The Limits Of Caveat Emptor In Real Estate Sales

Traditionally, when a property owner agreed to sell real property, it was up to the buyer to check out the real property as much as they wanted. If the buyer liked what they found, they could go ahead and buy the real property. If they didn’t, they could go buy other real property instead. The buyer bore the burden of understanding the real property being sold, including whatever deficiencies it had. If the buyer acquired the property and later found issues or problems with it, those were the buyer’s problem. The buyer ordinarily wouldn’t have a claim against the seller.

Those ancient principles of “caveat emptor” (let the buyer beware) have eroded significantly over the years in real estate. State legislatures have tried to improve the residential sales process by requiring sellers to disclose certain information. In commercial real estate sales, buyers typically demand that sellers provide a package of representations and warranties, assurances about the property. Those assurances mostly relate to factual matters a buyer can’t readily check out for itself. A seller can’t just shrug its shoulders and tell the buyer to make up its own mind about the property without involving the seller.

Even with those changes in law and practice, caveat emptor still retains some vitality in the modern world. It often remains the general backdrop for real estate purchases, to the extent that disclosure laws and representations and warranties don’t apply. A typical purchase and sale contract will still say that the seller doesn’t make any assurances at all about the property, except for any mandated residential disclosures and any representations and warranties negotiated in commercial sales. Subject to those exceptions, standard contract language requires any buyer to acknowledge that it isn’t relying on the seller for anything; has made its own investigations of the property; and accepts the property totally “as is.”

That typically makes sense because the property is what it is. The seller is typically selling something that’s “used.” It’s not perfect. And a buyer can in fact dig around as much as it wants, analyze the property on offer, and decide whether the buyer likes whatever is being sold.

The courts do generally still enforce “caveat emptor” concepts in contracts, subject to the exceptions described above. A recent New York case demonstrated another exception that will sometimes apply. Although the facts of the case are sparse, it appears the seller of residential real estate may have given limited disclosures to the buyer, none of which applied to the problems the buyer later discovered.

After the closing, the buyer figured out that the seller had, according to the court, “actively concealed” water damage at the property by installing fresh new wood over areas in the house where the wood had rotted. By taking affirmative steps to conceal problems with the property, the court decided that the seller may have committed fraud. That was true even though the contract contained the usual “caveat emptor” language and the seller hadn’t given any assurances about the wood at issue. According to the court, the seller’s efforts to hide the rotten wood “might have thwarted the plaintiff’s efforts to fulfill their responsibilities imposed by the doctrine of caveat emptor.”

The court issued its decision early in the litigation process, so it’s not a final determination. The court did allow the litigation to proceed, concluding that the caveat emptor language in the contract didn’t necessarily save the seller from possible liability.

Although caveat emptor remains mostly alive and well, subject to the exceptions described above, the case teaches that an unhappy buyer might still recover damages from a seller that affirmatively conceals bad facts about the property. As a practical matter, and regardless of what a contract says, sellers should think twice before they make changes to a property that might make it appear better than it really is.