On March 3, 2016, the Eighth District Court of Appeals in Cuyahoga County, Ohio rendered the decision in the case of Montgomery v. Vargo, 2016-Ohio-809 once again clarifying that all elements of fraud must be proven even if a defect in a home is not disclosed on the Residential Property Disclosure Form. Many people, including a lot of attorneys, simply assume that if a defect is found by a buyer after a purchase and that defect was not disclosed on the Residential Property Disclosure Form, then the seller is responsible for the repairs.
In Montgomery v. Vargo, almost two years after buying the home from Mr. Vargo “as-is,” Mr. Montgomery discovered that the roof over the den had some rotted wood with a cost to replace the roof of just under $3,000. It turns out that when Mr. Vargo bought the property in a foreclosure sale, he discovered that the chimney on the side of the den had separated from the house. He decided to remove the fireplace and chimney. He did not disclose that information on the Residential Property Disclosure Form.
The Magistrate who heard the case in Small Claims entered a judgment against Mr. Vargo for $1,500 solely because he did not disclose the removal of the fireplace and chimney. Mr. Vargo appealed as the removal of the fireplace and chimney were unrelated to the roof defects. In paragraph 6 of the Appellate decision, the court stated, “In this case, liability was imposed because of the failure to disclose a fact under which the seller owed a duty to disclose. The judgment must be reversed. Ohio law does not impose liability based on the mere failure to disclose.”
In paragraph 7, the court stated, “In this case, the court determined that the defect at issue, the rotted roof, was a latent defect unknown to either party until October 2013, two years after Montgomery purchased the property. Further, the trial court concluded Montgomery purchased it “as is,” and that conclusion was not appealed. In the absence of fraud, therefore, Montgomery cannot recover any damages from Vargo.”
In order to be successful in a fraudulent concealment case, a plaintiff must establish the following: (1) concealment of a fact when there is a duty to disclose, (2) that it is material to the transaction at hand, (3) made falsely, with knowledge of its falsity or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred, and (4) with intent to mislead another into relying upon it, (5) justifiable reliance on the representation or concealment and (6) resulting injury proximately caused by the reliance.
Mr. Montgomery relied upon Ohio Revised Code §5302.30 as requiring disclosure of the chimney removal. The court stated in paragraph 9, “The duty to disclose, however, is but one element of a fraudulent concealment claim. R.C. 5302.30 does not give rise to an independent cause of action. The statute merely codifies a party’s duty to disclose certain facts for the purposes of residential real estate transactions… The plaintiff must still present evidence substantiating all other elements of the fraud claim. Even if Vargo breached a duty to disclose, there was no evidence presented of any justifiable reliance on that concealment that proximately caused the injury for which damages were sought. In other words, there was no evidence that the rotted roof was even remotely related to the removal of the fireplace in the den or the chimney attached to the side of the house”
The court also stated in paragraph 13, “It should also be noted that R.C. 5302.30(F)(1) expressly limits liability to nondisclosure of facts within the seller’s actual knowledge. A seller of residential property is “not liable in damages that arise from any error in, inaccuracy of, or omission of any item of information required to be disclosed in the property disclosure form if the error, inaccuracy, or omission was not within the transferor’s actual knowledge. There was no evidence that Vargo had actual knowledge of any problems associated with the exterior roofing over the den; and therefore, even if he omitted any item of information that he was required to disclose, he cannot be liable. There was no evidence that Vargo had actual knowledge of the rotted condition of the roof — the latent defect.”
The court provided many examples of failed attempts of plaintiffs in other case to impute knowledge on the seller of a home with latent defects. The courts in Ohio have consistently held that a plaintiff must prove the actual knowledge of the defendant. Without being able to prove the actual knowledge of the seller, the chances of a positive outcome for a buyer are slim at best.
Ohio Revised Code § 3953.32
In 2007, the section 3953.32 became part of the law of Ohio in apparent response to abuses by a particular Central Ohio title agency and perhaps others. The law mandates that at the time the title insurance agency receives an order, it must offer closing protection to any, “…lender, borrower, and seller of the property…” The closing protection shall indemnify against loss of settlement funds resulting from specific acts of the title insurance agent. They include, “(1) Theft, misappropriation, fraud, or any other failure to properly disburse settlement, closing, or escrow funds; and (2) Failure to comply with any applicable written closing instructions, when agreed to by the title insurance agent.”
The fees charged in conjunction with Closing Protection are nominal, but do constitute necessary consideration to create the contract between the title insurance company and the protected party. So if the cost is nominal, the question is whether to buy it or not? In every closing where I represent a buyer or a seller, that is the question. Often times there are real estate agents involved and I routinely hear them advise their clients not to buy the Closing Protection. While at the same time I am advising my clients to accept the offer and to purchase the Closing Protection. Who is right? Which advice should you follow, or provide (in the case of real estate agents/brokers or attorneys)?
My basic overview is that like all insurance, you hope you will never need it. We all have home insurance, but how many have experienced a home fire? While I don’t expect an issue to arise with the title agent’s performance, if there is an event that would be covered by Closing Protection, it is likely to be of significant consequence, simply due to the amount of money involved in real estate transactions.
It is important to understand some of the functions of the title agent. They are responsible for handling all the money in a transaction. They send mortgage payoffs, pay taxes when close to due dates, disburse funds to various entities such as contractors making repairs prior to sale in response to requests to remedy, and record important documents such as deeds and mortgages. In return, they charge a settlement fee and receive a portion of the title insurance premiums.
Given the unique position of the title agency in the transaction and the responsibilities that come with that position, it is difficult to find a reason not to accept the offer of Closing Protection. If a title agency were to go out of business the day after the closing and something is not done, such as paying off the seller’s mortgage, what would a seller do? What recourse is available without the Closing Protection? The seller could sue the defunct title agency but the time, effort and money to do so, combined with the likely inability to collect on a judgment, render that option unreasonable. Perhaps the seller could liquidate other assets to pay off the mortgage, but that would be like paying the mortgage twice, as the payoff was deducted from the sale price to reach the bottom line for the seller. While the odds are not high of a title agent committing one of the defined acts, why have the risk at all if it can be easily and economically mitigated? That is the purpose of Closing Protection and that is why I recommend it to all of my clients.
Last year a client came to me with a problem, which in my line of work is not too unusual. The client was in contract to buy a spec home from a custom homebuilder. The contract was on the builder’s contract, not the CBR/CBA Real Estate Purchase Contract. The contract was contingent upon the buyer getting satisfactory financing. In addition, the client was going to move to the Columbus area from another part of the country when he went into contract, but circumstances had changed and now he was not making the move.
The home was priced under a million, but not by much, and the client had made a very significant earnest money deposit with the contract. The deposit was paid directly to the builder.
When the client discovered that the promised job was really no better than where he was, he decided it was not worth disrupting his family’s life to move to Columbus. He informed his agent that he would not be moving to Columbus and needed to terminate the contract. The agent understood the situation and knew that while the client would qualify for an owner occupied loan if he moved here, there was no way that he would qualify for, or would want, to buy the Columbus home as an investment property. So the agent decided to exercise the financing contingency as the way out for the client.
The agent prepared a Mutual Release form and sent it to the homebuilder’s agent and told the agent that the client was not moving to Columbus due to not taking the job. The builder did not agree or sign the Mutual Release. Instead, the builder sent back a letter stating that he would release the buyer only if he kept the significant earnest money deposit.
To make the story even more interesting, the builder sold the property to another buyer before the performance date had expired on the contract with my client, and for more money than my client had agreed to pay!
This all occurred prior to my involvement. I suggested getting a letter from the lender denying the loan and submitting a Notice of Termination to the builder, which was in fact done before the performance date in my client’s contract. Still, the builder has refused to return the earnest money deposit claiming that my client had terminated the contract without proper cause when his agent told the builder’s agent that he was not moving to Columbus and that was the real reason for the termination.
The builder’s attorney stated that he thought the financing contingency was exercised only after I was retained, and while he admitted that the Notice of Termination was received prior to the performance date, he questioned the motive. He suggested that it was just due to my analysis of the contract trying to find some way out.
The problem with this story is that the builder’s agent was given too much information that simply did not need to be given. All the buyer’s agent had to do was to submit a Notice of Termination stating that financing could not be obtained. End of story. By giving the other agent all of the other information, the validity of the termination due to the financing contingency is now in question.
Sure, the buyer can sue, and I think of several good legal theories to use. While I think he would win, I cannot guarantee it. Furthermore, legal action can take more than a year; all the while he is without his earnest money deposit and facing significant legal fees.
The point to this story is that an agent needs to be very careful when drafting and terminating a contract. If a buyer is moving here as part of a job transfer or relocation, it might be a good idea to write a contingency making the contract terminate in the event that the buyer does not move to Columbus.
The Notice of Termination Form from the Columbus Board of Realtors is probably the easiest and best way to effectively terminate a contract due to a contingency not being satisfied or waived, or due to an inspection which reveals material conditions that are not satisfactory to the buyer. While the Notice of Termination Form has been designed to be used with the CBR/CBA Real Estate Purchase Contract, it may also be used with contracts from builders as well. If you are not familiar with the Notice of Termination Form, now would be a good time to take a look at it.
Please do not use the Mutual Release Form to terminate a contract. The Mutual Release Form requires the seller to agree to terminate the contract. While that may be the case in some situations, you can’t rely on it. I can think of many sellers who would not like to see the contract terminate and if given a choice will not agree to do so. There are several sections in the CBR/CBA Real Estate Purchase Contract that gives the buyer the right to terminate the contract. In those instances, no agreement is needed from the seller at all, just a Notice of Termination. Time is of the essence, and you may not have a lot of time to get a termination done properly, and almost certainly there will not be enough time to do it wrong.
Damage and Destruction. Two words that can have a very detrimental effect on a real estate transaction.
The current CBR/CBA contract deals with two different types of damage. First, there is the damage that occurred prior to the contract being signed, pre-existing damage. Then there is the damage that occurs after the contract is signed but prior to closing. Section 4 of the contract is designed to discover and address the damage that occurred prior to the contract being signed. Section 9 is for damage that occurs after the contract is signed but prior to closing.
The Supreme Court of Ohio upheld the doctrine of caveat emptor in Layman v. Binns (1988), 35 Ohio St.3d 176, let the buyer beware. In that case the Court stated at page 177, “The doctrine of caveat emptor is one of long standing. Since problems of varying degree are to be found in most dwellings and buildings, the doctrine performs a function in the real estate marketplace. Without the doctrine nearly every sale would invite litigation instituted by a disappointed buyer…A duty falls upon the purchaser to make inquiry and examination.”
The Court stated on page 178 of the decision, “To make the doctrine operate fairly, courts have established certain conditions upon the rule’s application. We summarize and adopt these conditions as follows: (1) the defect must be open to observation or discoverable on reasonable inspection, (2) the purchaser must have an unimpeded opportunity to examine the property and (3) the vendor may not engage in fraud.”
If the property has existing damage, the buyer has a duty to discover the damage. For example, if the contract is signed in November of 2003 and there was hail damage to the siding from the April 2003 hailstorm, the appropriate avenue for the buyer is through the procedures in Section 4, not Section 9.
Section 13 of the CBR/CBA Real Estate Purchase Contract states, “At the time the Seller delivers possession, the premises will be in the same condition as the date of acceptance of this contract, except as provided in paragraph 9, and normal wear and tear excepted.” If the siding had hail damage on the date of acceptance, the seller’s only duty is to deliver the premise in the same condition. However, the buyer could discover the damage and request a remedy through Section 4 and negotiate.
Likewise, if there is a fire in the house after the contract is signed but prior to closing, Section 9 of the contract would apply. Section 9 provides the requirements of the seller who discovers that the property was damaged or destroyed, and also the options for the buyer. The seller bears the risk of loss prior to closing. If the property is substantially damaged or destroyed the seller is required to contact the buyer, whereby the buyer has certain options available. The question that has come up is what qualifies as “…substantially damaged or destroyed.”
The Tenth District Court of Appeals in Franklin County Ohio decided a case in 1982 that dealt with the standard contract then in use which contained the same phrase as we have today, “substantially damaged or destroyed.” Drake v. Burch (1982) 82AP-19, 82AP-56, is a case where the sellers removed the shrubbery prior to closing without the consent of the buyers. The buyers chose to rescind the contract. The Court stated, “…the word “property” is used in a broader sense in the clause and separately refers to each integral part of the real estate. This follows because various features of the real estate, such as landscaping, may have a decided effect both on the desirability and the market value of property. Neither the contract, nor the common law, requires the defendants to accept the property without the shrubbery or to accept the realtor’s offer of a payment in money.”
When damaged property is discovered it is critical to know how to address it and which part of the contract applies. Remember that time is of the essence.
It is common for contracts from home builders to include arbitration clauses. These clauses have been the subject of many lawsuits. The principal question is generally whether they should be enforceable. My question is whether arbitration clauses truly serve the intended purpose.
I speculate that many builders and their lawyers publicly champion the idea of arbitration by stating that it is less expensive and less cumbersome than traditional litigation in the courts. I wonder if in private the reasons for desiring the arbitration process are so it can be private without public disclosure and without the conformity to case law and statutes. Arbitrators can decide however they please. They do not have to be lawyers; therefore, they are not expected or required to apply the law. But the question then becomes what do we have without the law?
The law is comprised of statutes enacted by the Ohio General Assembly and of court decisions where disputes have been decided. Law is public. Law is for the benefit of all. By having a public body of law in statutes and court decisions, people can reference how courts have decided similar situations and thereby provides a base of reference for how to proceed in any given situation. Unless there are significant compelling reasons not to, courts will follow the law as it exists. If a party receives a decision that they can prove is not in accordance with the existing law, they can appeal it. The possibility of appellate review is the “checks and balances” on the trial court system. It also provides the decisions which control and apply to future similar disputes.
Arbitration is arbitrary. Arbitrators do not have to apply law to their decisions and there is usually no oversight or appeal process, except for the most egregious cases where fraud is proven. Fraud is very difficult to prove. Most arbitration clauses found in home builder contracts require the decision to be binding.
So does a system that keeps disputes private and does not apply law benefit anyone? For the building industry, it sustains the perception of potentially being anti-consumer. For an industry dependent on the consumer, it is a mystery to this writer why they would ever want to be perceived as anti-consumer. Furthermore, does it benefit the truly good builders to create an environment where the bad ones can persist? If builders know that they can be taken to court where decisions are based on law and are public, will that affect how they treat customers? By being held to established law and consequences, builders could conduct themselves accordingly. Likewise, consumers would be able to rely upon established law to know when they do and do not have reasonable case.
Home builders are hurting. We all know that times are tough in the real estate market, but that is not an excuse. The home building industry as a whole has to come to the realization that it is dependent on consumers and that it needs to embrace customer service. Some builders have always placed a strong emphasis on customer satisfaction. They survive in these difficult times. The question for those builders is whether they want to elevate the standards of all builders. It is not difficult to do, simply remove all arbitration provisions. Permit the legal system to work. It will make the unscrupulous builders, or those who simply deliver a poor product, to be held accountable. It is a public process. By being public, builders will know that they will not be able to hide within an arbitration proceeding.
In the end, both consumers and builders benefit by eliminating arbitration provisions and allowing builders to be subject to law and the legal system. If builders are concerned that the decisions rendered by the courts will be overly harsh or unfair, there are two options. One is the appeal process. The other is to treat customers like they would want to be treated; to respect customers, and thereby earn the customers’ respect, and by having contracts that are fair, balanced, and clear. No one enters into a purchase contract hoping for a lawsuit or an arbitration proceeding. They just want to buy a home that is built to the plans and specifications associated with the contract and in a good and workmanlike manner. The builder should strive to provide the same.
By eliminating the arbitration provisions, builders who are consistently sued will leave the business. The builders who have consistently earned the respect and trust of their customers will prosper. It is just that simple. The arbitration process has allowed problem builders to remain unknown to the consumers. By allowing builders to be subject to the legal system and held accountable to the law, both the industry and the consumers will benefit.
Since contracts from home builders vary significantly from the standard Board of Realtors® approved contract, it is the real estate agent/broker’s duty to alert the buyer that it may contain provisions unfamiliar to the agent/broker which may affect the buyer’s rights. Therefore, the real estate agent/broker needs to refer the buyer to a knowledgeable real estate attorney to make sure the buyer understands the contract and to help protect the buyer’s rights. Failure of a real estate agent/broker to refer a buyer to legal counsel in a home builder contract situation could be a breach of the statutory fiduciary duty owed to the buyer.
Fiduciary duty. What do these words really mean to real estate agents? To answer that question let’s start with Black’s Law Dictionary, 5th Edition, page 563, “Fiduciary: …a person holding the character of a trustee…in respect to the trust and confidence involved in it and the scrupulous good faith and candor which it requires. A person having duty, created by his undertaking, to act primarily for another’s benefit in matters connected with such undertaking.” Simply stated, fiduciary duty means to do what is in the client’s best interest, first and foremost.
Section 4735.62 of the Ohio Revised Code defines the fiduciary duties for a real estate licensee. It begins with, “In representing any client in an agency or subagency relationship, the licensee shall be a fiduciary of the client and shall use the licensee’s best efforts to further the interest of the client including, but not limited to, doing all of the following:…” and then it lists out nine specific areas. Subsection (G) states, “Advising the client to obtain expert advice related to material matters when necessary or appropriate;” As Division Counsel for the Ohio Division of Real Estate, Holly Johnston-Cook has stated, “It is an express fiduciary duty of an agent to advise his or her clients to obtain expert advice related to material matters when necessary or appropriate. Many of the complaints the Division receives against agents could have been avoided had the agents recommended their clients seek counsel.”
While one may think about a home inspector for a home inspection what about the recommendation to hire an attorney? Is a contract or a request to remedy a material matter which would require the expert advice of a real estate attorney? I suggest that it most definitely is and that further reading of the Ohio Revised Code and relevant case law supports that conclusion.
Section 4735.18 of the Ohio Revised Code is a long list of actions that can result in disciplinary action, including Subsection (32) “Performing any service for another constituting the practice of law, as determined by any court of law;”
Sections 4735.63 and 4735.65 are the provisions of the Ohio Revised Code detailing the duties owed by a real estate agent or broker to sellers and buyers respectively. Each Section ends with, “(C) Nothing in this section shall be construed as permitting a licensee to perform any act or service that constitutes the practice of law.”
So what is the practice of law and what is a real estate agent permitted to do? In 1941, the Ohio Supreme Court decided the case of Gustafson v. V.C. Taylor & Sons, Inc., 138 Ohio St. 392. “This court finds itself in agreement with the reasoning and conclusion of the lower courts to the effect that the supplying of simple, factual material such as the date, the price, the name of the purchaser, the location of the property, the date of giving possession and the duration of the offer requires ordinary intelligence rather than the skill peculiar to one trained and experienced in the law.”
In 2003, the Ohio Supreme Court found the preparation of deeds without the supervision of an attorney as unauthorized practice of law. As stated in Toledo Bar Assn. v. Chelsea Title Agency of Dayton, Inc., 100 Ohio St.3d 356, “The unauthorized practice of law is the rendering of legal services for another by any person not admitted to practice in Ohio * * *.” Gov.Bar R. VII(2)(A). ” `[T]he practice of law embraces the preparation of legal documents on another’s behalf, including deeds which convey real property.’ “
In 2005, the case of Miami Cty. Bar Assn. v. Wyandt & Silvers, Inc., 107 Ohio St.3d 259 was decided by the Ohio Supreme Court where it was found that a CPA firm was practicing law when it advised clients about entity formation. “[T]he practice of law is not limited to appearances in court, but also includes giving legal advice and counsel and the preparation of legal instruments and contracts by which legal rights are preserved.”
The Canons of Ethics for the Real Estate Industry are published on the Ohio Division of Real Estate’s website. Section II, Article 8. “The licensee should recommend that title be examined and legal counsel be obtained.” (Emphasis added)
What all of this is saying is that it is perfectly acceptable for a real estate agent to fill in the blanks on a pre-printed purchase contract, but beyond that, such as adding additional terms and conditions, the fiduciary duty requires the recommendation of hiring an expert in such matters, such as an attorney. Of course, by having the client hire an attorney to draft the contract and other related documents such as requests to remedy, the real estate agent is not only fulfilling the fiduciary duty but also removing themselves from making costly mistakes.
The recent case of Clark v. Humes, 2008-Ohio-640 is a perfect example of why it would be a good idea to have an attorney draft documents in a real estate transaction. This case, decided by the 10th District Court of Appeals in Franklin County, Ohio, centered on an inspection and the documents relating to the agreement on the remedies for unsatisfactory conditions. The case is silent as to whether the parties were represented by real estate agents or attorneys in the negotiations, but it is clear that they were using the Columbus Board of Realtors – Columbus Bar Association Residential Real Estate Purchase Contract.
After the inspection, the buyer submitted a request to remedy. It stated, “4) Beam in crawl space under sunroom to be replaced because of decay. Add additional support under beam. Determine if the cause of moisture is current; if current, repair condition. Method of repair to be decided upon by a licensed, structural engineer. Engineer fee is to be paid for by the seller.”
The sellers hired Craig Carson of Craine Engineering. His report stated, “The damaged sill plate should be replaced along the rear of the crawl space. The wood girder should be repaired where damaged. (REAR) Damaged insulation should be removed and replaced. Additional damage discovered during the process and with further investigation should be repaired. Sources of the problem (i.e. grading & drainage) should be addressed. Ventilation should be improved.”
The sellers, Humes, got an estimate for repair of the sill plate of approximately $800. The Court stated in paragraph 4 of the decision, “Having investigated the problem, the Humes drafted an “Addendum to Real Estate Purchase Contract” to address the Clarks’ concerns. This offer, which the Humes made on April 29, 2004, stated: 4. In reference to issue #4, Sellers have consulted with a structural engineer and will have issue remedied pursuant to the recommendations of that engineer. The Clarks accepted the Humes’ proposed remedy for the sunroom problem and when doing so, wrote next to the relevant provision, “[b]uyers agree to recommendation from Craig Carson Craine Engineering dated 4-29-04.””
The repairs were not completed, or even started, prior to closing. The parties agreed to escrow $3,000 with the title agency. Paragraph 8 of the decision, “Ultimately, the Clarks spent $21,482 to remedy the problems with the sunroom. The work included replacing the decayed and rotted sub-floor and support beam; repairing leaking windows; replacing the aluminum siding and decking that was removed to do the necessary repairs; and re-grading the backyard so that water would not drain into the sunroom again. Although the Humes released the $3,000 contained in the escrow account to pay for the repairs, they refused to pay the remaining $18,482 in costs.”
The Court awarded the maximum it was permitted, (Municipal Court has a maximum of $15,000). The Humes appealed asserting that they were limited to the $3,000 in escrow. The Court of Appeals determined that it was the Contract and the Addendum that controlled, not the amount in escrow. The well established rule of contract interpretation was reiterated by the Court in paragraph 12. “The construction of contracts is a matter of law. Alexander v. Buckeye Pipe Line Co. (1978), 53 Ohio St.2d 241, paragraph one of the syllabus. When construing a contract, a court’s principle objective is to ascertain and give effect to the intent of the parties. Hamilton Ins. Serv., Inc. v. Nationwide Ins. Co. (1999), 86 Ohio St.3d 270, 273. “The intent of the parties to a contract is presumed to reside in the language they chose to employ in the agreement.” Kelly v. Med. Life Ins. Co. (1987), 31 Ohio St.3d 130, paragraph one of the syllabus. In determining the parties’ intent, a court must read the contract as a whole and give effect, if possible, to every provision contained in the contract. Foster Wheeler Enviresponse, Inc. v. Franklin Cty. Convention Facilities Auth. (1997), 78 Ohio St.3d 353, 361-362.”
In the case of Clark v. Humes, the Court read the plain language of the documents and applied it. While it is not known from the decision what, if any, role real estate agents had in the drafting of the documents, the question is why should it even be a question? When it comes to drafting these documents, it is in the best interests of the clients to have attorneys involved. Furthermore, it is required by the Ohio Revised Code.
Bob Miller of RE/MAX Premier Choice of Dublin, Ohio and past-President of the Columbus Board of Realtors says one of the reasons he recommends an attorney is, “So that an objective attorney can “double check” the contract language and make absolutely sure, once again, that the contract is written to the Buyer’s satisfaction.”
Louise Potter of Prudential Calhoon Company Realtors of Hilliard, Ohio says, “Anything can, and will, happen during a real estate transaction. Having a real estate attorney involved from contract on is the best way to ensure your clients are well protected and fully represented on their side of the deal. A good agent knows it is always best to bring in the experts.”
Protecting clients by bringing in real estate attorneys, doing what truly is in the clients’ best interests, and thereby fulfilling the statutory fiduciary duty also protects the real estate agent as well. If the clients are represented by an attorney, the real estate agent does not risk practicing law.