not to do something that would prevent the buyer from making a thorough inspection of the property. Actionable conduct includes any behavior by the seller that points to or suggests suppression of the truth or that distracts the buyer’s attention from the true facts. A seller who does not make a full disclosure under these circumstances can be liable for fraud or for fraudulent concealment. And the fraud claim survives “as is” contract language disclaimers.

In many states, a seller’s obligations are fundamentally different in the sale of residential real estate. Many states have adopted a residential real estate sales disclosure statute requiring that a seller complete and sign a disclosure form and submit the form to a prospective buyer before an offer for the sale of the residential real estate is accepted. These disclosure forms codify the obligation to be affirmatively forthright about the condition of residential real estate. Under these statutory frameworks, residential real estate purchasers are presumed to rely on these representations and the representations are incorporated into the contract. Moreover, if a seller knowingly makes misrepresentations in the sales disclosure form, then the seller may also be liable for fraud. 

The antidote to these issues for many buyers is to insure that the prospective real estate purchaser – particularly in a commercial setting – conducts a thorough investigation of the real estate. The buyer should also ask for and obtain information about material aspects of the real estate from the prospective seller. Additionally, inserting affirmative representations about the condition and suitability of the real estate in the parties’ contract is sound practice, too. 

Sellers need to be careful about the same issues, but in reverse. A commercial seller need not and should not make affirmative representations concerning the condition of a piece of property unless required to do so by the contract. Moreover, if the seller decides to make affirmative representations about the condition of the property, those representations need to be accurate and complete or they can be actionable.

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