A Note From The Legal Helpdesk: Caveat Emptor for the Buyer's Agent
October 24, 2017
Caveat Emptor is a must-know phrase in real estate. The Legal Helpdesk has a two-part series on the rule. This week we are looking at the rule from the perspective of the buyer’s agent and next week from the perspective of the seller’s agent.
As a buyer’s agent, the doctrine of caveat emptor is especially relevant to your clients. Basically, caveat emptor means that the seller and seller’s agent have a very limited duty to disclose defects or issues in used real estate, putting much of the risk of buying used property on the buyer and buyer’s agent. Forewarned is forearmed, and with proper understanding, you can turn “buyers beware” to “buyers be aware.”
No Duty – So What
You may be wondering why it matters - what impact does a limited duty have on you and your client? After all, your client just bought a house, the house has an issue of which you were unaware, so the seller should be responsible for the issue. It matters because when a seller or seller’s agent has no legal duty to disclose an issue, a buyer cannot sue the seller or seller’s agent for the later found issue. This can result in the buyer incurring large and unexpected costs.
Even if a seller or seller’s agent makes a verbal or written disclosure that is inaccurate or knowingly wrong but not incorporated into the purchase agreement, Alabama courts have consistently dismissed lawsuits by the buyer due to the rule of caveat emptor and the presence of an “as is” clause in the purchase agreement. See Moore v. Prudential Residential Services Ltd. Partnership, 849 So. 2d 914, 924 (Ala. 2002).
Also, keep in mind that caveat emptor applies to all used real estate including improved and unimproved property such as vacant lots. DeAravjo v. Walker, 589 So. 2d 1292, 1293 (Ala. 1991)
Used Real Estate Only - New Homes Excluded
If your client is interested in new homes, caveat emptor does not apply. For the commercial sale of a new house by its builder/vendor, Alabama applies an implied warranty of fitness and habitability. This effectively places more risk or liability on the builder/vendor of a new home. See Sims v. Lewis, 374 So. 2d 298 (Ala. 1979).
Lessening a Buyer’s Risk
While caveat emptor is the general rule, a buyer can decrease or mitigate the risk of purchasing a used home in various ways. Home inspections and home inspectors are an important, albeit sometimes detrimental, tool of the buyer. A home inspection is meant to inform the buyer of issues with the house so that the buyer can incorporate issues into the purchase cost or ask the seller to fix the issue.
For any issues not fixed by the seller or not revealed by the home inspection, an “as is” clause in the purchase agreement means that these issues are still the buyer’s responsibility, precluding lawsuits even for negligence or fraud. To further limit a buyer’s risk, a buyer can negotiate with the seller to add language to the purchase agreement. This language may include incorporating the seller’s disclaimers or inserting a disclaimer excepting specific items, like fraud or negligence. See Teer v. Johnston, 60 So. 3d 253 (Ala. 2010).
Buyer’s Agent - Duty to Disclose
There are two legal aspects to the responsibility of a buyer’s agent to disclose information. First, under general Alabama law, a buyer’s agent has a duty to disclose in certain situations or be liable to the buyer for damages caused by the failure to disclose. Second, a buyer’s agent has additional duties to disclose imposed by the Alabama real estate law or be subject to disciplinary proceedings by the Alabama Real Estate Commission (AREC). We will discuss both aspects below.
Liability to the Buyer
A buyer’s agent can be liable to the buyer for failure to disclose in several scenarios. First, the buyer’s agent must disclose knowledge of a material defect or condition about the property that affects health or safety and that defect is not known or readily observable to the buyer. See Rumford v. Valley Pest Control, Inc. 629 So. 2d 623 (Ala. 1993). Second, if a buyer’s agent assumes the obligation to inspect the premises or a specific issue, the agent is bound by a duty of truthful disclosure. See Fennell Realty Co. v. Martin, 529 So. 2d 914 (Ala. 1988). In essence, a buyer’s agent must disclose harmful issues he or she knows about the property but should be careful in what he or she agrees to inspect (e.g., if you are not a licensed electrician, you incur substantial risk by agreeing to inspect the wiring of a house).
License Law Responsibilities
The Alabama real estate law imposes additional duties as well. Section 34-27-36(a) empowers AREC to revoke or suspend a license, impose a fine or reprimand a licensee for failure to abide by certain rules. Sub-section (a)(3) specifically forbids a licensee from “making a material misrepresentation, or failing to disclose to a potential purchaser or lessee any latent structural defect or any other defect known to the lessee.” It further defines a “latent structural defect” or “other defect” as not “trivial or insignificant defects but . . . those defects that would be a significant factor to a reasonable and prudent person in making a decision to purchase or lease.”
The important thing to remember is that the law limits the duty to disclosing known defects, even latent defects. So, a buyer’s agent has a duty to disclose most defects if they know about them. In practice, buyer’s agents walk through the house with their clients and are duty-bound to tell the client of any issues they see or know from other sources. However, the law does not impose upon a buyer’s agent a duty to search the property for defects.
For information on the duty of a seller or seller’s agent to disclose an issue, come back next week!
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