Wisconsin REALTORS® Association - Legal Hotline Hottips
Legal Hottips - July 7, 2008 The Below Case and Homebuyer Remedies against
Sellers Who Misrepresent the Condition of Their Homes Below v. Norton, 2008 WI 77 (http://www.wisbar.org/res/sup/2008/2005ap002855.htm).
No, homebuyers can still sue sellers who lie about the condition of their properties. What the Wisconsin Supreme Court in the Below v. Norton case did was to take away the ability to sue those sellers for misrepresentation. This is significant because it will generally remove the ability to sue for punitive damages and diminish the opportunity for rescission of the offer to purchase contract or the sale itself. Misrepresentation claims also offer more flexibility with regard to timing: a homebuyer would have three years after discovering a defect to sue based upon misrepresentation. If a defect is not discovered until years after closing, other remedies may not be available because the time limits for most lawsuits begin running when the event - here the misrepresentation - occurs. Without the threat of punitive awards, the consequences
for sellers who lie will be less severe. If a seller gets caught in a
misrepresentation, the homebuyer can still sue for a breach of contract
because the offer to purchase incorporates the real estate condition
report (RECR) and calls for additional property condition
representations (see lines 53-81 of the WB-11 Residential Offer to
Purchase). But in a lawsuit for breach of contract, the seller will
typically only have to pay compensatory damages to correct the defect
that the seller lied about or concealed. In other words, if the worst a
seller could face would be to pay for the defect that they should have
paid to fix in the first place, then sellers may decide to not be
truthful when making RECR or other property condition disclosures.
Since many buyers may be reluctant to sue because of the costs, time
and burden of proving the case, sellers may figure it is worth the risk
to lie because they stand a decent chance of getting away with it. Yes, there are two other legal theories that can be used to sue a seller who misrepresents the condition of their home. Both of these theories have been used successfully in homebuyer lawsuits against deceitful sellers. Under Wis. Stat. § 100.18, the false advertising statute, a homebuyer can sue a seller who makes a false, deceptive or misleading statement to induce a real estate sale if the homebuyer suffers a monetary loss as a result. A successful buyer may recover any monetary loss together with costs and reasonable attorney fees. §100.18 lawsuits can be brought only with respect to representations made before the offer to purchase is accepted. Statements made after a person has entered into a purchase contract logically do not induce the party to enter into the contract. Wis. Stat. § 895.466 (formerly § 895.80) gives a civil remedy to those suffering damages as a result of another's violation of Wis. Stat. § 943.20, a criminal statute. § 943.20(1)(d) makes it illegal for anyone to "Obtain[] title to property of another person by intentionally deceiving the person with a false representation which is known to be false, made with intent to defraud, and which does defraud the person to whom it is made." Obtaining title to other property includes obtaining money. Wis. Stat. §895.80 allows the court, in its discretion, to award all costs and attorneys fees, and to triple the damages. Why was the Below case decided the way it was? The Below case is the most recent in a long line of cases discussing, evolving and applying the economic loss doctrine to various scenarios. The economic loss doctrine is a judicially-created doctrine designed for the commercial business deals. Over the past several years, the Wisconsin Supreme Court explored the different situations where they believed the doctrine should apply. While most of the seven justices seemed to agree that the doctrine should apply to commercial business transactions and even to commercial real estate transactions, the court was a bit divided when it came to non-commercial or residential real estate situations. Some on the court appeared to believe that prior decisions had already determined that all real estate transactions should be subject to the doctrine, so that they really had no choice but to follow the court's prior holdings. Others disagreed and were ready to draw the line for residential real estate transactions. The WRA, acting through the Legal Action Program, filed an amicus brief with the Wisconsin Supreme Court to argue that application of the economic loss doctrine to residential real estate transactions was ill advised and would diminish legal protections and remedies for Wisconsin homebuyers. Wisconsin public policy, as reflected in Wis. Stat. ch. 709 RECR law and in the DRL offer to purchase forms, promotes seller disclosure of property defects because sellers are the ones most familiar with their property. Buyers who receive a seller's RECR receive more complete and accurate information on which they may base their offer to purchase negotiations. What is the economic loss doctrine? The economic loss doctrine looks to maintain the distinction between contract law remedies and tort remedies, such as in misrepresentation or negligence claims that are based on common law duties. The premise in the cases where the doctrine was applied in the past was that the parties in commercial contracts, including many commercial real estate transactions, are competent to assess economic risk and assume, allocate or insure against that risk. The parties in these bargained-for contracts tend to be experienced business people or purchase agents who routinely enter into business contracts and/or are assisted by attorneys - they can create warranties, indemnification agreements, set specific penalties or buy business operation or other insurance to guard against potential losses. The same cannot be said for consumers purchasing a home, whether or not real estate professionals assist them. They typically write up their purchase contracts on DRL-approved forms, which do little to allocate risk and future liability. Many sellers are motivated to be less than forthcoming in the RECR and in the offer - they need to sell their home - and some will endeavor to hide property defects. Application of the economic loss doctrine to residential offers to purchase is a bad fit - it is apples and oranges. It limits the remedies available to most parties, contrary to the Wisconsin policy of transparency and full disclosure as evidenced in the RECR law and the provisions of the DRL-approved offers to purchase. Does the Below case mean that parties can no longer sue real estate licensees for misrepresentation? No. The economic loss doctrine is about confining the parties to a contract to the remedies they create for themselves in their contract and not letting them use common law misrepresentation claims to later add remedies that should have been included in their contracts. Because agents and brokers are not parties to the offer to purchase, it would appear that the doctrine would not block misrepresentation lawsuits against licensees. Real estate licensees provide real estate brokerage services to the parties and the Wisconsin Supreme Court has already held that the economic loss doctrine does not apply to contracts for services. Wis. Stat. § 100.18 false advertising claims can also be brought against licensees. Fortunately, no attorney fees may be recovered from a real estate licensee engaged in real estate practice. § 100.18 does not apply to real estate brokers who do not know that the assertion or representation of fact they have made was untrue, deceptive or misleading. Otherwise, real estate sellers could simply 'launder' their false representations through their brokers thereby bypassing the purpose of the statute. Accordingly, real estate licensees may be found liable for false advertising under § 100.18, but only with respect to false representations knowingly made prior to the acceptance of the offer. What can be done to make sellers accountable for their property condition representations? Over the upcoming weeks the WRA will analyze and evaluate different potential measures. One avenue may be with legislation, perhaps amending Wis. Stat. chapter 709, the RECR law to provide additional remedies to buyers in addition to the contract rescission remedy currently provided in the statutes. The WRA will also work with the DRL Real Estate Contractual Forms Advisory Committee as they revise the offer to purchase to see what provisions should be to included in the offer with regard to seller property condition representations. These strategies will take some time because the legislature does not meet again until January and forms revision process takes time as the Committee works to develop the best possible forms for consumers and licensees. In the meantime, creating contract provisions to allow for actual attorneys fees, double damages or other penalties for sellers who intentionally misrepresent the condition of the property or conceal property defects is another possibility that will be carefully considered. This Wisconsin REALTORS® Association Best of the Legal Hotline service is provided for you by the WRA's Legal Affairs Department. The service should be considered a general statement of applicable legal principles. Given this format, it is impossible to fully address all potential legal issues which might apply in any particular situation. A determination of any individual's legal rights in a transaction can only be obtained after complete analysis of the law and its applicability to the particular fact situation. Please contact the WRA Legal Hotline if additional information is needed, or private counsel, if legal advice is needed. Thank you for using the Wisconsin REALTORS® Association Best of the Legal Hotline service. Debbi Conrad |