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"As-Is" Sales of Residential Real Estate and the Duty to Disclose: Let the Seller Beware

September 4, 2018

In Phelps v. Caperoon, 2018 Pa. Super. 171, 2018 Pa. Super LEXIS 674 (June 18, 2018), the Pennsylvania Superior Court considered for the first time, whether an "as is" clause in an agreement of sale negates a seller's statutory duty to disclose material defects in residential property under the Real Estate Seller Disclosure Law ("RESDL"), 68 Pa. C.S. §§ 7301 et seq.  After holding the duty to disclose is mandatory under RESDL, the Court then provided guidance as to how to calculate "actual damages" for violations of the statutory obligation.

Background

The Phelps case involved an agreement of sale for a 165 year-old, two story single family home and several additional buildings (barn, garage, greenhouse) on approximately eight acres of land in Lower Paxton Township, Dauphin County, Pennsylvania.  Under a written agreement, the parties agreed that Buyer, Nikos Phelps, would lease the property for a six (6) month period before consummating the purchase transaction. 

Prior to signing the agreement, Buyer personally inspected the property several times but chose not to hire a licensed inspector.  During his inspections, Buyer asked the Seller, Louis Caperoon, if there were anything he needed to know.  Seller replied "everything was fine.  There was nothing to be concerned with."  Phelps, at *1.  Although Buyer was aware the Seller should provide a disclosure statement under RESDL disclosing any known material defects, he did not find it unusual that Seller did not do so in this transaction.  Id.

The written agreement of sale contained the following "as is" clause:

Inspection of Premises—Buyer certifies that he has personally inspected the premises, or has caused it to be inspected in a manner satisfactory to him.  Buyer agrees that the property is in satisfactory condition and repair.  Buyer hereby acknowledges that he is purchasing the property "as is".  Buyer expressly waives any and all implied warranties to which the Buyer might be entitled, and acknowledges that he was given no express warranties.

As planned, Buyer completed the purchase transaction after residing at the property for the six-month lease term.  Shortly thereafter, Buyer claimed to have discovered "numerous deficiencies, including a deteriorated septic system requiring replacement; a cracked furnace heat exchanger; leaky roof; flawed electrical wiring; water damage from a never-connected washer drain; and various issues associated with the improper removal of load-bearing walls and heating ducts," which Buyer did not discover during the lease term because they were "hidden."  Id. at *3, n. 4.

Buyer filed suit against Seller claiming, among other things, violations of RESDL stemming from Seller's failure to disclose material defects in the required form.  In response, Seller admitted he had not provided Buyer with a RESDL disclosure form because the defects alleged by Buyer either had not existed or were known to Buyer at the time of the agreement.  Additionally, Seller asserted that no disclosure was required because the sale at issue involved a commercial property.  Id. at *4.

The trial court granted Buyer's motion for partial summary judgment as to Seller's liability under RESDL, reasoning that the "provisions of RESDL cannot be waived."  After trial, the court awarded Buyer $39,000 in damages for Seller's violation of RESDL with respect to the leaky roof and defective electric wiring.  The court found in favor of Seller on Buyer's remaining claims of UTPCPL violations and fraudulent misrepresentation.  Both parties appealed to the Superior Court on different grounds.

Seller's Argument on Appeal

Seller argued that the "as is" clause in the agreement of sale negated his statutory disclosure duties under RESDL, relying on the Superior Court's decision in PBS Coals, Inc. v. Burnham Coal Co., 558 A.2d 562 (Pa. Super. 1989).  In PBS Coals, the Court addressed the use of the term "as is" in the context of a transfer of real property interests, concluding that "when something is accepted 'as is' the buyer is put on notice that there may be liabilities attendant to the purchase", thus the buyer was obligated to resolve the defect at issue "because it purchased the property on an 'as is' basis."

Noting that PBS Coals predated RESDL by over a decade, the Superior Court turned to the relevant sections of RESDL which, with a few exceptions, applies to all residential real estate transfers in Pennsylvania.

Under Section 7303 of RESDL a seller "who intends to transfer any interest in real property shall disclose to the buyer any material defects with the property known to the seller by completing all applicable items in a property disclosure statement…"  68 Pa. C.S. § 7303.  However, a seller "is not obligated … to make any specific investigation or inquiry in an effort to complete the property disclosure statement."  68 Pa. C.S. § 7308.

Relying on decisions of both the Pennsylvania and United States Supreme Courts, the Court emphasized that use of the term "shall" in Section 7303 imposed a mandatory affirmative duty on Seller.  Thus, because "RESDL contains no exceptions to the disclosure requirements," Seller failed to demonstrate that he does not have to comply with RESDL's disclosure requirements because of the "as is" clause in the agreement of sale at issue.

Buyer's Argument on Appeal

In his appeal, Buyer argued that the trial court had miscalculated damages awarded under RESDL, claiming that under Skurnowicz v. Lucci, 798 A.2d 788 (Pa. Super. 2002), he was entitled to approximately $200,000 additional "actual damages" in the form of difference-in-value and consequential damages.  Seller countered, arguing that under Gadbois v. Leb-Co. Builders, 458 A.2d 550 (Pa. Super. 1983) "actual damages" should be the lesser of (1) the difference in market value and (2) the cost of repairs.

Under Section 7311, "any person who willfully or negligently violates or fails to perform any duty" under RESDL "shall be liable in the amount of actual damages suffered by the buyer as a result of a violation of this chapter."  68 Pa. C.S. § 7311(a).  However, the Court noted, "RESDL does not define the term 'actual damages,' and no Pennsylvania case has defined it."

Rejecting Seller's definition of "actual damages," the Court noted that Gadbois involved a breach of implied warranty of habitability in contracts to build new homes—a claim not raised by Buyer.  Finding Buyer's reliance on Skurnowicz was similarly misplaced, the Court found that case addresses the measure of damages for fraudulent misrepresentation rather than a statutory violation of RESDL.

Turning to prior judicial interpretation in the context of the Whistleblower Law and Truth in Lending Act, the Court noted that the term "actual damages" had been defined to mean compensation for actual losses.  The Court then looked to the legislative history of RESDL to examine whether "actual damages" includes difference-in-value, consequential damages, both or the lesser of the two.

The Court observed that RESDL was intended to protect purchasers of real property and to ensure that both parties have some parity of knowledge regarding any issues with the property, and because of this protective purpose, RESDL was to be "liberally construed to achieve its remedial goal." 

Based on the foregoing, the Court concluded that "actual damages" under Section 7311 for a violation of the statutory duty to provide a RESDL disclosure statement "may be determined by the repair costs, capped by the market value of the property."  Accordingly, the Court agreed with Buyer that the trial court erred in calculating the amount of repairable damages and overlooked an exhibit which provided an estimate for the roof repairs.

Practice Pointers

Even if a residential agreement of sale contains an "as is" clause and/or a buyer waives his or her right to inspect the property, there is no exception to a seller's duty under RESDL to disclose all material defects known to the seller at the time of the agreement.

In order to succeed on a claim of damages under RESDL, a buyer will need to establish that the seller failed to disclose a material defect known to seller or made representations regarding a material defect which seller knew or had reason to know was false, deceptive or misleading; and that buyer incurred damages as a result of such material defects.

In calculating damages under RESDL, a court will look to evidence of the fair market value of the property and the estimated cost to repair any alleged material defects thereon.


[1] RESDL defines "material defect" as follows:

A problem with a residential real property or any portion of it that would have a significant adverse impact on the value of the property or that involves an unreasonable risk to people on the property.  The fact that a structural element, system or subsystem is near, at or beyond the end of the normal useful life of such a structural element, system or subsystem is not by itself a material defect.

68 Pa. C.S. § 7102.

For more information please contact, Ken Fleisher at kjfleisher@zarwin.com or Anya Morrison-Davis at amorrison@zarwin.com


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