Effective January 1, 2012, the Regional Sales Contract has been amended. The Property Maintenance and Condition Paragraph of the Contract (Paragraph 7) has been changed to remove the previously included warranty as to the condition of equipment, appliances or major systems. This change is consistent with Maryland law which renders all Maryland residential property sales “as is” unless otherwise negotiated in the contract. Prior to the dramatic new modifications, the Contract called for the equipment, appliances and major systems to be in “normal working order.” Otherwise, the sale was in the “as is” condition on the date of ratification.
There have been numerous controversies over the meaning of “normal working order” and further questions as to the responsibility of the sellers to repair or replace defective items discovered during the pre-settlement walk through. In an attempt to minimize property condition disputes at settlement, the Regional Sales Contract has reverted to a complete “as is” contract, and has shifted to burden to the purchasers to discover defects during the home inspection.
However, the change in the Property Condition provisions is likely to result in far greater controversies in the future rather than fewer disputes. In defining an “as is” sale, the Courts have typically considered “as is” to mean “as a reasonably prudent purchaser would expect the condition to be, absent latent material defects.” Thus, by selling a property in its “as is” condition, a seller is never excused from disclosing to the purchasers any and all latent material defects.
Additionally, a seller must be aware of the definition of Common Law Fraud or Misrepresentation, and how that could impact their obligations for disclosure. Fraud is the “statement or omission of a material defect with the intention of inducing reliance, and which through reasonable reliance the purchaser suffers damages as a result.” In other words, if a seller is aware of a latent or hidden material defect, they must disclose that fact, even in an “as is” contract. Significantly, if the seller is sued for misrepresentation, it is likely that the Real Estate Agent will also be named as a defendant. If there is a claim of fraud in a law suit, the Agent’s Errors and Omissions Insurance Policy will not defend the claim!
In light of our increasing knowledge of environmental hazards, the obligations of the Seller to disclose have been significantly expanded. For example, toxic mold has become a major issue, and its existence in a property can cause serious health problems. Consequently, any infiltration of water or moisture into a property may be the cause of a future mold problem, and the disclosure of that infiltration would be the seller’s obligation in order to avoid a claim of misrepresentation by omission. Many sellers may believe that because the contract states that the sale is “as is,” they do not have an obligation to disclose. But again, they may be liable for this failure to disclose the previous water damage.
Removing any warranty as to property condition from the contract and imposing the burden on the purchaser to discover defects in a home inspection does NOT relieve sellers of the obligation to disclose any latent (hidden) material defects. For example, if the dishwasher leaks “occasionally”, but the buyer’s home inspector was unable to discover that problem, the seller’s failure to disclose the periodic leak could be considered fraudulent (omission to disclose a latent material defect). Had the sellers disclosed the periodic problem, it would have provided the purchasers and their home inspector with an opportunity to more completely investigate the condition of the appliance, and further to determine if the periodic leakage caused any mold or other significant problems.
In fact, if the buyer discovers the leaky dishwasher at the pre-settlement inspection, how does the seller respond? Either the Seller knew of the defect and failed to disclose it, (fraud) or the leak occurred post contract ratification and is a change in condition requiring repair. Without a proper understanding of the obligation to disclose, even in an “as is” sale with a Disclaimer Statement, the potential for significant settlement disputes is dramatic.
Although the intention was to minimize disputes, it is entirely possible that issues will increase at closing. Sellers may be under the impression that they need not disclose anything, and purchasers will believe that all latent defects have been disclosed. Even if a previous defect has been repaired by a seller, an issue remains as to whether that repair must be disclosed to the Purchaser. By disclosing, it affords the purchaser with an opportunity to further investigate the quality of the repair work and possible continuing problems with the previous defect. By failing to disclose, the purchasers are relying on the absence of prior defects, and thus may very likely have a fraud claim against the sellers for failure to disclose.
Remember the leaky dishwasher and the possible water damage/mold. Suppose that the seller had the dishwasher repaired. Should that repair be disclosed to the buyer? Some would say no. But what if the water leak caused mold to form beneath the floorboards? Suddenly, disclosure seems like the safest way to avoid a claim for damages.
Changing the terms of Paragraph 7 will help to minimize disputes about which items, if any were warranted to be in operating condition. If there are items the Purchasers would like to have repaired, those items must be identified and agreed upon at the time of the initial home inspection. For example, disputes over whether windows are included in Paragraph 7 will be eliminated because any desired repairs must be identified and resolved pursuant to the inspection provisions of the Contract.
The intention of all parties is to avoid controversy, disputes and litigation. It is the obligation of the sellers to make full disclosure of all potential latent material defects, and the obligation of the Realtor to advise the seller to make such full and complete disclosure. Sellers can no more hide behind the “as is” clause under the new GCAAR contract then they could in the past. When in doubt, disclosure is the safest course, and the only certain way to avoid a successful claim for damages.