Caveat Venditor (Let the Seller Beware?)

A residential real estate contract has a Disclosure Statement, which states in substance that the Seller does not make any representations or warranties concerning the property condition, and that the Buyers will acquire the property in “as-is” condition.   This should cover the Seller as to any property defects, right? Not necessarily.   The Virginia Supreme Court recently ruled that a seller’s concealment of a defect in the property was grounds for rescission of the real estate contract despite language in the contract that stated that the property was sold “as is”. As reported in the January 19, 2015 edition of the Virginia Lawyers Weekly, the Virginia Supreme Court in Devine v. Buki, et al., (Record No. 140301, January 8, 2015), in part upheld a finding of fraudulent inducement to perform the contract by the Northumberland County Circuit Court and an award of rescission of the contract to the purchasers. If a party conceals a fact that is material to the transaction, knowing that the other party is acting on the assumption that no such fact exists, the concealment is as much a fraud as if the existence of the fact were expressly denied, or the reverse of it expressly stated. The parties to the case entered into a real estate contract for the sale of a 200-year old house that the seller had purportedly fully restored. The contract contained a “Disclosure Statement” which stated that the owners made no representations or warranties as to the condition of the property and that the property was to be conveyed “as is” with all defects which may exist. Following the closing on the transaction, the purchasers discovered that the seller had actively concealed substantial rot and terminate damage to the home’s foundation, which had not been discovered by the purchasers’ pre-closing home inspection. The damage was so extensive that the home’s structural integrity was significantly compromised. The purchasers sued the seller for fraudulent inducement and sought rescission of the contract, claiming that the concealment of the damage to the foundation induced the purchasers to proceed to closing and purchase the property. The trial court ultimately agreed and granted rescission of the contract, plus consequential damages for the purchasers’ interest payments on their mortgage loan, real estate taxes, and property insurance. On appeal to the Virginia Supreme Court the seller argued that he had no duty to reveal the damage to the foundation because of the contract’s Disclosure Statement. The Court disagreed, finding that the seller may not rely upon and claim the benefits of the contract, and at the same time, contract against and relieve himself of the consequences of his fraud. Essentially, if a party conceals a fact that is material to the transaction, knowing that the other party is acting on the assumption that no such fact exists, the concealment is as much a fraud as if the existence of the fact were expressly denied, or the reverse of it expressly stated. The entire contract was rescinded as a result of the seller’s fraudulent inducement, including any language indicating that the sale of the property was made “as is.” Any case involving a claim of fraudulent inducement will most certainly revolve around the specific facts of each case. With this said, a prospective Seller and the Seller’s representative should always...

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Liquidated Damages – Not Always A Given

A recent ruling by the Fairfax County Circuit Court on a damages provision in a real estate contract could foreshadow an evolution on the interpretation of the Default clause on real estate and other contracts in Virginia. As reported in the July 24, 2014, edition of the Virginia Lawyers Weekly, Judge Charles Maxfield of the Fairfax County Circuit court sustained a demurrer to the complaint in Sagatov Builders, LLC v. Christian Hunt (CL2014-5735) ruling that an option clause in the damages provision in a real estate sales contract was unenforceable. A copy of the opinion can be found at our website. The clause in question provided that in the event of a purchaser default, the seller could choose either to seek liquidated damages (i.e., keep the purchaser’s deposit of $50,000.00) or to pursue actual damages. The seller in this case claimed a purchaser default and filed a breach of contract case seeking liquidated damages. The purchaser demurred to the complaint on the grounds that the liquidated damages clause is an unenforceable penalty. In an apparent case of first impression, Judge Maxfield agreed with the purchaser and sustained the demurrer. Judge Maxfield held that the contract option to pursue either actual damages or liquidated damages undermines the purpose of liquidated damages, which is to provide agreed compensation for loss or injury when actual damages may be uncertain. The judge further held that the optional clause acted as a penalty as the seller could choose the liquidated damages where the deposit exceeded the actual damages, thereby punishing the purchaser. The seller was given leave to amend its complaint to seek actual damages, which it has since done. The defendant has filed an answer, and the case is otherwise proceeding. Careful consideration should be given to the inclusion of such optional damages clauses. The ruling in this case, that damages clauses that provide an option to pursue either liquidated or actual damages in the event of default are unenforceable, has the potential to affect the drafting and interpretation of the customary language of such contracts that has otherwise escaped serious scrutiny for decades. Such clauses are often found in commercial purchase and sale agreements, as well as in standard residential contracts such as those published by the Northern Virginia Association of Realtors. While the Virginia Supreme Court has not ruled on the issue and the ruling is not binding statewide, the ruling does set some precedent for Fairfax County and may be viewed as persuasive authority by judges in neighboring jurisdictions. Careful consideration should be given to the inclusion of such optional damages clauses. We’ll keep you advised on any...

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