I have not posted in quite some time as I have been consumed with a move to a new firm. As of three weeks ago, I am now Of Counsel to the law firm of Bullivant Houser Bailey.
In that period, a very significant case was decided that will greatly impact buyer/seller/broker relationships. On March 1, 2007, the Washington Supreme Court essentially decided that buyers will no longer have a claim for negligent misrepresentation in post-closing property condition disputes. For the first time in Washington state, the Supreme Court applied the Economic Loss Rule in the context of a real estate transaction. The Economic Loss Rule generally provides that where two parties enter into a contract (e.g. a Purchase and Sale Agreement) and economic losses occur (as opposed to physical harm or personal injury), recovery is confined to the contract.
By way of background, if a buyer of real estate closes and then determines that the property was not in the same condition as disclosed or that the seller withheld material facts, the buyer historically had two ways to state a claim against the seller. The first was via the contract if there were any express warranties that could be enforced. However, most residential transactions have few, if any, warranties that benefit the buyer. So practically, the buyer was forced to go outside the contract and rely on a claim of negligent misrepresentation or fraud (also known as intentional misrepresentation). These claims are called torts. Since fraud is very difficult to prove, the claim that many lawyers have relied on for their buyer clients is the negligent misrepresentation claim. Those days are over!
In determining whether the Economic Loss Rule applies, the key inquiry is the nature of the loss and the manner in which it occurs. In other words, does the loss deal with economic injury (e.g. loss of bargain) or personal injury or injury to other property. If the loss is economic, and no exception applies, then the complaining party will be limited to whatever contract remedies exist.
In the recent case of Alejandre v. Bull, the Buyer claimed that the seller should pay for damages associated with a failed septic system. The facts are lengthy but like most post-closing property condition disputes, this one clearly involved economic loss and not personal injury. In a nutshell, since the buyer had no warranties regarding the septic system, they were out of luck unless they could prove that the seller intentionally misrepresented the condition of the septic system (i.e. committed fraud). In the court’s mind, a negligent misrepresentation was not enough to override the “bargain” struck between the parties under the contract which did not include any warranty for the septic system.
There will be many buyers who encounter a post-closing loss and start looking for a (deep) pocket. While the liability of the seller to the buyer is limited by the Economic Loss Rule, no such luck for brokers and agents who have statutory duties (many of which are non-waivable) under RCW 18.86. Those duties include the duty to use reasonable care and skill, to disclose material facts and to advise their client to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise.
Buyers would be well-served to negotiate warranties that apply to aspects of the property that are important to them. At the same time, brokers and agents need to understand that while they legally don’t have any greater duties to the buyer, the practical effect of this case will cause unhappy buyers to look to the broker’s E/O policy with greater frequency. Now more than ever, brokers and agents will make sure that the buyer conducts comprehensive due diligence concerning the condition of the property and that appropriate experts are hired to advise them.
All properties have warts. The key is to expose them before closing so that the buyer can determine if they can live with them.