In Below v. Norton, (2008 WI 77) www.wisbar.org/res/sup/2008/2005ap002855.htm, the Wisconsin Supreme Court held that the Economic Loss Doctrine (ELD) applies to residential real estate transactions, thereby barring common law intentional misrepresentation claims. Does that sound like legal mumbo-jumbo? Let’s break that down and then review what impact the decision will have on day-to-day real estate practice.

Economic loss doctrine 

The ELD is a judicially created doctrine that tries to encourage the parties to a contract to anticipate all of their potential legal claims relating to the contract and address them in the contract. According to the ELD, there should not be any lawsuits based on misrepresentation, fraud or negligence (referred to as tort claims) with regard to the subject of a contract, because the parties should have provided the remedies they need in their contracts. The ELD originally was applied to commercial contracts and business deals in which experienced business people, often with the assistance of their attorneys, routinely bargain for business deals, create warranties and indemnification agreements, and set specific penalties or buy business operation insurance to guard against potential losses. These sophisticated parties generally benefit from the rights and remedies of the Uniform Commercial Code (UCC) and negotiate to assume, allocate or ensure against risk of loss to the extent they are not protected by the UCC.

The same cannot be said for consumers purchasing a home. Homebuyers, with the assistance of real estate agents, typically write up their purchase contracts on the offer to purchase forms approved by the Department of Regulation and Licensing, not attorney-drafted contracts customized to the specific property, transaction and potential risks. Buyers fall “in love” with the home of their dreams and, by and large, do not think or behave like sophisticated professionals negotiating a business deal – and they do not enjoy UCC protections.

Application of the ELD to residential offers to purchase is a bad fit. It limits the remedies available to most buyers, contrary to the Wisconsin policy of transparency and full disclosure as evidenced in the Real Estate Condition Report (RECR) law and the provisions of the DRL-approved offer to purchase forms.

Less truth and fewer consequences 

In residential real estate transactions, the seller is required by Wis. Stat. Chapter 709 to make property condition disclosures to the buyer in an RECR. Up until now, sellers who misrepresented or concealed the condition of the home often were sued for intentional misrepresentation because the buyer could recover compensatory damages and punitive damages and could file suit based upon when the damage was discovered instead of when the deception occurred.

Without the threat of punitive awards, the consequences for sellers who lie may be less severe. If a seller gets caught in a misrepresentation, the homebuyer can still sue for a breach of contract because the offer incorporates the RECR and calls for additional property condition representations (see lines 53-81 of the WB-11 Residential Offer to Purchase). But the seller will typically only have to pay to correct the defect that the seller misrepresented or concealed. If the worst a seller could face would be to pay for the defect that they should have paid to fix in the first place, then sellers may decide against making truthful property condition disclosures. Since many buyers may be reluctant to sue because of the costs, time and burden of proving the case, particularly if the amount involved is only a few thousand dollars, sellers may conclude it is worth the risk to lie because they stand a decent chance of getting away with it.

Sellers who misrepresent the condition of their homes may also be sued under Wis. Stat. § 100.18 and Wis. Stat. § 895.466. Under Wis. Stat. § 100.18, the false advertising statute, a homebuyer can sue a seller who makes a false, deceptive or misleading statement to induce the real estate sale if the buyer suffers a monetary loss as a result. A successful buyer may recover any monetary loss together with costs and reasonable attorney fees. §100.18 lawsuits can be brought only with respect to representations made before an offer to purchase is accepted.

Wis. Stat. § 895.466 gives a civil remedy to those suffering damages as a result of a violation of Wis. Stat. § 943.20, a criminal statute. § 943.20(1)(d) makes it illegal for anyone to “obtain title to property of another person” by intentionally deceiving the person with a false representation, which is known to be false, is made with intent to defraud, and does defraud the person to whom it is made.” Obtaining title to property includes obtaining the purchase price money from the buyer. Wis. Stat. §895.466 allows the court, in its discretion, to award all costs and attorney fees, and to triple the damages, but is more difficult to prove.

Licensee liability 

Because agents and brokers are not parties to the offer to purchase, it would appear that the ELD would not block misrepresentation lawsuits against licensees. Real estate licensees may be found liable for false advertising under § 100.18, but only with respect to false representations knowingly made prior to the acceptance of the offer. No attorney fees may be recovered from a real estate licensee engaged in real estate practice under § 100.18.

Keeping sellers honest 

Wisconsin public policy, as reflected in the RECR law and the DRL offer to purchase forms, promotes seller disclosure of property defects in residential transactions because sellers are the ones most familiar with their homes. Buyers who receive a seller’s RECR receive more complete and accurate information on which they may base their offer to purchase negotiations.

Over the upcoming weeks, the Wisconsin REALTORS^® Association will evaluate different avenues that might be pursued to restore the prior level of seller accountability. One avenue may be legislation amending the RECR law to provide remedies for buyers in addition to the limited contract rescission remedy currently provided in the statutes. The WRA will also work with the DRL Real Estate Contractual Forms Advisory Committee in evaluating offer to purchase provisions regarding seller property condition representations. However, the legislature does not meet again until January, and the forms revision process will take many months.

Take extra care 

In the meantime, the best thing that REALTORS^® can do is to be extremely careful to do their jobs very well.

• Visual inspections: License law requires listing brokers, before executing the listing contract, to inspect the property and ask the seller about the condition of the structure, mechanical systems and other relevant aspects of the property, requesting that the seller provide a written response, that is, an RECR. Prudent listing brokers will require all listing agents to keep a written record of their observations, using a form like the WRA Listing/Selling Visual Inspection Form.
• Seller’s RECR: The responsibility for completing an RECR falls solely upon the seller. If the seller wants specific guidance on what must be disclosed, the agent should refer him to his attorney for legal advice. An agent who tells a seller how to answer RECR questions risks liability for the content thereof.
• Disclosure of material adverse facts: If a seller fails to disclose a defect and it is not disclosed elsewhere, the licensee must promptly disclose the defect to all parties, in writing, if it constitutes a material adverse fact. A sample material adverse fact disclosure letter is available in April 2007 Broker Supervision Newsletter, online at www.wra.org/bsnapr07.
• Attributing the source: When a broker receives data from the seller or city treasurer's office and restates the information in the MLS data sheet or other advertising as if it were fact, the broker may be liable if the information is not true. Accordingly, REALTORS^® are urged to specifically attribute data used in advertisements, such as acreage, square footage or assessed values, to the source.
• Inspection contingencies: A diligent agent will give the buyer every opportunity to inspect and test by providing a full array of inspection and testing contingencies in the offer. It is better to have contingencies that the buyer decides not to use than to amend the offer to add something later on — there is no guarantee that the seller will agree.

The WRA, acting through its Legal Action Program, filed an amicus brief with the Wisconsin Supreme Court in the Below case to argue that application of the ELD to residential real estate transactions was ill advised and would diminish legal protections and remedies for Wisconsin homebuyers.

Debbi Conrad is Director of Legal Affairs for the WRA.

Editor’s note: The DRL became the DSPS in 2011. Information above may not be current.