Caveat Emptor (“Let the Buyer Beware”) Is Alive and Well in Ohio

In case there was any doubt, the recent decision of the Summit County Court of Appeals in Wilfong v. Petrone, 2013-Ohio-2434 (aptly labed the "Furnace on the Ceiling Case" by this author), has reaffirmed/applied this longstanding doctrine. 

Basically, the doctrine of caveat emptor precludes a purchaser from recovering for a property’s defective condition if the following conditions are met:  1) the property defect is discoverable upon inspection or open observation; 2) the purchaser has an unimpeded opportunity to examine the property and 3) there is no fraud on the part of the seller.  Layman v. Binns, 35 Ohio St.3d 176 (1988). 

 Since the disgruntled buyer (Mr./Mrs. Wilfong) claimed fraud on the part of the seller, the following summary should prove helpful:

 In the context of real estate transactions, there are basically two types of fraud: fraudulent misrepresentation and fraudulent concealment (with “fraudulent nondisclosure” sometimes being referred to as either a third type of fraud, or, a type of fraudulent concealment).  The elements of fraudulent misrepresentation are: (a) a false representation concerning a fact material to the transaction; (b) knowledge of the falsity of the statement or utter disregard for its truth; (c) intent to induce reliance on the misrepresentation; (d) reliance under circumstances manifesting a right to rely and (e) injury resulting from the reliance.  Sanfillipo v. Rarden, 24 Ohio App. 3d 164.

 The basic elements of fraudulent concealment are (a) actual concealment; (b) of a material fact; (c) knowledge of the facts concealed; (d) intent to mislead another into relying upon such conduct; (e) actual reliance; and (f) injury resulting to such person because of such reliance.  Even without an affirmative misrepresentation or “actual” concealment, an action for fraud, commonly referred to as “fraudulent nondisclosure” is also maintainable in Ohio for failure to fully disclose material facts where there exists a duty to speak.  In such regard, the Supreme Court of Ohio has held that a “vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection”.  Binns, 35 Ohio St.3d at 178. 

 The Wilfongs contended that the caveat emptor doctrine did not apply because the Petrones fraudulently misrepresented and/or failed to disclose the extent of water intrusion problems in their basement.  The basic facts of the case are as follows. 

The Petrones built a lake house on Silver Valley Lake in Munroe Falls, Ohio.  A part of the lake house actually overhangs the lake and is supported by stilts.  The lake house, in a federally designated flood plain, is located at the lowest elevation point of the neighborhood.  The Cuyahoga River is located in the immediate vicinity of the lake.

The Wilfongs purchased the home (which was built in 1998) from the Petrones in 2005.  Prior to the purchase, the Wilfongs visited the house four times.  One of those times they brought their broker, and another they brought a friend in the construction business.  Immediately “open to observation” during the first visit was that the house was built on stilts over the surface of a lake, with a furnace hanging horizontally from the ceiling in the basement.  In the latter two visits, the Wilfongs admitted that they understood there was no sump pump in the basement, and that the sewer outlet was located on a front wall of the house, instead of the wall nearest to the lake.  The purchase agreement in this case contained an “as-is” clause and an addendum that provided, to the effect that “buyers have inspected and accepted the house in it’s as-is condition”.

The Petrones did make certain disclosures on Ohio’s Residential Property Disclosure form (required in most residential transactions pursuant to Ohio Revised Code §5302.30; With regard to the form, it is important to note that while a false representation on the form could help support a fraud claim, the Ohio Seller Disclosure Act makes it clear that the form is not intended to affect or create new common law (fraud) claims or remedies. Rather, it was intended to help inform buyers, and create a right of recession if not produced prior to closing). On the form, the Petrones did indicate that the property was located in a flood plain, and they further disclosed:          “In the flood of 2002, we had a sewer back-up, and we had…the basement pumped out”. Under the section of the form marked “water intrusion”, the Petrones stated: “we had a 100 year flood in 2002 and again in 2003. The lake pipe has been replaced”.

About a year after closing, a melting snow caused the lake level to rise which caused 8 inches of water in the Wilfongs basement.  In 2008 and 2011, the Wilfongs experienced “flooding events” due to flooding of the Cuyahoga River, which flowed to the lake, which resulted in approximately 5 feet of water in the basement. 

The Wilfongs argued that the disclosure statement did not indicate the extent of the flooding, rendering what was stated on the form a misrepresentation.  They further argued fraudulent non-disclosure, because the Petrones did not divulge what they had since learned from a neighbor; namely, that the Petrones had tried to build a dam along the river as well as pump out the lake to a lower level in order to keep the water from finding their basement.  The Wilfongs did admit, however, that they did expect some water intrusion in the basement.

The Court of Appeals held for the Petrones, easily coming to the conclusion that there was no fraud or misrepresentation.  Had I been on the panel of judges, I would have only needed to ask one question:  “How can you have not known there was a big water problem if the furnace was attached to the ceiling rather than the floor of the basement?”  The judges presumably asked that same question.  The court reasoned that the evidence clearly established that the Wilfongs had an unimpeded opportunity to discover the defect (water intrusion). The Wilfongs had in fact four opportunities to inspect the house, they were aware it was in a flood plain, they were aware that the house extended over a lake and rested on stilts, they were aware of the furnace hanging from the ceiling, they were aware that there was no sump pump, and they were aware that water had previously leaked into the basement during floods. There was no misrepresentation because the statements made by the sellers were all true.  Further, the court reasoned there was no fraudulent non-disclosure because there was no failure to disclose material facts which are latent, not readily observable or discoverable.

The one dissenting judge on the court argued that there was misrepresentation because the information on the disclosure form did not accurately reflect the nature and extent of the water intrusion problems.  The problem with that reasoning, however, is that the information provided was in fact true.  I believe the dissenting judge was more troubled by the information that was not offered (for example, the attempt to dam up the river and drain the lake).  While indeed troubling, there is no duty according to Ohio law for a seller to disclose everything it knows about its property; only latent, not readily observable or discoverable defects.  You simply cannot get more readily observable than a furnace attached to a ceiling.  Moreover, all the buyers would have had to do to learn about the Petrones efforts to alter the lake water level was talk to the same neighbors they talked to after they purchased the property, but prior to signing an as-is, with all faults contract.

The moral of the story?  Know when to hold them, know when to fold them, know when to walk away and know when to run (when what should be on the floor is on the ceiling).