Fraud in Residential Real Estate Transactions in Ohio

Fraud in Residential Real Estate Transactions in Ohio

A frequently litigated issue is whether sellers of residential real estate are liable for defects discovered by buyers either before or after closing on the sale. The common element of these cases is whether there was fraud involved on the part of the seller. Often a part of the litigation is related to property being sold as-is. The purpose of this article is to examine Ohio law as it has developed in this area.

The Supreme Court of Ohio stated in the headnotes of Layman v. Binns (1988), 35 Ohio St.3d 176, “[t]he doctrine of caveat emptor precludes recovery in an action by the purchaser for a structural defect in real estate where (1) the condition complained of is open to observation or discoverable upon reasonable inspection, (2) the purchaser had the unimpeded opportunity to examine the premises, and (3) there is no fraud on the part of the vendor.” The Court also stated, “[a] seller of realty is not obligated to reveal all that he or she knows. A duty falls upon the purchaser to make inquiry and examination.” The seller’s obligation to reveal all he actually knows about his property changed five years later.

In 1993, Ohio Revised Code §5302.30 was enacted into law requiring the Division of Real Estate to create the Residential Property Disclosure Form (“RPDF”) whereby most sellers, with few exceptions, are required to disclose whatever actual knowledge they have responsive to specific questions about the home. It is available for free from the Division of Real Estate website. The most recent edition, as of this article’s writing, was published in 2013. The first sentence on the RPDF states, “This is a statement of certain conditions and information concerning the property actually known by the owner.” It goes on to state, “The information contained in this disclosure form does not limit the obligation of the owner to disclose an item of information that is required by any other statute or law to be disclosed in the transfer of residential real estate.” It then provides the following: “Instructions to Owner: (1) Answer ALL questions. (2) Report known conditions affecting the property. (3) Attach additional pages with your signature if additional space is needed. (4) Complete this form yourself. (5) If some items do not apply to your property, write NA (not applicable). If the item to be disclosed is not within your actual knowledge, indicate Unknown.”

“Three types of such fraud may exist in real estate transactions: fraudulent misrepresentation, fraudulent concealment, and fraudulent nondisclosure.” Decaestecker v. Belluardo, 2008-Ohio-2077, ¶37. Pursuant to the holding in Layman v. Binns, if none of the three are present then the purchaser is precluded from recovery from the seller. However, in the event that fraud is present, then one would need to explore further as to whether the purchaser has grounds for recovery.

In Ohio, many of the reported cases in this area have to do with water intrusion in basements, so for illustration purposes we will assume that the transaction is a single family home that has had water intrusion through the basement walls. The sellers know about the condition and have performed some work themselves to try to remedy the problem including using caulk and paint made to cover over water stains. The issue for the sellers is how to deal with the RPDF.

Section D of the Form asks, “WATER INTRUSION: Do you know of any previous or current water leakage, water accumulation, excess moisture or other defects to the property, including but not limited to any area below grade, basement or crawl space?” Given the facts above, it should be obvious that the sellers should fully explain what they know and what they have done. But what if they don’t? What if they check the box by “NO” or if they just leave it blank? Have they committed actionable fraud?

“The elements of fraud are: (a) a representation or, where there is a duty to disclose, concealment of a fact, (b) which is material to the transaction at hand, (c) 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, (d) with the intent of misleading another into relying upon it, (e) justifiable reliance upon the representation or concealment, and (f) a resulting injury proximately caused by the reliance.” Burr v. Stark County Bd. of Comm’rs, 23 Ohio St.3d 69 (1986), paragraph two of the syllabus.

Regarding fraudulent concealment or nondisclosure, the Supreme Court of Ohio has held that “a vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection.” Layman v. Binns, 35 Ohio St.3d 176,178. “Fraudulent concealment exists where a vendor fails to disclose sources of peril of which he is aware, if such a source is not discoverable by the vendee.” Bryk v. Berry, 2008-Ohio-2389, ¶7. “The nature of the defect and the ability of the parties to determine through a reasonable inspection that a defect exists are key to determining whether or not the defect is latent.” Id. “If the seller fails to disclose a material fact on the disclosure form with the intention of misleading the buyer and the buyer relies on the form, the seller is liable for any resulting injury…However, the disclosure form is not a substitute for a buyer’s inspection.” Kramer v. Raterman, 2005-Ohio-2742, ¶14. “Courts have held that even when structural defects are described in less severe terms than what is actually true, notice to the buyer of the defect precludes claims of fraud and misrepresentation.” Id. ¶20 Therefore, it is very important to take any note of any indications of defects disclosed by the sellers, even though they may not be exhaustive in the description of the defects.

The doctrine of caveat emptor, as embodied in an “as is” clause, “only applies * * * to patent defects: those which are readily discoverable to prospective purchasers on inspection. The purchaser does not likewise assume the risk of latent defects: those which are not readily discoverable. However, neither does the seller have a duty to disclose the existence of latent defects unless he knows of them. A seller’s failure to disclose the existence of a known latent defect may constitute fraud, which is actionable.” Decaestecker v. Belluardo, 2008-Ohio-2077, ¶37.

As stated in Loya v. Howard Hanna Smyth, Cramer Co., 2009-Ohio-448, ¶12-13 “A cause of action cannot be maintained against the seller or its agent for fraudulent nondisclosure when the property is being sold “as is.” …In the instant case, the home was sold “as is” and, thus, any claim for fraudulent nondisclosure is barred. A cause of action can still be maintained for fraudulent misrepresentation, however.” (Citations omitted.)

Recently, the Sixth District Court of Appeals stated, “In Ohio, a seller of real property must complete a statutorily required form, disclosing ‘material matters relating to the physical condition of the property and any material defect relating to the physical condition of the property that is within the actual knowledge of the seller.’ Therefore, even with an “as is” clause, a seller may be liable for nondisclosure of a material, latent defect that is actually known to him. On the other hand, where a buyer conducts an inspection of the property and learns that problems existed in the past and chooses not to undertake further investigation, the “as is” clause may remove the seller’s duty to disclose information relating to the defect.” Graber v. Emch, 2012-Ohio-1395, ¶ 24. (Citations omitted.)

The Fifth District Court of Appeals in McNabb v. Hoeppner, 2011-Ohio-3224, ¶15 stated, “An “as is” clause in a real estate contract places the risk upon the purchaser as to the existence of defects and relieves the seller of any duty to disclose latent defects. The “as is” contract provision cannot be relied upon to relieve the sellers of liability on a claim for fraudulent misrepresentation. While R.C. 5302.30 specifically states that the disclosure form required by the statute is not a warranty, it can form the basis of a claim for false representation if the seller makes false statements to the buyer therein, which are relied upon by a buyer.” (Citations omitted.)

Some courts have found some common residential real estate contract form language to be equivalent to an as-is clause without ever using the words “as-is.” As stated in Good v. McElhaney, 98-LW-4088, “We find no reversible error with the trial court’s finding that the sales contract in the case sub judice was “as is.” Although the sales contract did not employ the phrase “as is,” the sales contract used the following language: “3. This property is being purchased in its present physical condition after examination by the undersigned Buyer, and the Buyer is relying solely upon such examination with reference to condition, value, character, and size of the property and improvements and fixtures, if any.” This language unambiguously states that appellants agree to accept the risk of defects in the property and further states that appellants are relying solely on their own examination of the property. Appellants further argue that an “as is” clause in a contract does not bar a claim of fraud. We agree with appellants in this regard.”

The Tenth District Court of Appeals in Brewer v. Willoughby, 93-LW-5747, agreed with the parties that the language in the contract in general use in Franklin County at the time containing the following clause amounted to an “as-is” clause: “Buyer has examined all property involved and in making this offer, is relying solely upon such examination with reference to the condition, character in size of land and improvements and fixtures if any. This contract constitutes the entire agreement and there are no representations, oral or written which have not been incorporated herein.”

There is one other issue with the clauses discussed by the courts in Good v. McElhaney and Brewer v. Willoughby and that is the concept that buyers are “…relying solely upon such examination…” The question here, yet to be addressed by an appellate court in Ohio, is whether the buyer can then claim reliance on the RPDF or if they have waived said reliance? Fraud requires reliance. If the buyer states they are relying solely on something, then at the same time, they are disclaiming reliance on anything else, arguably including the RPDF. Would it not be better to simply remove these type of clauses which one could argue eliminate the ability of the buyer to rely upon the Residential Property Disclosure Form as a basis for fraud?

Now back to the question about the seller with known water intrusion in the basement. In the case of Kaye v. Buehrle, 8 Ohio App.3d 381, the sellers caulked and patched cracks in the basement walls several years prior to selling the home. The contract contained an “as is” clause. The Court’s ruling that while the sellers were not subject to a claim for fraudulent nondisclosure, there was still exposure for claims of fraudulent misrepresentation and fraudulent concealment. The Court found that, “…no statements were made by the Buehrles with respect to the condition of the house prior to its sale. Thus, the critical element of reliance is not present. The Kayes did not rely on any affirmative representations of the Buehrles in purchasing the house. Therefore, the directed verdict was proper as to the claim for fraudulent misrepresentation.”

Regarding fraudulent concealment, the court found that repairs made eight years prior to selling with no further problems did not amount to, “…evidence to indicate that the Buehrles patched the wall with the intent to conceal any defects. From the record it seems clear that their intent was simply to repair the wall. Without evidence of an intent to conceal and acts performed to effect that intent, the Buehrles cannot be held liable for fraudulent concealment.”

In the case of Grieg v. Wallick, 2012-Ohio-77, the Residential Property Disclosure Form completed by the seller, Wallick, was marked NO to the questions about water intrusion and the questions about the structural components including the basement. The home inspection did not reveal any problems with the basement walls as the basement was finished and freshly painted, including the floors, which Mr. Grieg testified, “…you could’ve ate off the floor. I mean it looked perfect.” The Griegs moved in the home in October of 2005 and the water problems in the basement started in the spring of 2006. After trying various ideas to remedy the problem, Mr. Grieg hired a company to remove the drywall in the basement and to make all necessary repairs. Once the drywall was removed, cracks with several layers of caulk in the foundation walls were discovered along with bowing in the walls.

At the trial, there was testimony and pictures from a real estate agent who had listed the property in 2004 prior to the basement work. The listing expired in December of 2004 without a sale. The property was listed with another real estate agent in May of 2005 after the work had been performed and was sold a few months later to the Griegs. Apparently the first real estate agent’s photos and testimony was impactful as the trial court awarded not only economic damages, but also noneconomic and punitive damages.

The Fifth District Court of Appeals upheld the damages awarded by the trial court including punitive damages. “The trial court, in awarding punitive damages, found that appellant had acted with a conscious disregard for the rights and safety of Grieg and that such conscious disregard had a great probability of causing substantial harm. We find that the trial court’s decision was not arbitrary, unreasonable or unconscionable in view of the fact that appellant dry walled over the bowed wall to conceal it from prospective buyers and then misrepresented when and why he did so. As is stated above, appellant testified that he dry walled the basement because it was the last item of a list of things that he wanted to do to the house and testified that he did not intend to sell the house when he put up the dry wall. There was, however, evidence adduced at trial showing that the east basement was not dry walled at the time appellant’s property was first listed in 2004.” Id. ¶87

To sum up fraud in residential real estate transactions, first, not all fraud is the same and depending on the contract terms, it may or may not be actionable. Second, while we would like all sellers to be honest and to tell all they know about the property as is required by the RPDF, sometimes people are not honest. The motivation to sell a problem home can be a factor for some sellers to not be truthful in their responses to the questions of the RPDF. Furthermore, beware of bare minimum disclosure which provides some indication that there may be a defect. This is commonly found when the severity of water intrusion is downplayed, but disclosed. The disclosure that there is a “trickle of water” or the “corner gets damp” during heavy rains may be enough disclosure to defeat claims of more serious conditions actually experienced. The buyer was put on notice to investigate further. Third, a defect discoverable by a reasonable inspection of the premises, whether the buyer actually inspects the home or not, is generally enough to defeat any claim for recovery. Fourth, many of the contracts being used in the state of Ohio contain some language which can be construed as an “as-is” clause, whether or not explicitly stated as such. As shown above, this would only defeat claims for fraudulent nondisclosure, but not fraudulent misrepresentation or fraudulent concealment. Fifth, the challenge with every claim by an aggrieved buyer is proof. Being able to prove the knowledge of the seller can be very difficult. Proving what was done and by whom can be daunting. Proving all of the elements of fraud may not be possible.

So what can a buyer do to protect themselves? If the RPDF provided by the seller is old, request an updated one. In the event that the seller has learned about defects since the first RPDF was completed, such as through a home inspection conducted by another buyer who terminated the contract to purchase due to unsatisfactory conditions disclosed through their inspections, then the seller is required to provide the information. Note that the seller is under no duty to inspect the premises and also is under no duty to update the RPDF. That being said, a buyer can always demand an updated RPDF as a condition of the contract.

Buyers should inspect every aspect of the premises and not be afraid to ask the seller direct questions about the home. Contracts need to have provisions for the buyer to terminate the contract in the event they discover some material, non-cosmetic, condition which is unsatisfactory. Buyers need to make sure they have enough time in the contract to conduct inspections and follow up inspections if necessary. Real estate agents and real estate attorneys need to advise clients accordingly and to suggest inspection periods long enough to conduct proper due diligence.

One final note is that Ohio Revised Code §4735.67 pertains to real estate agents and brokers and states, “(A) A licensee shall disclose to any purchaser all material facts of which the licensee has actual knowledge pertaining to the physical condition of the property that the purchaser would not discover by a reasonably diligent inspection, including material defects in the property, environmental contamination, and information that any statute or rule requires be disclosed. For purposes of this division, actual knowledge of such material facts shall be inferred to the licensee if the licensee acts with reckless disregard for the truth.” So in the event that a real estate agent or broker has knowledge of a defect that is not discoverable, then they have a duty to tell prospective buyers of the defect. Part (E) of §4735.67 states, “No cause of action shall arise on behalf of any person against a licensee for disclosing information in compliance with this section, unless the information is materially inaccurate and the disclosure by the licensee was made in bad faith or was made with reckless disregard for the truth.”