Duty to Disclose Defects

Question 1

Caveat Emptor

Answer 1

common law duty placed on the buyer to complete inspection of defects. Seller has no duty to disclose physical defects that could be reasonably discovered by the buyer (protects seller)

Question 2

Exceptions to Caveat Emptor: can rescind contract if one of these is met

General Common Law Exceptions:

Answer 2

Fiduciary relationship (greater expectations of care in disclosure: trustee/beneficiary, attorney/client)

Concealment

Affirmative Misrepresentation (a lie)

Question 3

Stambovsky exceptions

Answer 3

A. Seller creates conditions that:

B. Materially impairs value of contract (can be subjective)

C.Are unlikely to be discovered by a reasonably prudent purchaser exercising due care (finding for ghosts/ unlucky house)

Question 4

After Johnson: specifically seller of homes + the above

Answer 4

Known facts

Materially impair value

Which are not readily observable

Are not known to buyer at time of execution

Question 5

Practice Problem Takeaways:

Answer 5

** even if buyer disclaims actual knowledge as is: if the Stambovsky exceptions are followed, it does not matter and seller can still rescind

If buyer knows of fact already at contract execution, cannot meet exception

Conceded= said and proven in fact pattern (element will be met) (will plainly be elements are proven in fact pattern)

Question 6

Stambovsky v. Ackley *exception to caveat emptor SPOOKY

Answer 6

Fraudulent misrepresentation

Rule of Law

If a seller creates a condition that materially impairs the value of a contract and is within the knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care, nondisclosure of the condition constitutes a basis for rescission of the contract (exception of caveat emptor).

Facts

Jeffrey Stambovsky (plaintiff) entered into a contract for the purchase of a home in Nyack, New York, with Helen Ackley (defendant). Prior to the purchase, Stambovsky conducted the required home inspection and searched the public records regarding title. However, unbeknownst to Stambovsky, Ackley had held the house out to the public as a haunted house. An article had been written about the home in Reader’s Digest, and the home was included on a haunted homes tour of Nyack. Ackley did not disclose these facts to Stambovsky during their negotiations. Upon learning that the home was haunted, Stambovsky brought an action against Ackley to rescind the sales contract for the home. The trial court dismissed the complaint, stating that no remedy at law was available.

Issue

If a seller creates a condition that materially impairs the value of a contract and is within the knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care, does nondisclosure of the condition constitute a basis for rescission of the contract?

Holding and Reasoning (Rubin, J.)

Stambovsky inspected the premises and conducted the appropriate title-record searches, but he was unaware of the home’s reputation and was unlikely to inquire about whether the house was possessed.

Question 7

Johnson v. Davis *exception to caveat emptor

Answer 7

Rule of Law

Where a seller of property knows of facts materially affecting the value or desirability of the property that are not observable or known to the buyer, the seller has the duty to disclose them to the buyer.

Facts

Johnson (defendant) agreed to sell his house to the Davises (plaintiffs), but did not tell them what he knew about the poor structure of the roof. Mrs. Davis specifically asked about water marks on the ceiling, but Johnson told her that they were not water marks and that the roof was in good working order. After the Davises paid a deposit to Johnson for the house, a rainstorm occurred and Mrs. Davis entered the house to find water gushing in from the windows and ceiling. The Davises brought suit alleging breach of contract and fraudulent misrepresentation. Trial court found for Davis’ (rescinded the contract and got deposit money back)

Issue

Is a homebuyer entitled to a refund of the deposit when the seller knew of, but failed to disclose significant leakage problems in the house’s roof?

Holding and Reasoning (Adkins, J.)

Yes. A seller of a house is liable for failing to disclose material problems with the structure of the house that he knows about. The distinction between nonfeasance and misfeasance is hard to decipher and courts are continually restricting the doctrine of caveat emptor in the interests of fairness and justice. In line with these restrictions, the court holds that Johnson is liable for failing to disclose the leaky roof. Johnson knew about the leakage problems with the roof and not only failed to disclose them, but actually lied about them to Mrs. Davis. “One shouldn’t be able to hide behind caveat emptor shield” which does not conform with notions currently of justice, equity, and fair dealing. Because a leaky roof is a material defect, trial court affirmed and Johnson is liable to the Davises and must return the deposit.