The recent Wisconsin Court of Appeals case of Malzewski v. Rapkin teaches many lessons about real estate condition reports (RECR), misrepresentation claims, home inspections and a buyer’s remedies.
In the Malzewski case, the RECR was completed to indicate that the sellers were “aware of defects in the basement or foundation (including cracks, seepage and bulges); during very heavy rainstorms, there might be a little seepage in the walls/floors. The seller has regraded to correct this when it has happened.” The buyer’s offer to purchase included a home inspection contingency and a provision allowing the buyers to “do a walk-through within three working days of acceptance.” The buyers did the walk-through and waived the inspection contingency. Approximately one year after they closed, paint on the basement walls peeled away and pre-existing cracks in the basement walls opened. A foundations contractor estimated that it would cost $25,600 to repair the failing basement walls.
The buyers sued the sellers for failing to disclose the cracks in the basement walls, alleging breach of contractual warranty, intentional misrepresentation, theft-by-fraud, Wis. Stat. § 100.18 false advertising, strict-responsibility misrepresentation and negligent misrepresentation. During discovery, the sellers admitted the basement walls had 12-foot-long, three-eighths-inch-wide cracks, which they filled in 10 to 20 times with masonry cement. They also painted the walls approximately five times. They never had a contractor look at the basement or foundation. The sellers moved for summary judgment, claiming they had fully disclosed the condition of the house on the RECR, and that there was no evidence that they knew the cracks were a defect under the RECR and Wis. Stat. § 709.03.
The buyers maintained there were questions of fact both as to whether the sellers intended to deceive them and whether the buyers were justified in relying on the representation that there had been only a little seepage. If the sellers had told them that the walls had repeatedly cracked and had been repeatedly filled in with caulk and painted over, the buyers claimed they would not have purchased the house.
The trial court concluded as a matter of law that the sellers did not know there was a defect in the house and granted the sellers’ motion for summary judgment. The buyers appealed to the Court of Appeals, contending that whether the sellers believed that the basement wall cracks were a defect that should have been disclosed on the RECR is a disputed question of material fact that cannot be decided on summary judgment. The Court of Appeals, however, took a different approach and analyzed the justifiable reliance element in the claims made by the buyers. The Court concluded that the buyers must show reasonable reliance on the sellers’ RECR in order to sustain all but one of their claims.
For example, the buyers alleged that the sellers breached their contractual warranty when they falsely represented that the only problem with the basement was slight seepage. However, because the buyers waived their right to a home inspection, their reliance on the RECR was unreasonable as a matter of law. The court referenced the case of Lambert v. Hein, 218 Wis. 2d 712 (Ct. App. 1998), as authority for the principle that a buyer who is aware of the true nature of defects, or who has the right to discover the true nature of defects that are disclosed, cannot later complain when he or she goes ahead with the purchase, despite knowing about the defects, or after giving up the contractual right to discover their true nature.
The RECR and the provisions in the offer to purchase, the Court noted, are intended to afford a buyer the opportunity to discover actual or potential defects in the property so that the buyer can then make an informed choice whether to proceed with the transaction, seek amendments to the contract or abort the transaction. By closing the transaction without exercising their right to a home inspection, even when they were aware of potential seepage defects, the buyers waived their right to pursue a claim based on RECR representations.
Similarly with the causes of action for intentional misrepresentation, strict-responsibility misrepresentation, negligent misrepresentation and theft-by-fraud, the Court concluded that because the buyers waived their right to a home inspection even though the RECR disclosed possible issues with the basement, they were not justified in relying upon the RECR.
The elements of false advertising, found in Wis. Stat. § 100.18, are that the plaintiff sustained a pecuniary loss because of an advertisement, announcement, statement or representation made by the defendant that was untrue, deceptive or misleading. Reasonable reliance is not an element of false advertising, but may still be considered at trial in determining whether the purchaser in fact relied on the seller’s representation.
The sellers admitted that they knew the basement walls had 12-foot-long, three-eighths-inch-wide cracks, which they caulked and painted over. The Court indicated that a reasonable jury could find that those cracks and the attempted remediation efforts should have been disclosed, and that failure to do so violated Wis. Stat. § 100.18, even though the buyers waived their right to the home inspection. Accordingly, the Court reversed the trial court’s summary judgment on the false advertising claim and remanded the case for further proceedings.
REALTOR® Practice Tips
The sellers apparently completed the RECR on a subjective basis – they did not view the cracks as a defect nor did they consider that the seepage problem might reoccur – and the trial court accepted that on face value. The buyers and their attorney, on the other hand, challenged this failure to disclose the complete picture as misrepresentation.
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The sellers may have avoided a lawsuit if they had more fully disclosed the situation – described the problem over the years and what they had done to address it – but they may have lost the sale.
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The sellers’ approach of not fully disclosing landed them with a false advertising claim to litigate, and the misrepresentation claims might have held as well if not for the reliance issue.
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The buyers committed the cardinal sin of not having a home inspection. It seems clear that a buyer who waives the home inspection will have a difficult time later sustaining any misrepresentation claims. The courts will likely find that such a buyer cannot claim to have reasonably relied on any property condition representations.
REALTOR® Resources Page – Disclosure
See the Disclosure REALTOR® Resource page at www.wra.org/disclosure. Check out Legal Update 02.07, “Duty to Disclose,” online at www.wra.org/LU0207, and for further discussion of the Lambert case and a theft-by-fraud claim, visit www.wra.org/legal/wr_articles/wr0501_legal.htm.
Debbi Conrad is Director of Legal Affairs for the WRA.