The Principle of Caveat Emptor: Does It Still Exist Today?

Tuesday, July 22, 2014

When I was in law school about 100 years ago, my real property professor mentioned “caveat emptor” in almost every class. Loosely translated this means “let the buyer beware.” The legal principle behind “caveat emptor” is that a person who buys something without any kind of warranty is responsible for making sure it is in good condition, and if they don’t take this responsibility, then tough luck. 

Over time, the legal system and the legislature have been gradually shifting this responsibility from the shoulders of the buyer to the deep pockets of others. Today, the following parties may, depending on what state they are in, share some responsibility for protecting the buyer from his/her own failure to conduct adequate due diligence:

·         The seller through written disclosures

·         The realtor(s) involved through disclosure or expanded fiduciary duty

·         The home inspector who writes a report for the buyer

·         The mortgage lender under certain federal programs

With this shift in responsibility, buyers have developed a false sense of security that the safety net cast by the legal system and the legislature will protect them from just about anything. Consequently, buyers are not taking any time between the signing of the purchase contract and the end of the contingency period to actually do anything except read the disclosures and reports of others. This has had the unintended consequence of reducing what a buyer previously needed to know about buying, owning, and maintaining a home. At no time was this more evident than during the subprime lending debacle when many people approved for 100% loan-to-cost mortgages clearly did not have a clue about the burdens of home ownership.

Recently, there have been some interesting cases where the principle of caveat emptor seems to be making a comeback, much to the chagrin of some buyers. In one such case (Douglas v. Visser) the Washington State Court of Appeals reversed the trial court and found that in spite of egregious conduct by the seller, the buyer had sufficient notice there were issues with the home therefore had a duty to conduct further investigation of the issue. In that case, the facts seemed to favor the buyer. The seller not only failed to make adequate disclosures, but actually instructed a worker to use inferior materials to hide obvious defects. The buyer, on the other hand, had a home inspection done and the inspector reported finding a “small area of rot and decay near the roof line” and a “rotted sill plate.” Since the inspector could not see the true extent of the damage that the seller’s worker had concealed, the buyer assumed these were the only defects and closed on the purchase. Shortly after moving in, the buyer learned the true extent of the problem and was told it would be less costly to demolish and re-build than to repair. The buyer sued and won in the trial court, but lost on appeal when the court decided the rule of law based on caveat emptor was controlling.

Will this result in a major response by the legal system or the legislature to re-double efforts to protect unsuspecting buyers? I doubt it. It is far more likely this decision will be used as a blueprint for defense counsel to follow. It will also undoubtedly give rise to new cries of “caveat emptor” by everyone in a real estate transaction gone bad -- except for the buyer. In the eyes of this writer, the pendulum had swung too far in favor of the buyer in this day and age of looking to blame others for your own failings, so if the pendulum occasionally swings in the other direction, it probably all evens out in the end.

In the meantime, my law school professor would be happy to know “caveat emptor” is alive and well. 

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