3,768 words 6/14/2012

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1 JUDICIAL UPDATE FOR REALTORS There are many recent judicial decisions affecting REALTORS and real estate. article discusses some of the more important ones. This Buyer Beware Defects in Property Do Not Always Support Rescission of a Contract Two cases decided by our Georgia appellate courts highlight the need for buyers not only to inspect the properties they are planning to buy, but to investigate further when the evidence of problems arises. The first is the case of Jegadeesh v. Ryan (293 Ga.App. 341). The facts of the case are as follows. Mr. and Mrs. Ryan sold their custom-built home to Mr. and Mrs. Jegadeesh in The Ryans had not resided in the home since When they put the property on the market in 2003, they signed a GAR Seller's Property Disclosure Statement in which they answered Don t know to the question Are you aware of any water leakage, accumulation, or dampness within the basement crawl space or other parts of the main dwelling at or below grade? The Ryans other responses on the disclosure statement indicated that they were not aware of any repair being made to control any water or dampness problems. The buyers obtained a property inspection prior to closing. The inspection revealed water damage and high moisture readings at a pool retaining wall with the pool decking showing substantial cracking that would allow some moisture over time into the patio support structure. Repairs were negotiated between the parties, and the sale closed in July Soon after taking possession, the buyers discovered water in the subfloor above the basement, and notified the sellers of their intention to rescind the contract. The buyers filed a lawsuit alleging that the sellers committed fraud by failing to disclose, among other things, the history of water problems in the house. At trial, the evidence established that shortly after the house was built in 1994 the Ryans discovered puddles of water in their basement. They complained to the builder, who sealed a tunnel between the main house and the pool house and also made repairs to the pool deck. Soon afterwards the Ryan s complained to the builder that the leakage was serious enough to prevent them from ever being able to finish off the basement. Although it was unclear whether the builder made any further repairs, the Ryans regularly resurfaced and caulked the pool deck until they moved out in No further puddles were ever seen in the basement and no other problems were noted. Although some remodeling was performed on the house before it was listed for sale, there was no evidence that any intervening water damage had been discovered. As the Court of Appeals explained, in order for a buyer to recover from a seller who is alleged to have passively concealed a defect, the buyer must prove that that the seller was aware of the problem and did not disclose it, and that the defect could not have been discovered through the exercise of due diligence. In this case, the buyers could not prove either of these required elements of fraud. First, the uncontroverted testimony of the Ryans was that they had not noted any water problems from 1995 until they moved out of the house in Second, the buyers obtained a home inspection, knew of the dampness issues, negotiated repairs, and decided to close on the property knowing of at least some of the water issues. Therefore, the Court ruled that buyers could not now rescind the contract because they chose to proceed with the closing despite having some knowledge of the problem. The buyers lost in court even though it appears that the sellers were not completely forthcoming in answering the question, Have any repairs been made to control any water or dampness problems? Obviously, some repairs had been made to control water or dampness problems of which the sellers were aware. Judicial Update 2010 ( ) 1

2 The Court, however, was not as concerned with whether the sellers misrepresented the facts in filling out the Seller s Property Disclosure Statement because the buyers could not prove that they did not know about the water problem before they purchased the home. What the Court really appears to be saying in this case is that buyers had enough information about the potential problem that they should have investigated further. Not having done so, they could not prove that they could not have discovered the problem through the exercise of due diligence. Since this is a required element of fraud their case failed. In thinking about how to go about doing a further investigation when a home inspector uncovers evidence of a problem, my suggestion is to always recommend that the buyer hire someone with special expertise in whatever the issue of concern or problem might be. With our courts denying legal relief to buyers in cases where the buyers only had pieces of the puzzle but not the full picture, cautious buyers should be encouraged to bring in an engineer or other qualified expert who can fit the pieces together and ascertain the true condition of the property. While there is obviously a cost to this approach, in considering the alternative, as demonstrated by the results in this case, it is foolish not to do so. This case is also interesting because the Court of Appeals appeared to interpret the seller s obligation to disclose in a Seller s Property Disclosure Statement as being limited to repairs that were being made at the time the disclosure was being filled out by the sellers and not to past repairs. Since no repairs were being performed at the time of the disclosure the Court concluded that the seller made no misrepresentations in the Seller s Property Disclosure Statement. Clearly, the Court s interpretation of the seller s obligation to disclose in the Seller s Property Disclosure Statement was far more limited than what was either intended by the GAR Forms Committee or how most REALTORS understand what is being asked in the question. Look for the GAR Forms Committee to likely modify the Seller s Property Disclosure Statement to clarify that the disclosure obligation is intended to cover past and present knowledge of problems and repairs. This case also underscores the other practical difficulty with fraud cases. Specifically, while buyers often suspect fraud, proving it is very difficult. Specific evidence must be found of the seller s deceit. This is often very difficult to do when the sellers are the only ones with knowledge of what took place in the past. For example, let s assume for the sake of discussion only that the basement had a repeated problem with puddling and that each time the sellers caulked and resealed the pool deck. If no one but the sellers knew this information, and they deny having such knowledge, it is very difficult to controvert their claim. This is why it is so important not to take a Seller s Property Disclosure Statement at face value and to probe further when evidence of a problem arises. The second case is Lehman v. Keller (297 Ga.App. 371). In this case, the buyers, Mr. and Mrs. Lehman, purchased a home from Mr. Keller and later discovered termite damage to the home. They sued Mr. Keller for fraudulent concealment of the prior termite damage and for breach of contract. As in the first case, the Court of Appeals found in this case that the buyers could not prove they exercised reasonable care to protect themselves against the alleged fraud. Mr. Keller informed the buyers, in his Seller's Property Disclosure Statement, that there had been an inspection performed on the property a year before. He also informed them that he was aware of earlier termite damage but that the damage had been repaired. Mr. and Mrs. Lehman did not request additional information regarding the previous infestation, or the repairs, or a copy of the earlier inspection. Furthermore, the purchase and sale agreement established a ten-day inspection period during which the buyers could submit an inspection report and set forth any defects in the property. The clause stated that if the buyers failed to do so, they were accepting the property "as is with all faults including but not limited to damage from termites and other wood destroying organisms." The buyers did not conduct an inspection prior to closing. Judicial Update 2010 ( ) 2

3 Some 10 months after closing, when the buyers had decided to sell the house, an inspection was obtained for a potential buyer which showed termite infestation. The report indicated that the repairs done to the property were allegedly in the nature of a coverup and were thus unacceptable. The Lehmans still did not contact the seller for another 7 months, at which point their attorney sent Mr. Keller a letter notifying him of the buyers' intent to rescind the contract. The Court of Appeals found that the Lehmans did not exercise any due diligence with respect to the property. In the opinion of the Court, there was no evidence that the seller attempted to conceal anything. With the buyers not being able to prove that they could not have protected themselves against the fraud through the exercise of due diligence, the buyer s fraud claim could not stand. Finally, the Court reasoned that even if rescission had been a viable option, it is a remedy that must be requested as soon as the facts underlying the claim are known not 18 months after closing. Therefore, the judgment for the seller was affirmed by the Court of Appeals. Unpaid Utility Bills at Closing Lien or No Lien? The next case, Federal Home Loan Mortgage Corporation v. City of Atlanta, 285 Ga. 189, involved the resolution of conflicting provisions in an Atlanta city ordinance and state law (See, O.C.G.A ) on the issue of whether the City could demand payment of an outstanding water bill incurred by a previous owner before providing water service to a new owner. The facts of the case are as follows. In 2007, the Federal Home Loan Mortgage Corporation ("Freddie Mac") obtained title to a residential property which Wells Fargo Bank had purchased at a foreclosure sale. After obtaining title, Freddie Mac discovered that the prior owner had an unpaid water bill owing to the City of Atlanta of over $11,000. The City asserted that this outstanding water bill constituted a lien on the property pursuant to Section (1) of the City's ordinances. That ordinance provides: Upon the failure of any person to: (i) Pay any water bill or charge against any premises for which the person is responsible ; or (ii) to send a written notice of dispute.., the person will be sent a notice that their service will be terminated without further notice and the commissioner [is] authorized to turn off and discontinue water service to the person and premises until the bill or charge is paid. Subject to O.C.G.A , the delinquent bill or charge shall be a lien on the property where the bill or charge was incurred. Freddie Mac filed a complaint seeking a declaration that the water bill of the former owner was unenforceable against the purchaser at a foreclosure sale; that the bill was not a lien on the property; and that the City did not have the right to refuse to provide water service to the property until the $11,000 was paid. It based its complaint on two subsections of state law set forth in O.C.G.A The Supreme Court agreed with Freddie Mac on one point, and disagreed on the other. Subsection (a) O.C.G.A provides that no public or private water supplier shall refuse to supply water to any residential property with its own water meter because of the indebtedness of a prior owner or occupant. This state law is in conflict with the portion of the City's ordinance permitting it to discontinue service to the person and premises until the bill is paid. The Supreme Court in reconciling the two laws found that the City's ordinance was preempted by the state statute, and that the City could not refuse to supply water to the premises until it received payment on an unpaid bill owed by a former owner or occupant. Judicial Update 2010 ( ) 3

4 However, the Supreme Court of Georgia s interpretation of subsection (c) of O.C.G.A was not as favorable for Freddie Mac. This section of the law provides that "A public or private water supplier shall not impose a lien against real property to secure unpaid charges for water furnished unless the owner of such real property is the person who incurred the charges." In this case, no physical lien for the amount of the water bill was ever filed by the City of Atlanta against the property in the land records office. In trying to determine the City s lien rights, the Supreme Court reviewed several previous cases in which it was found that liens for unpaid water charges "have the same priority as liens for ad valorem taxes" and "were not extinguished by the banks' foreclosures." More importantly, the Court found that liens for both unpaid ad valorem property taxes and unpaid water bills arise and attach to the property at the time the taxes are due and unpaid, and are exempt from the requirements of notice and recordation. Therefore, the Court concluded that the City had no obligation to file a physical lien in the land records and that such a lien arose as a matter of law. Therefore, the lien for the $11,000 in unpaid water bills incurred by the prior owner attached to the property before the foreclosure sale and was not extinguished by it. The Court s decision was therefore something of a Pyrrhic victory for Freddie Mac. The City cannot deny Freddie Mac water service. However, with the unpaid bill being a valid lien against the property, Freddie Mac will likely have no choice but to pay the water bill before it sells in order to clear the title to the property. It is important to note that subsection (c) of the state law requires that a lien for unpaid water bills may not attach to the property unless the charges were incurred by the owner of the property. If there are unpaid water bills that were incurred by a lessee or other occupant who is not the owner, they do not constitute a lien against the property. Unfortunately, since this ruling came down some municipalities are now not willing to give closing attorneys sufficient information to determine whether the outstanding water bill was incurred by a record owner of the property or not. Without the name of the party who incurred the charges, it is impossible to determine whether they appear in the chain of title, and therefore impossible to determine whether the charge constitutes a valid lien on the property. In such situations, some title companies will list the unpaid water bill as an exception on the title policy, while others will not issue a title policy unless the outstanding charges are paid. Until this issue is resolved, expect to see more litigation in this area. Commissions The court also addressed a broker s entitlement to a real estate commission in cases where the contract is assigned from one buyer to another. In Dover Realty v. Pecce (295 Ga.App. 221), Mr. Pecce entered into an exclusive listing agreement with Dover Realty, which contained a stipulation that if the seller obtained a private buyer with no prior contact with Dover Realty, he would not be obligated to pay any commission on the sale. Within two weeks of signing the listing agreement Mr. Pecce was contacted by Mandalay Properties about buying the parcel. It was undisputed that Mandalay Properties had never had any communication with Dover Realty. Immediately thereafter Dover Realty brought another buyer, Mr. Joyner, to the seller. A contract was signed with Mr. Joyner which provided that it was a "backup contract" and would take effect only if the contract with Mandalay Properties failed to close. Over the following weeks, Mandalay Properties negotiated with Mr. Joyner to assign its contract to Mr. Joyner. Mr. Pecce knew nothing of the assignment until the day of closing and, since Dover Realty was not present at the closing, it only learned of the assignment one month later. Dover Realty claimed that Mr. Pecce owed it a commission on the sale, since the buyer was originally procured by Dover Realty. The Court of Appeals disagreed finding that the seller was bound by the terms of the contract that ultimately closed the contract with Mandalay Properties. In that contract, no broker was involved in the transaction and no commission was due. The effect of the assignment, according to the Court of Appeals, was the same as if Mr. Judicial Update 2010 ( ) 4

5 Pecce first sold the property to Mandalay Properties, and Mandalay Properties subsequently sold the property to Mr. Joyner in a separate transaction. In such an event, Dover Realty clearly would have no right to the payment of a commission from Mr. Pecce. Since there was no evidence of any bad faith, fraud or collusion between Mr. Pecce and Mandalay Properties, Dover Realty could not collect any commission. Limitation of Liability Provision Upheld A case involving an architect's limitation against liability is helpful in understanding how our courts will likely view the limitation against liability benefiting REALTORS contained in GAR s brokerage engagement agreements. In Precision Planning, Inc. v. Richmark Communities, Inc. (298 Ga.App. 78), an architect was hired by a property owner to design a retaining wall for a detention pond, among other things, and the architect's contract for services contained a provision limiting the architect's legal liability to the property owner. The limit was the sum of $50, or the amount paid to the architect under the contract, whichever was greater. When the retaining wall failed the property owner sued the architect. The architect relied on the provision limiting the architect's legal liability as the primary defense to the claim of the property owner for damages (which claim was for more than $50,000). The property owner argued (and the trial court agreed) that the provision was void as against public policy, and was therefore unenforceable. The Georgia Court of Appeals reversed the trial court, saying that only in extraordinary circumstances would it interfere with the rights of parties to contract with one another on any terms they desired. The court did not see the agreement of the parties to limit the liability of an architect as being so outrageous as to merit the intervention of the court to strike down the agreement. This is yet another case in which our courts have upheld contractual provisions limiting a professional s legal liability. REALTORS similarly limit their liability in brokerage engagement agreements with clients. In the GAR brokerage engagement agreements, the broker s liability to a client is limited to the amount of the commission actually paid to broker in the transaction in question. If no commission is paid the broker s liability is limited to $100. This recent Court of Appeals decision increases the likelihood that if challenged the Georgia courts will also uphold the limitation of liability provisions protecting real estate brokers and licensees. Deleted: in Seller's Inaction May Waive Non-Performance by Buyer Real estate purchase contracts frequently have conditions or contingencies in them which, if not performed, may entitle one or both of the parties to terminate the agreement. Financing contingencies, inspection periods and payment of additional earnest money prior to closing are examples. In the case of DuPree v. South Atlantic Conf. of Seventh-Day Adventists, Inc. (299 Ga.App. 352), the Georgia Court of Appeals addressed a situation wherein the buyer failed to make an additional deposit of earnest money required by the contract. In August 2006, Ronald DuPree entered into a contract to purchase a parcel of property from the South Atlantic Conference of Seventh-Day Adventists, Inc. ("South Atlantic"). The contract was signed on behalf of the seller by the pastor of a church within the South Atlantic Conference, and required an initial earnest money deposit of $3,000, which was paid by Mr. DuPree. The contract also required an additional $10,000 payment by December 2, 2006 and a closing date of December 12, It was undisputed that Mr. DuPree did not pay the additional earnest money deposit as agreed. However, none of the parties or their agents raised the issue, and the transaction proceeded toward closing. The day before the closing was scheduled, South Atlantic advised Mr. DuPree that the pastor who signed the contract on its behalf was not authorized to do so, and that it would not go Judicial Update 2010 ( ) 5

6 forward with the closing the next day. However, it indicated that its executive committee would reconsider the sale at its January 2007 meeting. Still, the issue of the missed $10,000 payment was not raised. South Atlantic ultimately decided not to proceed with the sale, and in January 2007 Mr. DuPree filed a lawsuit seeking specific performance. South Atlantic initially argued that the pastor who signed the contract did not have the authority to do so. One year later, in its January 2008 amended answer; South Atlantic first raised the issue of the missed $10,000 earnest money payment. It argued that the failure of that condition prohibited Mr. DuPree from obtaining specific performance of the contract. Mr. DuPree responded that by failing to raise the issue until more than a year after the payment was due, that condition was waived by the seller. The trial court disagreed and, finding no waiver of the condition, granted summary judgment in favor of South Atlantic. The Court of Appeals reversed the decision of the lower court and held that even in a contract in which "time is of the essence," a seller may waive the requirement for timely performance by its words or conduct, and a jury could reasonably conclude that South Atlantic's "protracted silence" amounted to a waiver. The trial court's ruling was reversed, and the case sent back for trial on that issue. The Court s decision in this case is consistent with other previously decided cases. The lesson for REALTORS is that if parties do not insist that an obligation in a purchase and sale agreement be performed when it is supposed to be, do not expect help from the court in enforcing the obligation at a later time. Conclusion Knowing the law is increasingly important for REALTORS as they try to avoid legal claims and protect the best interests of the buyer and seller clients. All of these case decisions are ones of which REALTORS should be aware. Seth Weissman serves as general counsel for the Georgia Association of REALTORS. He is a partner of the law firm of Weissman, Nowack, Curry & Wilco, P.C., a full-service real estate, business and litigation law firm with 14 offices located in the metropolitan Atlanta area. Please visit the firm online at Judicial Update 2010 ( ) 6