New Case Signals Return to "Buyer Beware"

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A recent case from the Washington State Court of Appeals signals a strong return to the legal principle of caveat emptor – otherwise known as “buyer beware”.  It’s important that real estate brokers understand the magnitude of the decision, whether they represent sellers or buyers.

The case is known as Douglas v. Visser, and even the Court conceded that the facts are “egregious”. Terry Visser, a real estate broker, and his wife Diane, purchased a property in Blaine in 2005, with the intent of renovating and renting it.  They quickly ran into trouble and decided to “cheap out” on the repairs and sell the property.  When their laborer told them that the floor joists were too soft to screws the flooring down, Visser told him to somehow “find a way to attach the wood”.  When he told them that the wood underneath the bellyband was rotted, Visser instructed him to “cover it with trim … cover it in caulking, use a bunch of nails, paint it and seal it”.  The laborer did as told and said nothing.

Visser then put the property on the market, and received an offer to purchase it from Canadians Nigel and Kathleen Douglas.  Visser provided Douglas with a Seller Disclosure Statement that was not fully filled out, and most of the questions were answered “don’t know”.  The Douglases sent Visser a series of followup questions and requested a copy of the Vissers’ inspection report.  Visser submitted handwritten responses to the Douglases, which they considered inadequate.  The inspection report was never provided.

The Douglases next had their own inspection, and their inspector discovered a “small area of rot and decay near the roof line” and a “rotted sill plate”.  He told the Douglases that these were not structural problems, but that they should be repaired if conditions degraded rapidly.  The Douglases did nothing further regarding the physical condition of the house, and the transaction was closed.

Shortly after taking possession, the Douglases discovered the extent of the problems and called the inspector back.  When he removed a ceiling tile, insulation and water came down from behind it.  Alarmed, Visser hired a mold specialist, who told them that it would be cheaper to demolish the house and rebuild than to repair the existing structure.  Two subsequent inspections revealed that Visser had knowingly concealed mold and rotted wood conditions.  The Douglases sued the Vissers for fraudulent concealment, negligent misrepresentation, violations of the Consumer Protection Act, breach of contract and breach of Visser’s duties as a real estate broker.

Given this level of deception and the “egregious” conduct of Visser, one would expect that the Court would easily rule in favor of the Douglases.  And that’s what happened at the trial court.  However, on appeal the Washington Court of Appeals reversed the trial court and held in favor of Visser, stunning nearly everybody in the real estate and legal communities.

To understand why, a little history is necessary.

In 1988, the Court of Appeals decided in Puget Sound Services v. Dalarna Management that a buyer had a duty to inquire further after discovering potential water leakage that was “readily discernible”.  In that case, the buyer’s inspector noted water stains and loose tiles, but the buyer did not inquire further.  It was only after the sale closed that the buyer discovered that the water damage was much worse than expected.  Dalarna is Washington’s leading caveat emptor case.

Just six years later, the Washington State Legislature passed RCW 64.06, the “Seller Disclosure” statute.  This statute requires the seller of residential property of 4 units or less to provide the purchaser with a “Form 17” within 5 days of mutual acceptance.  That form, which is not part of the transaction, requires the seller to disclose any defects in the physical condition of or the title to the property.  RCW 64.06 represented a statutory counterpart to the “caveat emptor” holding of Dalarna.

Reading these together, the buyer has a common law duty to investigate under Dalarna, but at the same time, the seller has a statutory duty to disclose under RCW 64.06.  Those duties overlap, however, and there was a lot of uncertainty in the gray area between the two.

In 2007, the gray became clearer as the result of Alejandre v. Bull.  In that case, the seller failed to disclose problems with the septic system of a house in Walla Walla.  The buyer’s inspector looked into the septic system, but noted that he was unable to check the drainfield because of problems with the baffles.  The buyer failed to investigate further, and after the system failed, he sued the seller.  In a surprising decision, the Washington Supreme Court held in favor of the seller, who had undoubtedly lied on the Form 17, because the purchase and sale agreement had “allocated the risk of economic loss” to the buyer through the inspection contingency and other language.  The decision was a milestone because it was the first major case in which the seller had lied on the Form 17 and gotten away with it.

The Douglas v. Visser represents even a more aggressive move in this direction.  In addition to failing to disclose the defects on the Form 17, the seller had actively directed his laborer to conceal the defects.  Reading these cases together, the seller may now intentionally conceal a defect and lie about it, and as long as the buyer’s inspector has some indication of a potential problem and the buyer fails to investigate further, the seller will survive a lawsuit.  It is unknown whether or not the case will be appealed to the Supreme Court.

So what’s a broker to do?

Representing the Seller:  Advise the seller to be as truthful and thorough as possible in filling out the Form 17.  The Douglas v. Visser case does not change this advice.

Representing the Buyer:  Advise your client to be extremely diligent.  Do not advise them to “let the inspection report speak for itself”.  If the inspector identifies a potential problem, the Visser case stands for the proposition that the buyer must investigate further.  Failure to do so will mean that there will be no recovery against the seller, even if they lied on the Form 17.  And remember that under RCW 18.86.50(c), brokers have the affirmative duty to “advise the buyer to seek expert advice on matters relating to the transaction that are beyond their expertise”.  Stated another way, the buyer has a heightened duty to investigate and you as their broker have an affirmative duty to refer them to experts.

Dual Agents:  Proceed cautiously because you will have to satisfy both of these duties.  Advise the seller be thorough, truthful and honest in disclosing defects and advise the buyer of their heightened duty to investigate.  And in both cases, advise them to seek expert advice on matters relating to the transaction that are beyond your expertise.

As always, in the long run, the best way to proceed is to be truthful, honest, and thorough with whomever you are dealing with.

About the Authors

Michael Spence

Mike Spence co-chairs the real estate practice group at Helsell Fetterman. A significant part of his practice involves advising buyers, sellers, property owners and brokers all aspects of real estate including waterfront property issues.

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