ABA Connection

Dream Home Nightmares

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Owning a home is one of the sweetest joys of the American Dream. But the dream can sour quickly when the roof starts leaking. Or when water finds its way into the basement, mold sprouts in the ventilation system, the plumbing backs up or termites start eating their way through the beams that keep the rest of the house out of the basement. Or even when misdirected golf balls punch holes in the side of the house.

That particular problem has been haunting a retired attorney who, with his wife, purchased a newly constructed home near a golf course in the suburbs of Portland, Ore. At the advice of their real estate agent, the couple hired an inspector to check the house’s synthetic stucco exterior for damage. (Alleged defects in synthetic stucco have been the subject of a growing number of lawsuits around the United States.) The inspector found some problems, but the seller agreed to repair them prior to the closing.

Only after they completed the sale, however, did the lawyer and his wife realize that the problems with the synthetic stucco were even more extensive than the inspector’s diagnosis had indicated. They were relatively lucky, however–eventually, the builder agreed to make further repairs.

But the problems continue. They still must incur costs to have the stucco inspect­ed annually, and frequent repairs are neces­sary to make sure water doesn’t get into the house’s interior and cause rotting.

And the problems are compounded nearly every time a golfer sends a stray shot toward the house. A golf ball striking the synthetic stucco walls “will go right through this stuff and open the system, which has to be patched and costs money,” says the owner. In terms of damage, “A golf ball is worth $400 or $500 if it really goes through.”

Just about every lawyer who handles residential real estate matters hears war stories like this from clients sooner or later–or, like the lawyer in Oregon, experiences them with his or her own house.

Resolving conflicts over defects and repairs of houses or condominiums can be difficult, and sometimes prohibitively expensive, even though changes in the law in recent years have generally imposed more duties on sellers of real estate and their agents to disclose defects, including environmental hazards, to buyers.

“There’s nothing more unpleasant–not only unpleasant, but unsatisfying–than suing a seller who’s long gone for some problem with the physical condition of the property,” says Mary S. Ranum, who practices real estate law as a member of Fredrikson & Byron in Minneapolis. “Yes, get the disclosures. Yes, review the disclosures. But, really, get a good inspector and rely on the inspection.”

Age-Old Problem

Although it was released more than 50 years ago, the film Mr. Blandings Builds His Dream House remains pertinent today for its pointed and satirical look at the disasters that can befall home buyers who don’t prepare for the possibility of prob­lems in their new dwelling.

Blinded by a dreamy vision of the rattletrap house they’ve fallen in love with, the unsuspecting couple, played by Cary Grant and Myrna Loy, have already bought it when they finally call in an inspector to give it the once-over. Walking out of the place, he gives them a three-word report: “Tear it down.”

Things are rarely that bad, but it’s almost always easier to address problems with a property as early in the transaction as possible–and before the sale has closed. Experienced real estate practitioners say disclosures and inspec­tions give buyers a two-step chance at identifying problems in a house before it’s too late. But it wasn’t always that way. Years ago, the basic rule that applied in real estate transactions was “buyer beware.”

Today, in an effort to help buyers avoid the kind of disaster that befell Mr. and Mrs. Blandings, many states have enacted laws requiring sellers of residential real estate to disclose known material defects in the property. In other states, case law has evolved to impose the same duty. Typically, the duty to disclose also applies to real estate agents. In most cases, the duty to disclose specific defects should be obvious to a seller and the seller’s agent. But in other cases, the duty may not be apparent. A number of states, for instance, expressly waive the duty to disclose “psychological property defects,” such as the occurrence of an unsolved murder or other violent crime in the house.

In 1993, the Ohio Court of Com­mon Pleas held that a seller could be liable for nondisclosure for not responding truthfully when the buyer asked about crime in the neighborhood. Van Camp v. Bradford, 623 N.E.2nd 731.

In New York, though, an appeals court upheld the dismissal of a nondisclosure suit against sellers and their sales agents who didn’t inform the buyer that a convicted sex offender lived across the street. Under the buyer-beware doctrine, there was no duty to disclose and the information was readily available to the buyer in the local newspaper, the court held. Glazer v. LoPreste, 717 N.Y.S.2d 256 (N.Y. App. Div. 2000). Generally, issues of alleged seller nondisclosure focus on what the seller knew, what the seller was supposed to know and when the seller knew it.

That leaves a lot of wiggle room for sellers, especially if they choose not to engage in their own attempt to identify defects before selling the prop­erty. In Illinois, for instance, the standard language in disclosure reports required from sellers under state law expressly states that the asser­tions made by sellers do not constitute warranties and that the seller represents the condition of a property “to the best of his or her actual knowledge.” Thus, the less a seller actually knows about the property, the better off he or she may be, suggest real estate practitioners.

Indeed, from a legal standpoint, sellers may be better off not conducting their own inspections of properties they are selling, according to Aurora N. Abella-Austriaco, a partner at Peck, Bloom, Austriaco & Mitchell in Chicago. If such an inspection identifies defects, the seller should disclose them to prospective buyers, says Abella-­ Austriaco, chair of the Single Family Residential Committee of the ABA Section of Real Property, Probate and Trust Law.

For a buyer, though, a home inspection can be a critical step in the process. Lawyers routinely recommend to clients who are purchasing houses that they hire professional inspectors to prepare thorough reports assessing the overall condition of the property, as well as specific systems such as plumbing and electric. This is best done either prior to entering into a contract or pursuant to a provision in the contract that allows the buyer to have the property inspected and raise issues arising out of the inspection within a certain number of days after the parties have signed the contract.

Such provisions generally allow the parties to declare the contract null and void if they cannot resolve the repair issues. Sometimes, disputes over repair issues will kill a deal, but in most cases the parties negotiate and agree to have the seller make at least some repairs or to credit the buyer an amount that will cover at least some of the estimated costs of the repairs.

Some lawyers say that one general inspection may not be thorough enough to identify all the defects in a house.

E. Hart Green, a lawyer in Beaumont, Texas, used a multiple-inspection approach when he bought a new home last year. In addition to a general home inspector, Green brought in an electrician, a general contractor, a termite inspector and a foundation expert before closing to ensure that the home was as problem-free as it appeared to be. While it is not an overly expensive house, Green says the inspections were justified by the potentially horrendous problems they could help prevent. “I’m just going to be dadgummed sure, or at least be as knowledgeable as I can,” he says.

Environmental Concerns

In addition to the “traditional” inspection issues–leaking roofs, bad plumbing and such–potential environmental hazards have become a growing concern for buyers and their attorneys.

Along with long-standing concerns about such factors as lead-based paint and household materials containing asbestos, other potential problems have been identified in recent years, including mold caused by water infiltrating into a house; radon, a colorless and odorless gas that seeps into basements and through concrete foundation slabs in certain regions of the country; synthetic stucco, which, when improperly installed, can lead to moisture inside walls that produces mold and rot; and even leakage from nearby underground oil storage tanks.

Other potential health issues include failing septic systems and bad water quality. The latter is more often an issue when drinking water is supplied by private wells. However, water piped in by a municipality or other government agency can sometimes be problematic, as well.

Buyers need to be particularly cautious about environmental defects, says Ranum, because they can be very expensive to repair.

Condominiums, townhouses and units in planned communities raise unique disclosure and inspection issues.

Because these units share a building or development in which general repairs are handled through a homeowners association, an inspection of a specific unit is generally less important than obtaining disclosure about major repair projects for the development and special assessments that may be charged to owners to pay for them, says Gary A. Poliakoff of Becker & Poliakoff in Fort Lauderdale, Fla., a vice chair of the Common Interest Owner­ship De­velopment Committee in the ABA’s real prop­erty section.

Disclosure issues relating to a condominium development can be complex, says Poliakoff, because the seller may not know of or be required to disclose issues that arise outside the four walls of the condo unit. Meanwhile, the homeowners association may not have a duty under common law to disclose information because it’s not in privity with the buyer, he notes.

“There’s a certain risk as to the purchase of any piece of property,” says Poliakoff, who notes that he has heard hundreds of stories of buyers who closed on a condominium unit only to find out shortly thereafter that a new special assessment was about to be levied. “In one case, it was as high as $50,000,” he says. “And yet the seller in that case didn’t have any duty to disclose.”

In recent years, however, Illinois and other states have adopted statutes that require sellers of condominiums to disclose, usually through homeowners associations or man­agement companies, the financial status of the association, any upcoming assessments and other information that may impact the buyer.

But even with stricter rules on disclosure and thorough inspection efforts, sometimes a buyer still doesn’t learn about defects or hazards in a house he or she is buying. No matter how qualified an inspector and how thorough the inspection, for instance, it isn’t always possible to detect hidden problems without extraordinary efforts, such as opening up walls, that sellers would be unlikely to agree to and buyers would be reluctant to pay for.

Timing Is Everything

When it comes to resolving issues that concern defects, repairs or environmental hazards in a newly bought house, timing is everything.

In most cases, a buyer can walk away from a deal if serious issues are identified during the inspection process, or demand that the seller make repairs as a condition of purchase. But once the transaction has closed, it’s much harder for a buyer to get anyone else to help pay for needed repairs.

At least there are multiple potential defendants in such cases: the seller, of course; the real estate agent; the builder, if the house is new construction; any contractor who performed previous repairs; the home inspector; and even the attorney who helped close the transaction.

Like most real estate practitioners, Abella-Austriaco is familiar with both extremes of handling claims over home defects and repairs. Sometimes things work out easily, she says. That was her experience when representing the buyer of a Chicago two-flat after it was discovered that the seller had intentionally concealed damage caused by water and insects. “I sent a letter to the seller, and they settled right away.”

Unfortunately, Abella-Austriaco ex­perienced a much more difficult time when she bought her own house in the Chicago suburbs. Soon after buying the house four years ago, she and her husband discovered that it had an undisclosed drainage line backup problem in the finished basement. Although the house had been inspect­ed prior to purchase, the flooding wasn’t apparent because the seller had made cosmetic repairs to conceal the bad drainage, Abella-Austriaco says.

Because they suffered approximate­ly $50,000 in property damage and repair costs, and could call as a witness a neighbor who had helped the seller clean up after previous flooding, litigation was worth the effort, says Abella-Austriaco. After three years, they reached a settlement that helped defray the cost of repairs but was still significantly less than their total damages, especially after paying attorney fees.

In Illinois, for instance, a claim of seller nondisclosure typically would be included among other counts such as negligent misrepresentation and fraudulent misrepresentation, says Abella-Austriaco. Under the state’s Residen­tial Real Property Disclosure Act, a court may, but is not required to, award attorney fees to a prevailing plaintiff.

Possible causes of action, in addition to nondisclosure and misrepresentation by the seller, include breach of contract. Warranty claims generally may be brought against a builder or a contractor who improperly made repairs, as well as the seller, based on implied warranties recognized in statutory or case law and any express warranties included in a real estate or construction contract.

Unless there is a substantial amount of damage to the home, however, or unless many other owners are experiencing the same problem and might be appropriate co-plaintiffs in a class action, the costs and time involved to litigate these issues may be prohibitive.

Thousands of lawsuits have been filed in recent decades, for instance, against manufacturers and installers of allegedly defective plastic plumb­ing pipe that leaked extensively throughout houses. But few homeowners are likely to consider major legal action over a bad plumbing job that causes a drain leak under a bathroom sink and requires the wooden vanity cabinet to be replaced.

Likewise, if the responsible build­er is bankrupt or the seller has moved to parts unknown, recovery may, as a practical matter, be impossible no mat­ter how major the damage or how strong of a legal case the buyer can make.

In addition, damages that can be recovered from a home inspector may be limited to the cost of the inspection, as is the case in Illinois, says Abella-Austriaco. “Unfor­tunate­ly, they’re limited to the amount that you pay,” she says. “So if you pay $350, they’re liable for $350.”

There are alternative avenues of recovery, however, that should be considered, including small claims court and mediation.

In some circumstances, it may be possible to pursue as a consumer fraud claim a case that might otherwise be economically unfeasible. If so, depending on the state law, this could potentially allow an award of punitive damages or attorney fees.

The Connecticut Unfair Trade Practices Act has been held to apply to a builder who failed to disclose to buyers that the lot on which he was to construct a home for them belonged to a third party. In Miller v. Guimaraes, 829 A.2d 422 (Conn. App. 2003), the plaintiff was awarded nearly $38,000 in attorney fees under the statute just $3,000 less than the basic damages being sought.

Courts in other states, however, have held that consum­er fraud statutes do not apply to residential real estate sales.

For instance, the Illinois Appellate Court held in Car­rera v. Smith, 713 N.E. 2nd 1282 (1999), that advertising and selling one’s home doesn’t constitute requisite “trade or commerce” as defined by the state’s Consumer Fraud and Deceptive Business Practices Act.

Mitigating Damages

Another possibility for recovery is homeowner’s insurance. In some cases, it will potentially cover the cost of undisclosed defects discovered after purchase, says Green, the Texas lawyer whose practice focuses on home­owner property damage litigation. In Texas, Green says, terms of coverage state that “you don’t have damage until the damage manifests itself to you,” even if it occurred years earlier.

At the same time, though, it isn’t wise to gamble on insurance covering something, only to find out otherwise after the purchase, Green says. “The most important thing is for purchas­ers to know what they’re getting.”

Moreover, he says, “You always want to mitigate your damages; you always want to get the repairs made. There are a lot of other people to call before you call your lawyer.” To enhance the chances of recovery when making an insurance claim, homeowners should “document ev­erything that you do with an insurance company in writing, every phone call, every discussion that you have with them,” Green says. This may help preclude the insurer from arguing that it doesn’t have to pay the claim because it didn’t receive timely notice of a particular issue.

Homeowners should also notify the carrier in writing, Green adds, even though written notice might not be legally required.

“In Texas, there’s a statute that says you’re supposed to give an insurance company notice in writing of a claim, but what their policy says is, ‘Give us a call at this number,’ ” he points out. Hence, the insurer might have waived the statutory notice requirement, but this isn’t certain. In Texas, at least, “The court hasn’t ruled on that yet, but it’s going to happen,” Green says.

As certain types of environmental claims proliferate, insurers typically change policy language to restrict coverage. Thus, coverage for mold has been reduced or even eliminated by insurers in the past decade as the numbers of claims and lawsuits exploded. But homeowners faced with an environmental problem should not assume that insurance doesn’t apply, says James B. Witkin of Linowes and Blocher in Bethesda, Md. He is the author of Environmental Aspects of Real Estate Trans­actions, published by the ABA, and is co-chair of the envi­ron­mental committee in the association’s real property section.

“In any of these cases, it’s important to look at your insurance,” he says. “Although many of these environmental perils may be excluded from your policy, you need to check your policy carefully–you may be pleasantly surprised.”

If the policy isn’t clear about the extent of coverage, insurers may balk at paying claims “in gray areas,” such as a mold infestation that would be excluded except that it was caused by a covered plumbing leak, says Witkin. But the carrier may ante up because ambiguous insurance policies, as contracts of adhesion, are supposed to be interpreted in the policyholder’s favor.

If the insurer’s refusal to pay a legitimate claim is egregious, a bad-faith suit seeking punitive damages might succeed. This possibility can both make a homeowner’s case more attractive to a plaintiffs lawyer and give the insurer an incentive to settle. A potential disadvantage of pursuing an insurance claim is that it may prompt the carrier to cancel the homeowner’s future coverage.

Even if you win the coverage fight over a mold issue, for instance, Witkin warns, “In this market many people who file mold claims find out they can’t renew their policies the next time.”

Similarly, owners who live in homes considered to have environmental problems may have trouble getting coverage to begin with. For instance, the retired Portland, Ore., attorney whose home is coated with synthetic stucco says that he, like many other owners of such dwellings, can only get homeowner’s coverage from a handful of insurers. In the movie, Mr. and Mrs. Blandings decide to build a new home from the ground up, and when they finally move in after many tribulations, it is truly their dream house. Most of the time, things work out much the same way in real life, too. Abella-Austriaco says she and her husband love their home even though they lost a significant amount of money and wasted a lot of time dealing with the litigation over the problems in the basement.

“I love the house,” she says. “I love our neighbors. It’s all worthwhile, with the headache that we went through. And frankly, because we went through so much, I’m prob­ably going to stay in this house forever.”

Martha Neil, a lawyer, is a legal affairs writer for the ABA Journal.

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