By: Stephen D. Richman, Senior Counsel, Kohrman, Jackson & Krantz
The doctrine of caveat
emptor (“let the buyer beware”) is still alive and well in Ohio, generally precluding recovery in
an action by a purchaser against a seller pertaining to a property’s defective
condition if:
1) the condition complained of is open to observation or
discoverable upon reasonable inspection;
2) the purchaser had the unimpeded opportunity to examine the
premises; and
3) there is no fraud on the part of the vendor. Layman v.
Binns (1988), 35 Ohio St.3d 176.
While Ohio’s Seller
Disclosure Act (R.C. 5302.30; the “Disclosure Act”) still requires
sellers of most types of residential property to disclose known defects, the
Disclosure Act does not directly modify the doctrine of caveat emptor by
creating a new statutory fraud claim or by eliminating existing common law
claims. In fact, Section 5302.30 (L) of the Disclosure
Act makes it clear that R.C. 5302.30 is not intended to affect
any (common law) remedies available prior to its enactment. Nevertheless,
if the seller fails to disclose a material fact on the disclosure form with the
intention of misleading the buyer and the buyer relies on the form, the seller [has
committed fraud and] is liable for any resulting injury. Pedone v. Demarchi, 8th Dist. [Cuyahoga] No. 88667, 2007-Ohio-6809.
However, “[w]hen a plaintiff claiming
fraud in the sale of property has had the opportunity to inspect the property,
he is charged with knowledge of the conditions that a reasonable inspection
would have disclosed.”
The Ninth District Court
of Appeals in Petroskey v. Martin, 2018-Ohio-445
(Lorain County) and the Eighth District Court of Appeals in
Hendry v. Lupica, 2018-Ohio-291(Cuyahoga
County) recently reaffirmed
the viability of caveat emptor in Ohio. Since the disgruntled buyer in Petrosky v. Martin (Mr./Mrs. Petroskey) and the disgruntled buyer
in Hendry v. Lupica (Mr. Angus Hendry) both claimed fraud on the
part of the seller, the following summary should prove helpful before
evaluating these cases:
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 facts of Hendry v. Lupica
are as follows:
In 2015, Mr. Hendry purchased a home in
Olmsted Falls, Ohio from the Lupicas (sometimes referred to herein as the
“Sellers”). Prior to closing, the Sellers produced a residential property
disclosure form that disclosed dampness and previous water damage in the
basement. Mr. Hendry also had the home inspected by a professional inspector.
The inspector found several issues with the basement, including foundation wall
cracks, holes and signs of water infiltration. The inspector’s report also
noted that the condition of the foundation was poor and advised Mr. Hendry to seek
additional information about these issues prior to purchasing the property. Mr.
Hendry did not follow that advice, and instead, negotiated a price reduction
with the Sellers. Not to long after the purchase, Mr. Hendry experience water
infiltration in the basement when it rained. He hired a waterproofing company to
fix these issues, and then filed suit against the Sellers in September 2015,
alleging fraud and mutual mistake, and requesting compensatory and punitive
damages, or rescission of the contract.
Mr. Hendry contended that the caveat emptor doctrine did not apply
because the Sellers fraudulently misrepresented and/or failed to disclose the
extent of water intrusion problems in their basement. The Sellers only
disclosed some dampness and some water damage that occurred prior to
their ownership of the home. Mr. Hendry further argued fraudulent
concealment because the Sellers did not divulge that they had recently painted
a wall in the basement. The trial court held for the Sellers and Mr. Hendry
appealed.
The Eighth District Court of Appeals upheld the trial court’s
ruling for the Sellers, easily coming to the conclusion that there was no fraud
or misrepresentation. The appellate court reasoned that the
evidence clearly established that Mr. Hendry had actual knowledge of water
infiltration in the basement through his professional home inspection. The
inspection reported large cracks and holes in the foundation, and other
problems and advised further investigation. Rather than investigate further,
Mr. Hendry “bought the defects” by negotiating for a price reduction. There was
no misrepresentation because the statements made by the Sellers were all true
(there was dampness and prior water issues). Further, there was no
fraudulent non-disclosure because there was no duty for Sellers to disclose everything they knew about its property;
only latent, not readily observable or discoverable defects. According
to the court, an
open and obvious small defect was notice to the buyer that a larger problem may
exist. Finally, the painting
of one wall was not deemed concealment by the court because it did not conceal
the extent of the problem; the cracks, holes and stains were still evident, and
the inspection report backed this up.
Petroskey v. Martin is also a recent, “water
infiltration in the basement case”, that includes a “scary” inspection report
and a buyer that sought to “buy the defect” vs. learn more about the problem.
The facts of this case are as follows:
In August, 2013, David Petroskey (sometimes
referred to herein as “Buyer”), and Dee Martin (sometimes referred to herein as
“Seller”), entered into a purchase agreement for a home in Lorain, Ohio.
In September, 2013, Buyer had the home
inspected. The inspection report noted various water issues and concerns about
the premises including: 1) evidence of water leakage and moisture in the crawl
spaces; 2) the property’s grading was a “[f]lat
[i]mproper soil slope towards [the] foundation;” 3) evidence of past water
leakage around the skylights and evidence of past or present water staining on
the ceilings in all bedrooms, the family room, and the master bathroom; 4) a “mold like substance” in the attic; and
5) loose and damaged trim wood and damaged wood fascia “from past or present leaks.” As was the case in Hendry v. Lupica, the inspector in Petroskey
v. Martin
also recommended further investigations and inquiries, including securing “[a] qualified roofing contractor to evaluate
and estimate repairs.”
The seller in Petroskey v. Martin also completed an
Ohio Residential Property Disclosure Form. However, where the Martin Disclosure Form asked, “Do you know of any previous or current leaks
or other material problems with the roof or rain gutters? …. (but no longer
than the past 5 years),” Mrs. Martin checked the “No” box. In her
deposition, Mrs. Martin testified that, at the time she completed the
Disclosure Form, she “thought it was
about seven years” since they had the roof replaced.
In October, 2013, Mr. Petroskey and Mrs.
Martin amended their purchase agreement. The amendment removed the general home
inspection contingency and reduced the sale price. After the amendment, Mr.
Petroskey (per his testimony) went through the Home “[m]aybe half a dozen” times before finalizing the purchase.”
Shortly after his purchase, Buyer suffered
ice damming on the roof, leaking skylights and a leaking roof. In addition, Mr.
Petroskey testified that “the front yard
did not drain properly and water entered the crawlspace and collected on the
floor.” Mr. Petroskey then sued the Seller alleging misrepresentations in
the form of Seller’s Disclosure Form declarations that there were no roof leaks
at the property. Whereas the Seller in Hendry v. Lupica failed to disclose the extent
of the defects (a distinction without a difference according to the Hendry court), the Seller in Petroskey v. Martin denied there were
any problems at all.
Accordingly, the trial court and the
appellate court in Petroskey v. Martin aptly agreed with
the Buyer’s characterization of the “no” answer on the Disclosure Form as a
misrepresentation. The courts noted, however, that only a claim for fraudulent misrepresentation was
actionable, and the evidence failed to show that the misrepresentation was made
with knowledge of its falsity, or with reckless disregard as to whether these
statements were true or false (recall that Mrs. Martin testified that she
thought the roof repairs were completed over seven years ago vs. within five
years as called for on the Disclosure Form).
Like the seller in Hendry v. Lupica, the seller in Petroskey v. Martin argued that there
was no fraudulent-non-disclosure because the seller had no duty to disclose material facts which are not latent,
and readily observable or discoverable through a purchaser’s reasonable
inspection.
Clearly, there was no question of past water leakage and water staining in the Lupica home, as well as in the Martin home. Both homes showed signs of
the same, and the inspection reports for both properties clearly identified
water leakage and staining.
The buyer in both cases argued that the
respective defects in their homes were latent. The buyer in Petroskey
v. Martin,
however did not argue latency regarding the extent of the defect (as the buyer
in Hendry v. Lupica unsuccessfully
had), but rather, latency regarding the cause of the defect. Mr. Petroskey testified that he had to pay approximately $50,000
for a new roof and argued that the inspection report did not specifically mention
ice damming and roof issues as the cause of the water intrusion and leakage.
Citing precedent from the Ohio Supreme Court
as well as from other cases heard by the Ninth District, the court in Petroskey
v. Martin
was not persuaded that these “lack of causation facts” made any difference. As summarized
by the Ninth District Court of Appeals in Petroskey: “The Ohio Supreme Court has found that, when
determining whether a defect was ‘open to observation,’ the issue is not the ‘cause
of the defect’ or the ‘remedial effectiveness of [a repair],’ …similarly, this Court has stated that the
cause of the defect, the underlying problem, does not have to be open and
obvious. If the defects are open and obvious …, the buyer is on notice to make further
inquiry as to the underlying condition.”
Applying the law to the facts, the court of
appeals in Petroskey concluded that, “Although
the home inspector did not identify the cause of the ‘leaks’ as ‘ice damming,’
he did notify the Petroskeys of evidence of ‘past water leakage,’ ‘past or
present water staining,’ and damage ‘from past or present leaks’ in various
locations throughout the Home. Thus, the defect was not latent and the
Petroskeys were on notice to make further inquiry as to the underlying
problem.”
What is the moral of this
story? 1) Never
waive your rights to inspections; 2) don’t rely on the Disclosure Form, which more
often than not turns out to be a “non-disclosure form;” 3) if any defect is uncovered in an inspection
report, assume it is a big deal and investigate it further with an expert (per
the court in Hendry, an open and obvious
small defect was deemed notice to the buyer that a larger problem may exist); and 4) if you decide to “buy the defect”,
make sure you know the price to repair it.
In other words, in the words of singer/songwriter/philosopher
Kenny Rogers: “You got to know when to hold them, know when to fold them,
know when to walk away and know when to run.”
