Trust and the Real Estate Transaction
Bar Bulletin · July 2013 ·by Michael Spence
A recent case from Division I of the Court of Appeals makes it crystal clear that buyers of residential real property can no longer blindly trust the seller’s disclosures in RCW 64.06’s Seller Disclosure Statement – known widely as the “Form 17”. The case, known as Douglas v. Visser, 295 P.3d 800 (2013), is the latest in a series of cases signaling a return to the legal principle of caveat emptor in residential real estate transactions.
By the Court’s own admission, the facts of Douglas v. Visser are “egregious”. Terry Visser, a real estate broker, and his wife Diane, purchased a property inBlainein 2005, with the intent of renovating and renting it. They ran into financial 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 screw 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.
Visser then put the property on the market, and received an offer to purchase it from Canadians Nigel and Kathleen Douglas. Douglas was given a Seller Disclosure Statement with either no answer or the “don’t know” box checked for many of the questions. The Douglases sent Visser a series of followup questions and requested a copy of the Vissers’ prepurchase inspection report. Visser submitted handwritten responses to the questions, 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 closed.
Shortly afterward, 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 (Division I) decided in Puget Sound Services v. Dalarna Management , 51 Wn. App. 209 (1988) 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. RCW 64.06 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. 153 P. 3d 864 (2007) In Alejandre, the seller of a Walla Walla house failed to disclose problems with the septic system that she knew existed. The septic tank pumper noted problems with the “back baffle”, but stated that there were no “obvious malfunctions” with the system as a whole. 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.
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 if the buyer fails to investigate further, the seller will survive a lawsuit.
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Michael Spence
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