Daily Development for Monday, April 5, 2004
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; MISREPRESENTATION; “AS IS:” Where buyer agrees to take property “as is and waives the right to inspect, buyer has no claim for misrepresentation, even where the misrepresentation is deliberately fraudulent.

Alires v. McGhehee, 85 P.3d 1191 (Ka. 2004)

Seller stated verbally to the buyers that there were no leaking problems involving the basement and additionally signed a disclosure form that indicated only leakage problems in basement caused by a broken pipe, which had been repaired. In fact, the trial court found, there were extensive cracks and other failures in the foundation, and the buyers had a long history of leakage problems and attempts to correct them, none of which had been disclosed. The trial court found that the representations had been knowingly fraudulent.

The intermediate court of appeals had reversed the verdict against the sellers on the grounds that the seller who made the allegedly fraudulent statement had later attempted to withdraw from the contract because her family had not located an alternative home. The buyers had resisted this attempt and insisted on closing. In the view of the court of appeals, this established that the involved seller had not intended to defraud. The Kansas Supreme Court, however, held that the fact that the seller later attempted to withdraw on other grounds did not demonstrate that the seller had not knowingly made a false statement of fact with the intent of bring about reliance, which constituted the elements of fraud.

Nevertheless, the Kansas Supreme Court concurred in the reversal of the trial court because it concluded that the various documents signed by the buyers in the case constituted a contractual undertaking on the part of the buyers to be treated as having constructive knowledge of the conditions that would have been discovered as a consequence of the inspection. The contract contained language that the buyers took the property “as is,” were not relying upon any representations of the sellers, and Here, it was given that an inspection would have disclosed the problems with the basement. Despite the fact that there was evidence that the buyers were very concerned about basement leakage and would not have bought a home with such a condition, the buyers elected not to inspect.

The case turned on the language of the documents, which appear to be the “new generation” form agreements used by Kansas brokers pursuant to the new NAR-inspired statute involving agency and disclosure responsibility of brokers, which have an incidental effect in some cases of affecting the liability of sellers as well. Because the language is so critical, the editor sets it forth here at length:

First, there is the language of the disclosure form:
"The Seller discloses the following information with the knowledge that even though this is not a warranty, prospective Buyers may rely on this information in deciding whether, and on what terms, to purchase the subject real property."

At the end of the disclosure statement was a buyer's acknowledgment and agreement, signed by the buyers, which provided:
"1. I acknowledge that I have read and received a signed copy of the Seller's Property Disclosure Statement from the Seller, the Seller's agent, or transaction broker.

"2. I have carefully inspected the property. Subject to any inspections allowed under my contract with Seller, I agree to purchase the property in its present condition only, without warranties or guarantees of any kind by Seller or any real estate licensee concerning the condition or value of the property.

"3. I agree to verify any of the above information that is important to me by an independent investigation of my own. I have been advised to have the property examined by professional inspectors.

"4. I acknowledge that neither Seller nor any real estate licensee involved in this transaction is an expert at detecting or repairing physical defects in the property. I state that no important representations concerning the condition of the property are being relied upon by me except as disclosed above or as fully set forth as follows: ____________________________."

The buyers failed to note any specific representations in the blanks (but the court held that this alone was not fatal to their claim.)

In addition, conspicuously displayed at the top of the disclosure form was the following:

The contract also contained the following paragraph regarding inspections:
"Buyer and Seller agree that the real estate licensees involved in this transaction are not experts regarding whether any environmental or health hazards, defects in the mechanical equipment or systems, structural defects, or damage from wood destroying insects exists in and on the property. Buyer and Seller should seek expert advice and obtain inspections to determine if hazards, defects or damage exist in and on the property. If inspections are not performed regarding all or part of the property, Buyer is bound by whatever information an inspection would have revealed, and waives any claim, right or cause of action relating to or arising from any condition of the property that would have been apparent had inspections been performed. Unless otherwise provided in paragraphs relating to specific inspections, Buyer accepts the property in its current condition. This shall not be deemed a waiver or modification of any implied warranties which may exist."

The buyers argued that they relied upon the representations of the sellers in agreeing to take the property

In one precedent case discussed by the court, the parties had entered into an agreement to exchange land subject to a stipulation that the contract should not be binding until each party had investigated the property of the other and each assumed the responsibility to make a full, fair, and complete examination of the property to be satisfied as to the truth or falsity of the representations made by the other and the advisability of making the exchange. The court held that after one of the parties made the examination, signified satisfaction, and closed the trade by exchanging title papers, such party could not rescind the contract upon the ground that the party was induced to make the contract in reliance upon false representations made by the other party, unless the other party fraudulently prevented the making of a full, fair, and complete examination of the property.
In a more recent case, however, the court concluded that where a contract is induced by a false representation of fact, it is not a defense that the buyer could have discovered the falsity of the representation if due diligence had been exercised. A critical distinction between the two outcomes the instant court stated, is existence of an agreement in the first case to undertake an investigation. “This [fact] that there was an undertaking to investigate relates to both the issues of whether the representation was material and of whether the recipient of the information reasonably relied upon the representation. See Restatement (Second) of Contract § 167, comment b; Restatement (Second) of Contract § 172, comment b.”

In the instant case, the court concluded, the buyers of could not reasonably rely upon representations of the seller “when the truth or falsity of the representations would have been revealed by an inspection of the subject property and the misrepresentations were made prior to or as part of the contract in which the buyer contracted for the right to inspect, agreed that the statements of the seller were not warranties and should not replace the right of inspection, declined inspection, and waived any claims arising from defects which would have been revealed by an inspection.”

The court noted that there was no showing that contract addendum that contained the waiver of the right to inspect was induced by any additional misrepresentations of the seller. As a consequence, the sellers are treated as if they had known of the defects. Consequently, the misrepresentations were not material and, as an alternative basis for non-liability, they were not the cause of the buyers’ damages.

Comment 1: Obviously this is a very important interpretation of the meaning of the standard form language of the instruments. The onus is placed upon the buyers to appreciate fully what it is that they are signing.

The editor would prefer that courts would not rely upon these canned consumer instruments delivered up to clients by real estate brokers who will brook few alterations and who act as if everything is “just the way its done.”

A lie is a lie. Sellers should not be protected from lies by boilerplate in form consumer instruments.

Comment 2: On the other hand, there is the argument, hard to avoid, that buyers need to take control of their own transaction, and a total failure to inspect for a common problem that the buyers later contended was central to their buying decision does strike the editor as significantly contributing to their loss here.

Comment 3: Where was the buyers’ broker in all of this? She testified that she knew that buyers were specially sensitive to leakage problems. Did that broker have a responsibility to underscore to the sellers that there was a specific blank in the form indicating that buyers’ were expressly relying upon the buyer’s representations?

It is unclear whether, in light of all the other disclaimer language, the court would have viewed the case differently had the buyers’ put into that blank “ representation as to lack of basement leakage.” But the editor believes that there was a very good chance that this would have made a difference.

Following this case, should buyers’ brokers in Kansas have the duty to tell their clients that they should fill in that blank by stating “all representations are material and affect my decision to purchase?”

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