While I was away…..

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.


62 thoughts on “While I was away…..

  1. Russ, first of all, congrats on your move!

    What if the seller did not disclose an obvious defect on the form 17 or if the checked the “unsure” box when there is evidence they new something was defective (like the septic tank, for example)?

  2. Hi Rhonda,

    Many people believe that Form 17 provides some sort of post-closing rights. It does not, which was affirmed in the Bull case. In the Bull case, the seller had filled out Form 17 and indicated that the septic system was functioning properly. Unless the buyer could show that the seller “intentionally” misled the buyer (and a host of other elements to prove fraud), the mis-information on Form 17 provides no help.

    If the defect is “obvious”, recent court cases indicate that a buyer cannot rely on representations that the defect does not exist and if they close without confirming the extent of the defect, they likely will be left with no recourse against the seller.


  3. I’m sure some sellers are saying “about darn time!” that a case like this affirms the buyers obligations to get thorough inspections, or sue the inspection company/professional that missed something that they may argue was “obviously a defect.”

    Reminds me of when Lynn and I purchased our house with an old septic system. Seller (fsbo) would not produce any representation about the property so I had everything inspected and used my own experience in building/remodeling to look for things. Seller refused to even have the septic pumped, which we ended up doing/paying for prior to closing. Oh well, if it fails it’s going to be big bucks.

    I think you are probably right, the buyers will look to different avenues or see who’s pockets are deepest and look to Brokers.

    Glad to see you posting again.

  4. Thx Tim.

    While there are still seller disclosure rules in place, these recent cases indicate a signficant move towards “buyer beware”. Hence, the greater assistance that an agent can provide coupled with greater risk if things go wrong.


  5. Russ,

    First, Congrats on the move! Second, can you briefly describe the difference between being an attorney with a firm and being “of counsel” with a firm. I remember Judges and lawyer-politicians being “of counsel”, meaning (I think)…well, lets not go into my 20 year old thinking on what “of counsel means 🙂 What does it mean?

  6. “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.”

    This reminds me of Sandy’s questions here in RCG comments, regarding the builder’s website depiction of the Model showing just over 2,500 square feet at the time the buyer contracted for the house. Later, and before closing, they changed the info on the website to about 50 sf less. Of course, in that example, the buyer learned of the difference prior to closing, so the builder just said, “Hey, it is what it is…do you want it or not?” Giving them the right to cancel prior to closing.

    But had they closed prior to the change in info, would that be a good example of “economic injury”, and the fact that no square footage was stated in the contract be an example of there being no contractual remedy? Would that be different if the floor plan showing the square footage were made part of the contract, and intitialed by all parties, as an attachment to the contract?

  7. Russ — congrats on the move; tell Sandy Gronfein I said hello.

    I’m a paralegal and part time law student who considers residential real estate to be my hobby; I read the Bull case when it was issued (I get the SC decisions via email), and I agree that this is definitely a shift to “buyer beware”. But then, I also wonder if that hadn’t already started.

    When I bought my first older home in Seattle in 2001, we didn’t do a sewer inspection, and it wasn’t customary at the time. Had we, we would have discovered the broken line that caused a retaining wall to crumble. When we sold the house in 2006, the buyer required a sewer inspection, and we had an inspection done when we bought our current house. Good thing too as the side sewer was leaking under our neighbor’s driveway.

    Ardell — at least at the firm I work at, “of counsel” means that you are too senior to be an associate, but they are not quite ready to bring you into the partnership.

  8. Thank Holly,

    Why would the State want to shift to “buyer beware” and why would the goverment want to impose duties on licensees that “can’t be waived” by the buyer who wants a small flat fee? What forces are at work to promote a change like this that appears to be moving in the opposite direction of Public Policy?

    “Public Policy – dedicated to the constitutional principles of limited government, open markets and individual freedom…”

    Seems the public wants less government and more freedom to strip out some of the duties and decrease the cost of a Buyer’s Agent, while the government is making sure that agents ARE needed and support a higher cost model.

    What’s up with that? Who is lobbying for these kinds of changes? Or what was the impetus to move in this direction?

  9. Ardell,

    The reason that we have three branches of the government is to provide checks and balances. If you look at what our legislature has and continues to do with regard to consumer rights, you will see a strong move to protect the consumer. Did you know that there is now a “Vacant Land” version of Form 17 that will likely pass in this session? The courts, being the other body that “makes” law, sees this and I think wants to temper the “enthusiasm” for consumer protection so that buyers and sellers are operating on a level playing field.

    So if we look at the current landscape of buyer/seller relations with respect to the purchase and sale of residential real estate, we have an obligation on most seller’s to disclose what they know and to not lie about it. We have the corresponding obligation of buyers to not be “little lambs” in the process and to perform their own due diligence to determine if what the seller says is true. At the end, the courts have now said that (absent unequal bargaining power), the courts will look at the contract to determine who gets what if there is a post-closing dispute involving economic damages. Seems fair to me.

    p.s. Like Holly says, “Of Counsel” means that I am not an associate nor am I an owner. It is a common place for senior attorneys who make a lateral move to a firm and allows both the firm and the lawyer to get to know each other before they wed.


  10. Russ,

    I’ve had been watching this case since I heard there was going to be a SC ruling using Economic Loss.

    What I find most interesting is how are these companies like R_dfin and other discounters that may not even visit the property going to handle the now increased liability and target on their back. As a buyer without having the seller to go after the broker is going to have heavier liability in the transactions. Have you heard anything from the Washington Association of Realtors? What is this going to do to E&O coverage?

  11. Allen,

    Agreed that liability to brokers will increase. Since this case is only a month old, I have not yet seen any response from organized real estate. Smart brokers will be talking with their counsel though. As for E/O, insurance always seems to operate from experience and as claims may rise both in frequency and amount, it may have a substantial impact on rates. Obviously, that is purely a guess and only time will tell.


  12. Hey Russ,

    Congrats on the new move. I hope it’s all you (and your employer) want it to be!! 🙂

    Also, thanks for the brief on the case, Alejandre v. Bull. Looks like more than ever there is a premium on having well drafted PSA’s, and buyers doing thorough due diligence.

  13. “At the end, the courts have now said that (absent unequal bargaining power), the courts will look at the contract to determine who gets what if there is a post-closing dispute involving economic damages.”

    Well seems like that’s a HUGE loophole. Isn’t ANY multiple offer situation “UNEQUAL bargaining power”, or listings that say buyers HAVE to “pre-inspect” if they want an inspection or Listing Agent adding undue pressure and tilting the “bargaining” scale by suggest there was an offer…when there wasn’t one or…

    Seems there could be lots of ways to suggest “unequal bargaining power” from the buyer’s side of the fence.

  14. Hey ALLEN!!

    I’ve got one for you, since you love to talk R-Fin. I’ll even pull the letters out for you, if you give me your thoughts on this one (off-topic)

    Buyer finds property on the Internet from Listing Agent’s great pics in the MLS. Buyer comes to Open House, unaccompanied, and loves the house. Buyer goes to an “online property purchasing service” and makes an offer. After a few days of negotiations, offer does not “consummate”.

    Can the Listing Agent call the buyer direct and suggest the “online fee”, being the shortfall, can be remedied by cutting out the “online servicer”.

    Since some insist they are NOT a “discounter” but an “online service” and simply a means for a buyer to purchase “online”. Can the “online” service be ousted, if that is what it takes to bridge the gap between “offer price and acceptable price”?

    If the difference equals say…1%, can the Listing Agent now pull the cards back on to his side of the table? Can the person who “stepped in” and is not effective be “tripped out” just as easily as they side-stepped the Listing Agent in the first place?

    Interesting turn of events. I think the legal answer could be that the “online service” made them sign a “Buyer Agency” contract, and they can’t be “ousted”. But what if a month passes without the “online agent” contacting the buyer? Could that be “abandonment of contract” if the “agent” holding the contract only communicates with the buyer “if and when called by the buyer?”?

    Lots of interesting scenarios happening out there. Would love your take on this one, Allen, since you brought up “the R Word”.

    I’d love to go count how many times your comments included “the R Company”? For someone who doesn’t even want to SPELL their name, you sure do manage to squeeze that company into most topics 🙂

  15. Trust me, Russ. Ask any buyer who has been in a multiple bidding war if they had “Equal Bargaining Power” with the seller, and the answer will be a resounding NO WAY JOSE! How about all of those people who did NO inspection, because there were 20 offers, and having an inspection contingency would have been a joke!?

    Even the “most sophisticated” buyer can’t always perform their “due diligence” in the current system. Now make a law that says every buyer always has the right to an inspection AFTER the contract is signed, and maybe every buyer can be put on notice to do their “due diligence”.

    But suggesting equal bargaining power and an always ability to do thorough “due diligence” is just baloney.

    I think Allen’s correct. All this does is attack Alternative Business Models and along with that…the Consumer’s right to have stripped down services and cost of same. Was this Law supported by WAR or any other Major Brokerages or Boards of Realtors? Sounds like same old, same old “Buyer Beware IF you don’t have an Agent with FULL service duties”. More reinfocement to plug the hole in the dike.

    You can sue the agent, but not the seller? How does THAT help someone buying a FSBO on their own?? I think that stinks.

  16. Ardell

    What happens when the market tanks and there are 5 sellers for every buyer. Who protects the sellers from buyers cramming down excessive deal points because they know that the next buyer may be weeks or months away? The law cannot change like the wind as the market does. Sometimes buyers will have economic power and sometimes sellers will. The law has to respect the right to contract regardless of market conditions. No one is putting a gun to the head of those 20 buyers that you mention. They can wait until the market provides them more power. Renting is always an option, right? If they choose to join the fray, they do so by knowing that their economic bargaining position is less than optimal. This doesn’t mean the law stinks.


  17. “The law has to respect the right to contract…”

    Really, Russ. If that is true, than why doesn’t “THE LAW…RESPECT THE RIGHT TO CONTRACT”…when it comes to buyers having the right to waive certain duties, in exchange for lower fees?

    Sorry for the all caps. My pinkie fingernail caught the all caps key by accident. I figured God or someone must have had a reason to shout at you 🙂

    Your argument about market conditions makes no sense in the context of this particular law. The law is about sellers not being accountable…it has no flip side of a coin. Sellers should be accountable for some things, and buyers should have the right to hold them accountable for some things. That doesn’t change, whether it is a buyer’s market or a seller’s market.

    When it is a buyer’s market…the buyer has time to do their due diligence…plenty of time. So reversing the logic based on market conditions, does not apply.

  18. Ardell

    There is a big difference between how the law protects consumers vis a vis service professionals and the rights of private parties to contract as they see fit. The law assumes (sometimes wrongly so) that there should be inherent protections when professional contracts with consumer vs. consumer to consumer.

    The point you make about market conditions being irrelevant misses the point. The flip side is that in a bad market, a buyer has the ability to extract warranties from the seller that contractually guarantees seller accountability.

    You tend to look at things from a buyer’s perspective. Why should a seller not be able to sell their property “as is”. Why must there always be protections for the buyer? Their protection is the ability to walk away if the deal doesn’t fit. While owning a home is the “American Dream”, it is not a fundamental right. As I have heard many say over the years, if you don’t like the market, wait around and you will like it eventually.


  19. Russ,

    Congrats on the move and welcome back. The one thing I love about law is that there is always something sticky to poke at.

    I think that this ruling is doing mutable things here. First it is strongly encouraging the use of inspectors and more in-depth contract language. With these two things it is encouraging the use of more professionals therefore more eyes and ultimately more quality control in the real estate process. Further it strengthens the insurance of government setting forth it’s right to ensure that property is in an inhabitable state through the use of more professionals while still not requiring the government to enact on any of its police powers in real estate. By putting pressure on real estate professionals to encourage proper disclosure by home sellers through the use other professionals such as appraisers, home inspectors and attorneys it as well gives relief to the peoples resources in lessening the suits (similar to insurance and bankruptcy suits). Most items on the disclosure form unless obvious could fall under the “did not know

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  22. I bought a home last fall in 2006. The seller, an owner of a local real estate firm sold it to me. He failed to disclose to me that the sump pump is on all the time ( he said once in a while). Since I have moved in, the underground spring as all of my neighbors in the area have confirmed to- floods my basement. When it rains, it floods, when my sprinklers are on, it floods. What can I do now with this new ruling? The sump pump has never failed~ However, sometimes, it can’t keep up with the flow of water. Please help.

  23. We had a new home built in 2003. We discovered water damage this year that resulted from two different building code violations. The worst was a spigot that was placed on our porch in front of the house, which did not have the proper way to drain. We’re now in for the tune of $20,000 in repairs. After pulling out the walls and affected floors, we’ve found that dirt was poured against the wood, which is another major no-no. We have damage and mold in a major structural beam running up our house, and our new contracter says we’d have a case if we sued our builder. Since it’s been 4 years, how far do we have to go proving “inhabitability” to try to win compensation for the damage. Put more simply, do we have a case, based on what I’ve told you?

  24. Question:
    What if a buyer purchases a property in a 100 year flood plane and then later find that the County 5 years before purchase had enacted limits on rebuilding/remodeling in that area ( 40% limit of value, even if house burned down) though still taxing this area at 100% rebuildable.
    Yet during a check with the clerks office at time of pending purchase, buyer was informed that while on 100 year flood plane there were no issues. No disclosure of limitations, so buyer purchases and finds out years later that property has no real value because of this and is pretty much unsaleable except for land value
    Is the state/ county required to let buyers know of these restrictions? If knowledge had been available or disclosed buyer would NOT have purchased. It is believed that the original homeowner was also unaware of limitations since most residents in this zone also just found out about the restrictions.
    What are the County/ State responsibility for disclosures such as this to a homeowner or new buyer? Theres about 250 homes facing what appears to be a land grab by the County starting with the restrictions or devaluation of property and we’re looking for some answers. Thanks, Lisa

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  27. So, in the new NWMLS Form 21, Purchase and Sale Agreement, which of the choices is best from an E & O point of view — Buyer will or Buyer will not?

    Item 9: Disclosures in Form 17: Buyer will

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