Daily Development for Tuesday, April 25, 2006

Seller's disclosure warranty of truth survives merger by deed. 

 

by: Patrick A. Randolph, Jr.

Elmer F. Pierson Professor of Law

UMKC School of Law

Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

 

VENDOR/PURCHASER; MERGER BY DEED; CONTRACT WARRANTY:  Warranty existed in a real estate purchase contract that incorporated a disclosure form by reference and explicitly warranted the truthfulness and accuracy of the form.  Yeager v. McLellan, 177 S.W.3d 807 (Ky. 2005). 

 

Sellers of a home completed and signed the disclosure form required under KRS 324.360.  Administrative regulations set forth at 201 KAR 11:350 state that the “disclosure is based solely on the seller’s observation and knowledge of the property’s condition and the improvements thereon” and it “shall not be a warranty by the seller or seller’s agent¼.” The statutory disclosure form itself also contained this statutory language.  

 

Sellers listed two instances of basement leaks on the disclosure form, stating that the first occurred in 1989 and the second in 1997.  The purchase contract provided that “Seller represents and warrants to Buyer¼that the information provided in the Seller’s Disclosure of Property Condition is true, accurate and complete to the best of their knowledge.  Seller and/or Buyer shall indemnify and hold harmless all the foregoing parties from any liabilities, damages, costs, fees and expenses resulting from any incorrect information provided herein¼or in the Seller’s Disclosure of Property Condition.” 

 

Less than three years after purchasing the house, Buyer filed suit against Sellers, charging that Sellers falsely completed the disclosure form because the two incidents listed were not the only times the basement leaked.  The circuit court entered partial summary judgment in favor of Sellers, stating that the disclosure form clearly provided that it was not a warranty. 

 

The appellate court reversed and remanded, and the Supreme Court granted review.  The Supreme Court upheld the reversal, ruling that the contract did contain an enforceable warranty as to the contents of the disclosure form because the contract incorporated the disclosure form by reference and explicitly warranted the truthfulness and accuracy of the form. 

 

The seller also argued  that the merger by deed doctrine precluded the buyers from recovering on the breach of contract/breach of warranty claim.  The doctrine states that all prior statements and agreements, both written and oral, are merged into the deed and the parties are bound by the deed.  One exception to the doctrine of merger by deed, asserted by buyer, provides that false and fraudulent representations do not merge. 

 

Thus, the Court held that if buyer can establish the six elements of fraud by clear and convincing evidence and demonstrate that the fraud exception to the doctrine of merger applies, she may proceed on her breach of contract/breach of warranty claim.

 

Comment 1: It certainly was appropriate for the court to find both that there was a warranty as to the truthfulness of the Sellers’ statements and that the warranty was not precluded by the doctrine of merger where the buyers did not know, and presumably could not know, that the seller’s statements were fraudulent at the time of the closing.  Merger is nothing more than a statement of the concept of waiver.  If a buyer is aware that certain conditions exist that don’t satisfy the contract, and agrees to close anyway, without reserving rights, then it is waiving the right to sue later for breach of those conditions.  Classically, the merger doctrine applied only to problems with deed warranties, but in more recent years it has been extended to other circumstances where waiver concepts logically ought to apply.  The editor is aware that some courts apply the doctrine more rigidly than would be appropriate for a simple waiver analysis.  But the editor, not being so rigid himself, states that they’re wrong and he’s right.

 

Comment 2:   Although the case is consistent with the editor’s views as to its holding, the court’s stress on the fraud exception strikes the court as overly constrictive.  What if there were a warranty in the contract that did not depend upon the sellers’ best knowledge and belief, but nevertheless dealt with matters of which the buyer would not have knowledge at time of closing.  Normally, courts would conclude that such warranties would survive the closing and would not be subject to the merger by deed concept because merger, or waiver, would not be consistent with the parties’ intent. 

 

Also see:  NVR, Inc. v. Edwards, 801 N.Y.S.2d 878 (A.D. 4 Dept. 2005).  An employee discount agreed to by a homebuilder and a former employee (implemented after sale) does not merge with the deed.

 

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters.  The same is true of all commentary provided by contributors to the DIRT list.  Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

 

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

 

ABOUT DIRT:

 

DIRT is an internet discussion group for serious real estate professionals. Message volume varies, but commonly runs 5  15 messages per work day.