Daily Development for Thursday, August 28, 2002

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

INSPECTORS; HOME INSPECTIONS; CONSUMER FRAUD: A home inspection service that tailors its inspection reports to satisfy its real estate broker referral sources violates the Consumer Fraud Act and is liable for attorney's fees in addition to damages for faulty inspection.

Herner v. Housemaster of America, Inc., A-6252-99T2 (N.J. Super. App. Div. 3/11/02.. (Unreported opinion)

First time home buyers, possessing no experience in any construction trade, received three sales brochures of home inspection services from a real estate broker. They selected one of the inspection companies, who assigned one of their full time inspectors to inspect the home. When the inspector arrived at the home, he presented a "two-sided, preprinted single page contract consisting of nine compactly worded clauses to the [new home buyers]." The cost of the inspection and "complimentary Guarantee" was $335. A "Limited-Time Guarantee Inspection" clause offered a professional opinion following an inspection of approximately two to three hours and stated, "[t]he Company will provide the Client with a complimentary Guarantee against unexpected, major repair expense for a period of 90 days from the inspection date or 30 days from title transfer, whichever occurs first. This Guarantee, including its terms and conditions, will be forwarded to the Client following the inspection."

Following review of the inspection report, the buyers proceeded to closing. Less than ninety days after closing, they noticed a leak in the kitchen ceiling and water started dripping above the refrigerator and a piece of spackle tape fell down. Eventually they called the home inspection service, who responded that the guarantee had lapsed. Leaks subsequently developed in the ceilings in most of the other rooms and other defects, including in the electrical system, were discovered.

The buyers sued under the Consumer Fraud Act. Ultimately, the inspection company settled on damages of $37,000, apparently on the grounds that ambiguity as to the length of the warranty led to a reasonable argument that the warranty was still in effect when the defects were discovered. But the settlement left open for judicial resolution the issue of attorney's fees under the Act.

The president of the franchisor of the inspection company testified that eighty percent of their referrals came from real estate brokers and the inspectors tried to give "a balanced inspection, the good and the bad of the house." When asked why the inspection company felt an obligation "to point out good things at the house to [a] buyer who's already decided to buy the house, the franchise company's president stated that "we have very nervous buyers. If you go along and just point all negatives, you can psych that buyer into not buying a house that they - really that they want."

The franchisor's "Inspector Guidelines Manual" emphasized not to "dwell on the negative aspects of the house." It called for an "impartial evaluation of the major elements of property, both negative and positive." It also pointed out that a common complaint from real estate agents is that inspectors "nitpick." The witness admitted that "nitpicking" reports will have a negative impact on referrals from real estate agents.

The franchisor had a different set of instructions for dealing with the relocation industry. Here, inspectors were told that relocation companies "need us to nitpick." The instructions given to inspectors were to note "everything you see on these reports, regardless of how minor."

According to the witness, because most relocation companies "can throw quite a business our way," it is necessary to give a thorough and comprehensive report, especially because the relocation company never sees the house. Further, testimony was to the effect that relocation companies don't need to see "positive things, because they're big boys.

They're a little different than the first time home buyer."

The report received by the home buyers said that the roof was "wearing and will require replacement." It noted stains in the kitchen, laundry room, and family room ceilings as well as a part of the attic, especially around the chimney. The report included that "budgeting for a new roof as replacement will soon be required." Nonetheless, the inspector estimated that the roof had a remaining life of ten to fourteen years.

Upon inspection after the leaks were discovered, the homeowner's expert stated that there was clear indication of water penetration between the roof and attic and that directly above the stains "were found two plastic basins partially filled with water." Further, a comforter was laid between the ceiling joist to absorb leakage, and the comforter was, in areas, wet to the touch. To the homeowner's expert, it was clear "that the roof had reached the extent of its expected life." The homeowner's expert also testified that cracked rafters and a broken roof plank should have been apparent. Similarly, the homeowner's expert opined that the original home inspector had missed a serious electrical defect that should have been clearly visible at the time of the initial inspection.

Under the Consumer Fraud Act, "use or employment by any person of any unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing, concealment, suppression or omission of any material fact with intent that others rely upon such concealment, suppression or omission, in connection with the sale or advertisement of any merchandise or real estate, or with the subsequent performance of such person as aforesaid, whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice." There is no requirement that an intent to deceive be a prerequisite to the imposition of liability under the Act.

Here, the homeowner alleged that the use of two separate standards by the inspection service was an "unconscionable commercial practice," especially where the inspector seemed to be serving the real estate agent to the detriment of its customer. According to the Court, unconscionability is "an amorphous concept obviously designed to establish a broad business ethic." The standard of conduct to the term "unconscionable" implies a the lack of "good faith, honesty in fact and observance of fair dealing." The Court also believed that what the homeowner wanted and "what a consumer home inspection service would generally and reasonably expect [to deliver] was an inspection report which forthrightly discloses physical conditions of a house which could reasonably affect the health, safety and welfare of its occupants." The Court did not believe that the homeowner wanted "an inspection whose undisclosed and predominant purpose was to market [this particular inspection company]."

According to the Court, the record established that the real estate agent was the inspection company's customer in fact. The inspection company's marketing and training strategy emphasized the need to give a report that would water down negative findings to induce a buyer to go to closing. That marketing business philosophy was undisclosed to the consumer. In addition, the Court believed that the informational brochure was highly deceptive and didn't disclose that the ninety day guarantee lapsed ninety days from the inspection rather than from closing. In summary, the Court believed that the record established "an inherent conflict between the essential purposes of a home inspection for the consumer ... and a duty of a [real estate agent] who is engaged to sell a home promptly that the highest price will bring." Consequently, according to the Court, the disclosed pattern of non-disclosure on the part of the inspection company rendered its report worthless to consumers. In essence, this particular company's system of home inspection resulted in a report that was so "unbalanced" as to "render it pablum and worthless." This led to an ascertainable loss to the homeowner and an appropriate claim under the Consumer Fraud Act.

Comment 1: Of course, many state s have consumer protection acts with similarly broad worded provisions for establishing claims. It is likely that home inspectors fall within the ambit of most of these Acts. Further, it is likely that in many jurisdictions a case could be made that there is a close working relationship between inspectors and brokers.

Comment 2: The plaintiff here was able to make an especially telling case because of the different standards that the inspection company expressly adopted for "relo" purchasers and other purchasers. In the words of modern teen speak: "Well, duuuuuuuh." Of course an inspection company that deliberately sets out to give more information to one class of customers than another, without disclosing the different standards, is asking for trouble. The editor suspects that this particular bit of useful evidence will not be that easy for plaintiffs to obtain in most cases.

Comment 3: On the other hand, the real gist of the court's finding here was that the inspection company engaged in practices to make itself "friendly" for brokerage companies. Although some inspection companies are not likely to have training manuals and working guidelines expressing this view, there is absolutely no question that inspection companies frequently take these issues into account.

Brokers, of course, ought not to be tolerating this. Their duty, at least when they are buyer's agent, is to assist the buyer in getting a complete and accurate view of the property. Even when the broker is not buyer's agent, the broker's own potential liability is reduced when a careful inspection takes place. Consequently, it may well be that in some areas brokers welcome "hard" inspections. In these areas, the "cozy inspection" probably doesn't happen and inspectors likely would not be vulnerable to the charges made here.

In the editor's experience, however, other brokers, viewing the immediate sale as a juicier carrot than minimization of later liability, do tend to introduce buyers to inspectors that are "closing friendly."

Although, as stated, proof of this is not always forthcoming, where it is available there is reason to believe New Jersey case would not have some application.

Comment 4: Is it possible that the net could be expanded to reach brokers themselves? In this case, the only evidence pointed to the fact that the inspection service targeted brokers. This was nothing to show that the brokers had made specific demands upon the inspection service or otherwise colluded to reduce the number of defects reported. Needless, to say, a consumer fraud case could easily be made in such circumstances.

Comment 5: Even more problematic is the situation arising when brokerage companies actually own or control the inspection companies that they refer to buyers. It would not take much, starting with this relationship, for a suspicious court to make out a theory that the inspectors were targeting their "masters" rather than their home buyer clients when they carry out their inspections.

The editor has noted before the offensive language that appears in the

1997 version of the REALTOR form sale agreement in the Kansas City area. Buried in the boiler plate in a paragraph entitled "Parties" is a waiver of claims by both buyer and seller against the broker with regard to the behavior of any other party - inspector, escrow agent, title company, etc., - with whom the broker has a business relationship, even if the broker referred that service provider. Brokers have been tough in bargaining to keep this language in the contracts, even when the Editor has sought to remove it. Why this language ought to appear in a contract of sale, instead of in an agreement for brokerage services, is a mystery to the editor, as is why the insertion of and insistence upon this language is not a breach of the broker's ethical duty to buyer or seller.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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