Daily Development for Thursday, January 29, 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; LIABILITY FOR AGENT'S ACTS: Sellers of a house were not liable for misrepresentations made by their real estate agent to the buyers where defects are not latent, buyers have right to inspect, and fail to make even cursory inspection.. Clark v. Allen, 796 N.E. 2d 965 (Oh. App. 12 Dist. 2003). After discovering serious moisture and rot problems below the floor of their house, purchasers sued the sellers for breach of contract, fraudulent misrepresentation, fraudulent concealment, and fraudulent inducement. Allens bought their house in 1962. In 1996 they entered into a contract to sell the home to Clarks. The house, which had been built in 1958, had a crawl space with a dirt floor and, typical of homes of that vintage, had neither a vapor barrier below the joists and subfloor nor a ventilation system for the crawl space. In 1994, the Allens had had the crawl space inspected for termites. The inspector found no termites, but did notice brown wood fungi on the floor joists. He suggested that he should spray the joists and install three vents in the crawl space, and upon the Allens' assent the work was done. At trial Betty Allen testified that as far as the Allens knew, that work had solved any moisture problem; ladders stored in the crawl space were never wet, and she had never noticed any problem with the floors. Before closing the sale to the Clarks, Betty Allen checked a box on the statutory disclosure form which indicated that the sellers knew of "any current water leakage, water accumulation, excess dampness or other defects with the basement/crawl space." She testified she did this to indicate that there had been a problem in the pasta clause The purchase and sale contract stated "[i]nspections regarding the physical material condition and use of the Real Estate shall be the responsibility of the Buyer,". Despite Mrs. Allen's disclosure, and the facts that the Clarks had never owned a home with a crawl space and had ample opportunity to inspect, Clarks neither had the home inspected nor looked into the crawl space themselves. Shirley Clark was, however, prompted by the disclosure to ask the real estate agent about the moisture problem. She testified that he told her the crawl space had been treated with "silicone" (a treatment that does not exist); that there was a lifetime guarantee of the treatment, and that the problem had been fixed (he denied making the first two representations). After purchasing the house, the Clarks discovered serious rot in the crawl space and spent over $22,000 repairing or replacing beams and installing a sump pump. The trial court found that the Allens did not know of the agent's misrepresentations, did not provide him with the false information, and did not order him to make the misrepresentations. The court also found that the Allens did not know about the continuing moisture problem, believing it to have been remedied by the work in 1994. By statute, sellers of residential real estate in Ohio are only required to disclose those defects that are within their actual knowledge. They have no duty to inspect their property, and the buyer bears the risk of latent defects. The trial court properly found that the moisture in the crawl space was a "patent" defect, "an open and observable defect that an ordinary prudent person would discover upon reasonable inspection." Indeed, after discovering problems in the master bedroom after closing, Shirley Clark was able to discover the damage in the crawl space when she simply peered into it with a flashlight, without first entering it. The Clarks failed to name the real estate agent in the suit. Compare: Staggs v. Sells, 86 S.W.3d 219 (Tenn. Ct. App. 2001). Where the sellers under a real estate contract authorize their agent to sign the contract without reviewing its terms, sellers are guilty of negligent misrepresentation when the contract states that the subject property is not subject to flooding and the sellers know that statement to be false. (Case did not involve whether the broker should have made independent determination that there was no flooding before so indicating on the contract. ) Comment 1: The question of seller's liability for representations made by the seller's agent is not fully resolved. Commentator Barlowe Burke discusses the issue in his treatise Law of Real Estate Brokers (Little Brown 1992) (supplemented through 2003). He notes that the jurisdictions split on the question. The older line of authority takes the view that the agent is not bound by the broker's misrepresentations as the broker was not authorized to make such misrepresentations. See, e.g. Cunningham v. Miller, 552 A.2d 1203 (Vt. 1988) (misrepresentation by broker as to seller's estimate of acreage of property sold.) There would be liability, however, if the broker passed along information provided by the seller. (Id.) Other cases are less generous. In Dyer v. Johnson, 757 P. 2d 178 (Colo.App. 1988), the court commented: "Generally, a principal may not be bound by the false represtnation of his agenet made without his knowledge, consent or authority. However, an exception to this rule exists if an agent has apparent authority to make a representation, the question of whether such authority exists being one of fact." Professor Burke cites cases in Pennsylvania, Idaho, Alaska and Florida as also following this newer approach, and suggests that there is other authority in Montana and Ohio as well. In many of these cases, representations have been held binding on the principle under circumstances that would not have led to that same result under the earlier line of cases. Professor Burke that many of the newer cases deal with rescission claims rather than damages claims. Note that the instant case is in Ohio, discussed as being in part of the "newer" line of analysis. But the alleged representations go beyond the pale of any implied authority. Further, the case turns on the question of whether the representations were material in any event given the contract language regarding inspection and the buyer's failure to make even the most cursory inspection of the area involved. Comment 2: Although the opinion appears to assume that the buyer had no claim even if the broker had made the alleged representations, it appears that the court concluded that these representations probably weren't made. Had they been made, there would be a strong inference that they were not part of the agent's authorization. But if they had been made, and authorized, would the court have concluded that, although palpably fraudulent, these still were not actionable because of the buyer's failure to inspect. If Ohio were to so hold, it clearly would not represent the majority view.