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:
"THIS STATEMENT . . . IS NOT A WARRANTY OF ANY KIND BY THE SELLER(S) OR ANY REAL
ESTATE LICENSEE IN THIS TRANSACTION, AND SHOULD NOT BE ACCEPTED AS A SUBSTITUTE
FOR ANY INSPECTIONS OR WARRANTIES THE BUYER MAY WISH TO OBTAIN."
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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