Condition of the Premises
• Traditional view: caveat emptor
– Unless K provides otherwise, Buyer takes property “as is,” no implied
warranty re: size or parcel or physical condition of improvements
– Seller has no post-closing liability for defective conditions, unless
Seller
• Makes express warranties (contract), or
• Makes affirmative misrepresentations (tort)
• To what extent has/should law retain (or move away from) caveat
emptor?
• Seller wants to say that the parties had established the price on a
“per acre” basis, rather than a “lump-sum” or “in gross” basis
– If this argument is accepted, Seller could rescind or get upward
adjustment of purchase price)
• Weight of authority: sale of real property is “in gross” absent
admissible extrinsic evidence that the parties negotiated the sale
price on a per acre basis
– Here, there would appear to be no mutual mistake as to actual
boundaries of the parcel (facts say that the parties “walked the four
corners” of the parcel)
– See McAndrew v. Perfect (Ind. Ct. App. 2003) (on similar facts, seller
could not rescind)
• Buyer signs K to buy farm
• K: property described as “Anderson Rd.,
Dearborn County, 81.1 acres owned by
Jones”
• Agreed price = $252,500
• Prior to closing, Buyer obtains a survey
that reveals parcel is actually 88 acres is
size, not 81.1 acres
• Can Seller cancel K, or can Buyer
enforce it?
Problem 1
“In Gross” Sales
• If land is being sold “in gross” (for a lump sum rather than on a
“per acre” basis), the accuracy of a statement of quantity in the
contract or deed is not “essential” to agreement
– E.g., “15.6 acres, more or less” commonly indicates an “in gross”
sale
– E.g., in home sale, contract identifies house as “2,400 square feet”
when it is actually only 2,300 square feet
• By contrast, if land is sold on a “per acre” basis, and there is
deficiency/overage in acreage, court may adjust price accordingly
Variations on Problem 1
• (a) Buyer does a survey, and discovers the parcel is 88
acres (not 81.1 acres as described in the contract), but
Seller does not know this. Must Buyer disclose this
information to the Seller?
• (b) Seller does a survey, and discovers that the parcel is
74 acres in size (not 81.1 acres). Must the Seller
disclose this information?
Modern Duty of Disclosure — Jensen v. Bailey
• Seller of home must disclose any known defect that is
– Material to a reasonable buyer
– Unknown to the buyer, and
– Unlikely to be discovered during a reasonable inspection of the
land (i.e., “latent” defect)
• Rationale?
– Buyer considers Seller’s silence as a signal that there is no
defect (nondisclosure = misrepresentation)
Disclosure
• There is no meaningful legal authority that compels Buyer
to disclose information to Seller (even if the information is
material and is unknown to Seller)
• The converse was also true, at least traditionally: no
obligation of disclosure on Seller (even if information is
material and is unknown to Buyer)
– Each party was considered equivalently capable of discovering
relevant information
Duty of Disclosure: Legal/Practical Limits
• Most cases have involved home sales, not commercial
property or raw land
– E.g., doubtful that court would impose duty of disclosure on
Seller in Problem 2 (presence of asbestos in commercial
property)
• Duty of disclosure also doesn’t protect Buyer if Seller is
honestly unaware of the problem, as in Jensen v. Bailey
• Only protects against “latent” defects
Latent vs. Patent
• A defect is “latent” if it is unlikely to be
revealed by a reasonable inspection
• But what’s a “reasonable inspection”?
Should the law presume it is an
inspection done by a professional
home inspector (e.g., Bob Vila), or an
inspection done by the typical buyer
(e.g., Homer)?
Disclosure v. Inspections
• Moreover, some courts are less inclined to allow a
nondisclosure action if contract provided “as is, where is”
clause and buyer contracted for a right to inspect, but did
not exercise it
– E.g., Alires v. McGehee (Kan. 2004); sellers failed to disclose
leaky basement; buyers contracted for inspection contingency
but never did inspection; held that buyers could not recover
damages after closing
• The higher the standard to which law holds buyers, the less
disclosure Sellers will make
– Result: (1) smart buyers hire professional inspectors, which increases the
cost of buying land; (2) dumb buyers are more often fleeced
• A lower standard would tend to produce more disclosure
– Sellers will more likely to disclose in marginal cases to avoid liability
– This may lower the cost of acquiring land (and protect naïve buyers), but
may encourage naïvete
• Note: If a broker is involved, broker will insist that Seller disclose
(to protect broker against nondisclosure liability)
Disclosure Statements
• Brokers will compel represented sellers to provide standard
form disclosure statements
– See listing form, p. 5, ¶ 9
• Some states require ALL sellers to provide comparable
disclosure on state-mandated form [note 12, p. 195]
– E.g., MD: If not provided, Buyer can rescind
– NY: if not provided, Buyer entitled to $500 credit against purchase
price
• Seller and Buyer sign home sale K
– Seller knows that the home once had
termite damage (previous treatment)
– Seller provides disclosure statement: “Are
you aware of any termite problems with the
home?” Seller’s answer: “No.”
• After closing, Buyer discovers further
termite damage
• Can Buyer recover damages based on
nondisclosure?
Problem 6
• Smith has some bad neighbors
– Next door neighbor’s son is a member of the
Young Aryan Nation
– Nearby neighbor is a registered sex offender
• Should Smith have to disclose these facts to
prospective buyers?
• What if his Buyer is Jewish, or a family with
young children?
Termites:
Problem 5
Must Seller Disclose Problems
that Were “Fixed”?
• Weight of authority: Seller does not have to disclose prior
damage that has been fixed, if the Seller relied on assurance
from contractor that condition had been fixed, and does not have
any reason to know of new problems
• In practice, however, brokers will often require their Sellers to
disclose such matters anyway (again, broker doesn’t want to be
sued, even if broker is likely to win that suit)
Nonphysical Defects
• Some decisions have required Sellers to disclose latent
“psychic” defects that materially affect land’s value
– E.g., Reed v. King (Cal. 1983) (multiple homicide)
– E.g., Stambovsky v. Ackley (N.Y. 1991) (haunted home)
• Others have refused to treat psychic conditions as material
– E.g., Milliken v. Jacono (Pa. 2014) (murder/suicide)
• What’s the better approach?
• Recent courts have been reluctant to extend duty to
disclose beyond the premises, or to “nonphysical” defects
– Requiring disclosure may render such land effectively
unmarketable (unsaleable)
– Where to draw the line?
– A particular buyer’s subjective preference might be rational
(“reasonable”) and yet hard for the seller to predict or anticipate
– Better for Buyer to signal the materiality of the information to
Seller by asking specific Qs (e.g., “Has anyone been murdered
in this house?)
Caveat Emptor and Warranties
• Under traditional approach, seller did not impliedly
warrant the condition of the property (“as is, where is”)
– Buyer received no warranty of property’s condition unless
Seller made express warranties in the contract of sale
– Traditionally, there was no difference in this respect between
residential and commercial transactions
Missouri Disclosure Statute
• Fact that land is “psychologically impacted real property,” or
in close proximity to such land, “shall not be a material or
substantial fact that is required to be disclosed” [RSMo. §
442.600(1)]
– “Psychologically impacted” includes (but is not expressly limited to)
land that was site of homicide or other felony, suicide, or that was
occupied by someone with HIV/AIDS
Implied Warranty of Quality
• Today: the law still refuses to imply any warranty of quality in the
consumer-to-consumer sale of an existing home
• But, law in nearly all states provides that a builder-seller of new
home impliedly warrants its structural soundness and its fitness
for use as a residence [e.g., Speight v. Walters Dev. Co., Ltd., p.
197]
– Buyer of new home is relying on expertise of builder regarding the quality
of materials and construction (typical buyer has no such expertise)
– New homes more analogous to goods (long subject to Art. 2 warranties)
Implied Warranty of Quality
• Coverage varies by state:
– In some states, this warranty extends only to major structural
defects [note 1, p. 205]
– In others, warranty covers any part of home that “has a functional
purpose that directly benefits the home” or “plays an integral role in
the enjoyment of the home”
• E.g., defective landscape retaining wall violated warranty, Hershewe v.
Perkins, 102 S.W.3d 73 (Mo. App. 2003)
• Risk allocation/cost of insurance is the same for the builder,
whether or not the warranty “runs” to a remote purchaser
– Builder has no control over whether initial purchaser resells
• Trend in case law is in the other direction [fn. 2, p. 200], and
holds builder liable to remote buyer for violation of implied
warranty (despite lack of privity)
– In MO, resale buyer of relatively new home must contract for
(1) express warranty from Seller, or (2) more likely, a thirdparty warranty (e.g., “home protection warranty”)
Problem 7
• Missouri law limits the implied
warranty to the original buyer
• In other words, the implied
warranty doesn’t run to a
subsequent buyer [p. 199, fn. 1]
• In this sensible?
Problem 8
• Builder signs contract with Buyer for
new home
• Contract disclaims the IWQ and instead
“substitutes” an express warranty (2
years in duration, covering all defects in
materials, workmanship)
• Is this legally effective to replace the
implied warranty?
Waiver/Disclaimer
• This approach could substantially shorten duration of
Builder’s exposure (e.g., 2 year express warranty vs. 6 years
for implied warranty of quality)
• Could also (depending on the language of the express
warranty) narrow the scope of the covered risks
• MO: could be enforced if evidence shows express warranty
was a “bargained agreement in fact” [Crawford v. Whittaker
Constr. (1989)]