Buyer Beware is Still the Law of the Land
Washington’s Seller Disclosure Statute, RCW 64.06, originally passed in 1994, required Sellers of real property to disclose “material defects” on a Seller Disclosure Statement, which quickly became known as a “Form 17”. A special provision of RCW 64.06 provides that the statutory obligation to disclose material defects is independent of the common law principle of “Caveat Emptor”, otherwise known as “Buyer Beware”.
Since the adoption of RCW 64.06, there has been an overlap between the Seller’s statutory duty to disclose material defects and the Buyer’s common law duty to investigate for those material defects. Early on in the life of RCW 64.06, most courts held in favor of the Buyer when there was an undisclosed material defect. However, that changed dramatically in 2007 in the case of Alejandre v. Bull, in which the Washington Supreme Court held for the first time that a buyer has a heightened duty to investigate when the contract allocates the risk of an economic loss to the buyer. Alejandre was followed in 2010 by Eastwood v. Horse Harbor, in which the Supreme Court held that a plaintiff can sue both for breach of contract and misrepresentation, if there is an ‘independent duty’ in tort. Eastwood was followed in 2013 by Douglas v. Visser, in which a Seller, who happened to be a real estate broker, intentionally failed to disclose material defects, but was exonerated because the buyer failed to follow through on their inspector’s recommendation for additional and more detailed inspections.
The Alejandre/Eastwood/Douglas line of cases represent a swing of the pendulum from “sellicus disclosicus” deeply into “caveat emptor’ territory”. Those of us who practice in this area watch case law closely to see where the courts are heading next.
That question was recently answered in the case of Woodcock v. Conover, and the courts are clearly still in “caveat emptor-ville”. Although Woodcock is an unpublished case, it can still be cited in briefs and in court.
In Woodcock, the Seller disclosed that her 113-year old West Seattle fixer was connected to the city’s sewer main, but checked “don’t know” in response to the Form 17 question regarding plumbing defects. The Buyer’s realtor suggested that the buyer obtain a structural and a sewer inspection, and scheduled them both for the same day, but the Buyer instructed the realtor to hold off on the sewer inspection until the structural inspection was completed. By the time the Buyer received the results of the structural inspection, it was too late to have the sewer inspection. Plus, the structural inspection did not identify any plumbing issues.
The day before closing, the Buyer visited the house to confirm that other work orders had been done, and at that time, she noticed moisture issues in the crawl space. She notified her lender, who expressed concerns, however she agreed to close the transaction and ‘deal with the problems’ when she moved in.
Three months later, the Buyer noticed sewage in the crawl space. She called a different plumber, who found numerous defects in the sewage system. He also found a significant amount of lime, which is used to mask the odor of sewage.
It turned out that the Seller had reason to know about the defects, but failed to disclose them. Before preparing the Form 17, the Seller had hired an inspector, who noted slow drainage and a broken waste vent in the crawl space and recommended further evaluation by a plumber. In response, the Seller hired a plumber, who ostensibly fixed the problem. However, a subsequent video of the line identified root blockage, toilet paper and offset sewage lines, all significant defects. Neither the video or the results of it were provided to the Buyer.
Based on these facts, the Buyer sued the Seller for fraudulent concealment, fraudulent misrepresentation and conspiracy to commit fraud. And consistent with Alejandre, Eastwood and Douglas, the court once again held for the Seller. Material to this holding was the fact that the Buyer failed to conduct the recommended sewer inspection. The court also found that she did not have the right to rely on the Seller’s representations in the Form 17 and that she could not prove fraud on the part of the Seller. The court also found that the Buyer’s realtor did not commit professional malpractice during her representation. A final holding was that the Seller was awarded her attorney’s fees.
To summarize, the Seller had actual knowledge of a material defect by virtue of the pre-Form 17 sewer scope and failed to disclose it. However, the Buyer had the ability to identify this defect before closing, but failed to do so. That being the case, the court found in favor of the Seller.
So what does this mean?
- Sellers Must Still Disclose. Nothing in this case, or in Alejandre, Eastwood or Douglas relieves a Seller of their statutory obligation to disclose material defects they have actual knowledge of under RCW 64.06.
- Buyers Must Investigate. At the same time, however, the courts have once again declared that a Buyer has a heightened duty to investigate for material defects, especially if they are notified of the potential for a defect before closing, even if that defect is not disclosed on a Form 17.
- Buyers Must Conduct Additional Inspections. If a Buyer’s inspection recommends additional inspections and the Buyer fails to do so, they will not be able to recover against a Seller, even if the Seller failed to disclose the initial or a related defect.