Case Law Update
Since the mid-1990’s, the State of Indiana has required sellers of single-family residential real estate to complete and deliver to buyers a disclosure form entitled “Seller’s Residential Real Estate Sales Disclosure”, pursuant to the requirements of Indiana Code § 32-21-5. Over the past twenty four months, the Indiana Court of Appeals has decided four cases dealing with the effect of the representations made by sellers of real estate in the Sales Disclosure Forms and, in the process, has reversed the common law interpretation and enforcement of these forms.
OVERVIEW OF THE DISCLOSURE FORM
The body of the Sales Disclosure Form contains checklists where a seller is required to disclose the status of various systems and improvements to the real estate, including appliances and the electrical, water, sewer and heating and cooling systems. In addition, the seller is required to make disclosures addressing the condition and history of other parts of the home, including, for example, the roof, the foundation, the occurrence of water intrusion and the presence of wood destroying insects. However, special attention should also be paid to the notices and disclaimers that are included in the fine print of the Seller’s Disclosure Form, including:
- “This information is for disclosure only and is not intended to be a part of any contract between the buyer and the owner.”
- “The information contained in this Disclosure has been furnished by the Seller, who certifies to the truth thereof, based on the Seller’s CURRENT ACTUAL KNOWLEDGE.”
- “A disclosure form is not a warranty by the owner or the owner’s agent, if any, and the disclosure form may not be used as a substitute for any inspections or warranties that the prospective buyer or owner may later obtain.”
In Indiana, the traditional rule regarding the purchase of real estate has always been one of “caveat emptor” or “buyer beware”. While it would appear that the Indiana Legislature attempted to make inroads on this rule with the requirement for the Seller’s Disclosure Form and the language of Indiana Code § 32-21-5, the Indiana Court of Appeals has traditionally used the disclaimers recited above to override this attempt at buyer protection.
LAWSUITS INVOLVING THE FORM
Dickerson v. Strand
The most recent case to reinforce Indiana’s long held rule of caveat emptor was the case of Dickerson v. Strand, 904 N.E.2d 711 (Ind.Ct.App. 2009), which dealt with a fraud claim made by a buyer of real estate regarding representations included by a seller in a Sales Disclosure Form. The lawsuit in Dickerson involved a home that was significantly damaged by termite infestation, including structural damage to the foundation of the home. While contractually entitled to a home inspection before purchase, the buyer of the home did not have an inspection performed and instead relied on the Sales Disclosure Form, which stated that there were no structural problems with the home. Years later, the buyer discovered the structural damage, as well as the temporary efforts that were used by the seller, not to repair the damage, but to simply “prop up” the home to prevent immediate collapse.
The trial court granted summary judgment to the seller and, on appeal, the appellate court summarized the issue as: whether the buyer had the right to rely on representations by seller as to the quality of the house when the buyer had a reasonable opportunity to inspect the house for themselves. The appellate court affirmed the ruling of the trial court, finding that “[W]e need not decide whether [the seller’s] representations were fraudulent because, under Indiana law, the [buyers] had no right to rely on those representations.” The court recognized the well-established legal principle in Indiana that “a purchaser of property has no right to rely upon the representations of the vendor of the property as to its quality, where he has a reasonable opportunity of examining the property and judging for himself as to its qualities.”
In an effort to point out the inconsistency of this ruling with the Indiana Legislature’s intention to protect sellers through Indiana Code § 32-21-5 requiring the Sales Disclosure Forms, Justice Vaidik drafted a dissent to the majority opinion in Dickerson. Justice Vaidik centered his inquiry, not on whether the buyer had an opportunity to inspect, but “whether the seller of covered residential real estate actually knew about the property’s defects when filling out the disclosure form.” Based on this inquiry, Justice Vaidik found that there would have been a significant question of fact as to what the sellers knew at the time of completing the Sales Disclosure Form and, therefore, the summary judgment ruling was inappropriate.
Following Dickerson, three Indiana Court of Appeals decisions have agreed with the Dickerson dissent: Vanderwier v. Baker, 937 N.E.2d 396 (Ind.App. 2010) and Hizer v. Holt, 937 N.E.2d 1 (Ind.App. 2010) and, most notably, Wise v. Hays, 2011 WL 529712 (Ind.App. 2011), which was authored by Justice Vaidik.
Hizer v. Holt
In Hizer, the seller completed the Sales Disclosure Form stating that there were neither defects with the plumbing nor any water problems in the basement. After closing, the buyer discovered several problems with the both the plumbing and basement walls, including efforts by someone to conceal several problems in the basement. The appellate court reversed the trial court’s grant of summary judgment in favor of the seller and remanded, stating:
[W]e conclude that Indiana Code chapter 32-21-5 abrogates any interpretation of the common law that might allow sellers to make written misrepresentations with impunity regarding the items that must be disclosed to the buyer on the Sales Disclosure Form pursuant to section 32-21-5-7(1). Moreover, we disagree with our court’s conclusion in Dickerson and hold that a seller may be held liable for fraudulent misrepresentations made on the Sales Disclosure Form if the buyer can prove the seller’s actual knowledge of the defect at the time the form is completed.
Vanderwier v. Baker
In Vanderwier, the seller completed a Sales Disclosure Form noting “minor garage seepage” during severe rain. After closing, the lower level of the home flooded and, during repair, the buyer discovered water marks on the walls and rotted boards from prior water damage. The trial court ruled in favor of the buyers on their fraudulent misrepresentation claims and the appellate court affirmed, adopting the Hizer opinion in its entirety.
Wise v. Hays
In Wise, the buyers of sixteen acre parcel inquired of the sellers as to the designation of a wetlands on the property and whether it would affect future residential development of the parcel. In response, the sellers stated that the property could be developed for additional residential housing. The buyers also received a Sales Disclosure Form in which the sellers responded that there were no structural problems with the house, that they had received no notices from any governmental agencies regarding the property, that there were no additions to the residence performed without a permit and that the property was not in a flood plain, among other things. The buyers purchased the home following a home inspection by a licensed home inspector.
Following the purchase, the buyers obtained copies of previous correspondence from the Army Corps of Engineers to the sellers, which stated that the property was in violation of the Clean Water Act due to earthwork that had been performed by the sellers. The correspondence also stated that the wetlands may affect future development of the parcel. In addition, the buyers hired a professional engineer to inspect the residence following the purchase and the engineer found numerous code violations and structural problems with the residence. The buyers filed suit for negligence and fraud, but the trial court dismissed their claims based on the sellers argument, and the Dickerson holding, that the buyers had no right to rely on the sellers’ representations when they had a reasonable opportunity to inspect the property.
In reversing the trial court decision and remanding for trial, Justice Vaidik for the Court of Appeals cited to his own dissent in Dickerson and the holdings of Hizer and Vanderwier, and found that, “For transactions covered by Chapter 32-21-5, a seller maybe liable for misrepresentations on the sales disclosure form if the seller had actual knowledge of that misrepresentation at the time the form was completed.” The appellate decision went on the state that the correspondence from the Army Corps of Engineers and the inspection report from the professional engineer established genuine issues of material fact as to what the sellers had actual knowledge of at the time they made their disclosures.
While the Hizer, Vanderwier and Wise decisions give much-needed teeth to Indiana Code § 32-21-5 and the Sales Disclosure Form, it is important to recognize that a buyer will still have to prove that the seller had actual knowledge of problems with a residence when completing a Sales Disclosure Form. This is often an uphill battle in its own right, but it is good news for buyers of real estate in Indiana that sellers no longer able to make fraudulent statements in order to consummate a sale and then hide behind the buyers’ home inspection, which in all likelihood will not discover concealed defects.