Buyers: Declare Your Independence From Inspection Agreements

I originally intended to tell some war stories about my fights against arbitration clauses in investment contracts, building contracts, and inspection agreements. My struggle was in trying not to sound too much like a whiner when writing about the bad rulings and in trying not to sound too cocky when writing about the good rulings. Truth is, I could either win or lose a battle against forced arbitration on any given Sunday. You shouldn't care so much about what happens in my arena. What you should care about is avoiding that particular arena in the first place.

I always seek to have my clients' disputes decided in a court of law, usually by a jury of their peers. While I may sometimes gripe about the results or the process, the fact remains that our civil justice system is the envy of the rest of the world. In particular, my clients never have to worry about their opponents bribing, threatening, or punishing the judge or jury.

Unfortunately, arbitration is a different animal. We in the Milwaukee area are familiar with Major League Baseball's punishment of an arbitrator who dared rule against it. The financial industry has fired arbitrators for daring to rule in favor of investors. Word around the campfire is that the Metropolitan Builders Association and the Wisconsin Association of Home Inspectors are not too fond of those who stand up for homeowners either.

I do not often write about buyer claims against home inspectors in this blog because I always advise clients not to sue home inspectors. Home inspectors are protected by a strict two-year statute of limitation and by extremely lenient Standards of Practice. Buyers cannot recover their attorneys' fees on a home inspector negligence claim, and most inspectors do not have errors and omissions insurance. Home inspectors also have the simple-minded (but often convincing) argument that "if I should have seen it, why didn't you?" Home inspectors usually only get themselves in trouble when they downplay the significance of what they see, try to play structural engineer, or engage in deceptive or misleading advertising. That being said, buyers need to protect themselves against accidentally waiving their day in court against their home inspectors.

When you show up for your home inspection, your home inspector will present you with a multi-page document with fine print entitled "Inspection Agreement." In my opinion, you should not have to sign such an agreement.

Why not? The better question is why should you have to sign? Inspection Agreements are not required by the statutes and regulations governing home inspection practice in Wisconsin. There is no Wisconsin law requiring written agreements for services that will take only a few hours to render and will cost less than $500. You should simply be able to write the inspector a check and receive the required home inspection report.

Most of the language in these Inspection Agreements is unnecessary because the Standards of Practice clearly spell out what home inspectors are responsible for, what they are not responsible for, and what they cannot do. Wis. Stat. § 440.975(2) spells out that home inspectors are merely required to perform reasonably competent and diligent inspections to detect observable conditions and that such inspections need not be "technically exhaustive." Wis. Stat. § 440.975(3) requires home inspectors to provide written reports. Wis. Admin. Code § SPS 134.03 spells out the required contents of said reports. Wis. Stat. s. 440.975(4) spells out that home inspectors are not required to report on the need for repairs or whether or not a particular component meets code. Wis. Stat. § 440.975(5) spells out that a home inspector cannot tell a buyer not to purchase a particular property. Wis. Stat. § 440.975(6) spells out that home inspectors are not required to give warranties, test or operate components, enter dangerous areas, move personal items, predict future conditions, or inspect for mold.

Some home inspectors sneak illegal language into their Inspection Agreements. Home inspectors will often try to prevent you from holding them liable for repairs to components that they improperly inspected. They might even try to prevent you from holding them liable for bodily injury caused by a defective condition that they missed. No, they can't do that:

Disclaimers or limitation of liability. No home inspector may include, as a term or condition in an agreement to conduct a home inspection, any provision that disclaims the liability, or limits the amount of damages for liability, of the home inspector for his or her failure to comply with the standards of practice prescribed in this subchapter or in rules promulgated under this subchapter.

Wis. Stat. § 440.976.

While one could argue that home inspection arbitration clauses - especially those that require arbitration presided over by fellow members of the home inspector fraternity - are illegal disclaimers or limitations of liability, I am not aware of any court that has adopted this particular argument. The general rule is that contractual arbitration clauses ARE enforceable. If you want to avoid having any future dispute with your home inspector decided by his friends, there is a solution - do not sign the Inspection Agreement.

Wis. Stat. § 100.18 - For Members Only

On multiple occasions (here and here), I have emphasized the importance of buyers receiving the statutorily-mandated Real Estate Condition Report prior to making an offer. Usually, this isn't a problem. Real estate agents make sellers' Real Estate Condition Reports readily available on MLS, at open houses, or provide them to the buyers prior to the initial showing. Then again, some homeowners attempt to sell their home without a real estate agent's assistance and some buyers rush in to make offers before a home is really "on the market."

Why should I wait for a Real Estate Condition Report before making an offer, you might ask. The common sense answer is that you want to know the property's condition in deciding what price to offer. You would pay less for a home with a leaky basement or a leaky roof than a home with a dry basement and a new roof, all else being equal. The legal answer is that you risk losing your best claim in the event that the sellers misrepresent the property's condition in the Real Estate Condition Report.

If you discover defects in your new home that were not identified in the sellers' Real Estate Condition Report, a claim for violation of Wis. Stat. § 100.18 is your best claim and it's not even close. You don't have to prove that the sellers intended to deceive you; only that they intended to sell their home when they completed a Real Estate Condition Report (why else they would complete a Real Estate Condition Report is beyond me). You don't have to prove that the sellers' representations were false; only that they were deceptive or misleading. You don't have to prove that your reliance on the sellers' Real Estate Condition Report was reasonable; only that these representations materially induced (caused) you to purchase the property. See K&S Tool & Die Corp. v. Perfection Machinery Sales, Inc. You are entitled to recover your damages plus reasonable attorneys' fees if you prevail.

Trouble is, Wis. Stat. § 100.18 contains this pesky little "member of the public" requirement. After all, it is commonly referred to as the false advertising statute. While Wisconsin courts recognize that "the public" does not necessarily mean a large audience and could mean an individual member of the public, a buyer loses his status as a "member of the public" once he or she forms a "particular relationship" with the seller. In the context of real estate sales (as opposed to repeat purchases of goods and services in a commercial setting), a buyer ceases to be a member of the public once he or she enters into a contract with the seller. See Kailin v. Armstrong.

This requirement bit one of my clients in Novell v. Migliaccio. While the tortured history of that case deserves its own post, the Cliffs Notes version is that Mr. Novell's case was originally dismissed at summary judgment on the grounds that it was unreasonable as a matter of law for him to rely on the Migliaccios' Real Estate Condition Report. Like the other case that was dismissed by Judge Guolee on October 17, 2005, I argued that case to the Wisconsin Supreme Court during the last week of February 2008. Relying on K & S Tool & Die, the Wisconsin Supreme Court held in Novell that a buyer need not prove that his reliance on the sellers' Real Estate Condition Report was reasonable for the purposes of his § 100.18 claim.

Trouble is, there was another problem with Mr. Novell's § 100.18 claim - a problem that the Migliaccios' attorney somehow only figured out after losing at the Wisconsin Supreme Court. The Migliaccios and the Novells were family friends, and they handled this transaction without the assistance of any real estate professionals. The Migliaccios did not even complete their Real Estate Condition Report until nearly two months after they accepted Mr. Novell's offer. The trial court held that no reasonable jury could find that the representations in the Real Estate Condition Report were made to Mr. Novell while he was still a member of the public. In order to save Mr. Novell's case, I had to convince the Wisconsin Court of Appeals that the Migliaccios' concealment of their leaky basement with paint could qualify as a misrepresentation under § 100.18. As they say, necessity is the mother of invention.

Now I'm litigating another case with "member of the public" issues. Once again, the buyers made their offer without first receiving a Real Estate Condition Report. The sellers withheld their Real Estate Condition Report from the buyers until after they accepted the buyers' counteroffer. As in Novell, I will argue that the sellers concealed their leaky basement while the buyers were still members of the public. Unlike Novell, I have an argument that the buyers received the Real Estate Condition Report before there was an enforceable contract because the buyers still had the unilateral right to rescind the contract depending on the contents of the Real Estate Condition Report.  In other words, the buyers could have backed out of the deal without consequence (and recovered their earnest money) had the sellers represented in their Real Estate Condition Report that they were aware of basement defects. See Wis. Stat. § 709.05. 

While my legal sorcery might save the day again, buyers should not rely on attorneys to protect them from trickery and deception after their purchase. Instead, prospective buyers must find a real estate professional (either an attorney or a buyers' agent) before they offer to purchase a home. Working with a real estate professional should protect most buyers in the event that they encounter a seller who misrepresents a property's condition.

Marchese v. Miller and Total Realty LLC - An Example Of What Real Estate Agents Should Not Do

As I said in an earlier post, most buyer claims against real estate agents contracted by the seller involve allegations of misrepresentation or nondisclosure. In Marchese v. Miller and Total Realty LLC, the Wisconsin Court of Appeals has provided real estate agents with a helpful example of what not to do.

In Marchese, the real estate agent advertised a vacant lot as buildable. He also drafted a WB-40 Amendment To Offer To Purchase that provided that the buyers would not make any payments towards their purchase of this lot until the sellers relocated the retention pond on the lot. He even reassured the buyers prior to closing that that the sellers would relocate the pond. The buyers closed on their purchase even though the pond had not been relocated because they assumed that the title company would not disburse any money to the sellers until the pond was relocated. Unfortunately, money was disbursed to the sellers and the pond was never relocated. The buyers had to purchase another lot because this one was unbuildable with the pond in its present location.

The buyers sued the sellers and the real estate agent. The subject of the Court of Appeals' decision was the trial court's order dismissing all claims against the real estate agent notwithstanding the jury's verdict finding that the real estate agent engaged in intentional misrepresentation and violated Wis. Stat. § 100.18.

The Court of Appeals held that the evidence presented at trial was sufficient to prove a § 100.18 claim. The real estate agent admitted at trial that he advertised that a home could be built on the lot even though he knew that no home could be built until the pond was relocated. Even more damning, the seller testified at trial that he told the real estate agent that he would not move the pond until he got paid - after the closing.

The Court of Appeals further held that the evidence presented at trial was sufficient to prove an intentional misrepresentation claim. Though the real estate agent told the buyers that it "shouldn't be a problem" for the sellers to relocate the pond before they got paid, the real estate agent knew that the seller would not move the pond until he got paid.

While there are important lessons in this decision about whether or not real estate agents should should advertise in a manner which is false, deceptive or misleading (no!), whether or not expert testimony is required to prove a negligence claim against a real estate agent (no!), and whether or not judges should disregard jury verdicts (again, no!), the real lesson is that real estate agents must do whatever they can to distance themselves from sellers hellbent on committing fraud. Wis. Admin. Code § REEB 24.03(2)(b) says as much under the label of "COMPETENCE REQUIRED": "Licensees shall act to protect the public against fraud, misrepresentation and unethical practices." Furthermore, Wis. Admin. Code § REEB 24.07(2) provides as follows:

Disclosure of material adverse facts. A licensee may not exaggerate or misrepresent facts in the practice of real estate. A licensee, when engaging in real estate practice, shall disclose to each party, in writing and in a timely fashion, all material adverse facts that the licensee knows and that the party does not know or cannot discover through a reasonably vigilant observation, unless the disclosure of the material adverse fact is prohibited by law. This provision is not limited to the condition of the property, but includes other material adverse facts in the transaction. 

This duty to disclose material adverse facts is NOT limited to situations in which the seller tells his real estate agent that his basement and roof leak like a sieve whenever it rains. Under Wis. Admin. Code § REEB 24.02(1)(b), "adverse fact" is defined to include "[i]nformation that indicates that a party to a transaction is not able to or does not intend to meet his or her obligations under a contract or agreement made concerning the transaction." Here, the seller threw his real estate agent under the bus and testified that he told the agent that he had no intention of complying with his obligations under the WB-40 Amendment. Real estate agents - this is what could happen to you if you allow yourself to get involved with sellers with the wrong intentions!

Making A Viable Claim Under The Home Improvement Practice Code

Last week, the Wisconsin Court of Appeals filed its decision in Masterclean, Inc. v. Butler.  In Butler, a Waukesha County jury awarded the homeowners $29,407.37 in damages against a home restoration and remodeling contractor.  The trial court interpreted the jury's verdict as a finding that the homeowners suffered those damages as a result of the contractor's failure to put all material terms and conditions of the contract in writing in violation of the Home Improvement Practices Code, thus entitling the homeowners to double damages and reasonable attorneys' fees and costs pursuant to Wis. Stat. § 100.20(5).  After doubling the jury's damages award and tacking on reasonable attorneys' fees and costs, the trial court entered a $89,165.67 judgment against the contractor.  The Court of Appeals reversed the judgment, holding that there was no credible evidence supporting a finding that the contractor's failure to put all material terms and conditions of the contract in writing caused the homeowners' damages.  Since the jury also found that the contractor breached its contract and that this breach caused damage to the homeowners, the homeowners will still get a judgment against the contractor.  Unfortunately for them, this judgment will be a lot closer to $30,000 than $90,000.

I've written about the Home Improvement Practices Code before, including the basic requirement that the contractor "put it in writing."  For some reason, the contractor in this case brought a breach of contract claim against the homeowners for nonpayment even though its workmanship was shoddy and its contract violated the Home Improvement Practice Code.  To be clear, a contract that violates a statute or consumer protection regulation cannot be enforced by the contractor under most circumstances.  See Baierl v. McTaggart, 2001 WI 107, 245 Wis. 2d 632, 629 N.W.2d 207.  Contractors that sue homeowners for nonpayment based on a contract that does not perfectly comply with the Home Improvement Practices Code are playing with fire.  Their contract claims will be dismissed and their customers may even countersue them for the damages caused by their shoddy workmanship and Home Improvement Practices Code violations.

While a contractor's failure to "put it in writing" is a good defense for homeowners, the Butler decision shows how difficult it is for homeowners to prove that this Home Improvement Practices Code violation caused them damages.  The Court of Appeals noted that the homeowners' damages were the estimated cost of correcting poor workmanship and also noted the lack of evidence that the contractor had performed unauthorized work.  Essentially, the homeowners would have suffered almost $30,000 in damages even if the contractor had crossed all of its Ts and dotted all of its Is.  Conversely, the homeowners would not have suffered almost $30,000 in damages had the contractor completed its work in a competent and professional manner.

In contrast, it is much easier to prove that a contractor's misrepresentations caused a homeowner's damages.  The Home Improvement Practices Code specifically prohibits contractors from making "any false, deceptive, or misleading representation in order to induce any person to enter into a home improvement contract, to obtain or keep any payment under a home improvement contract, or to delay performance under a home improvement contract."  Wis. Admin. Code § ATCP 110.02(11).  The homeowner's straightforward argument is that he or she only hired this contractor because he said that he had experience making such improvements, that his work was guaranteed to prevent the basement from leaking, or that he was certified to install EPDM roofs.  The homeowner suffered damages in the amount that he or she had to pay the contractor or in the amount that he or she must pay to correct the contractor's work as a direct result of the contractor's misrepresentations.

Other Home Improvement Practices Code violations that may cause a homeowner to suffer damages include the following:

• Failing to disclose the identity of any other person assuming responsibility for the performance of the contract, such as when a credentialed contractor farms out his work to anyone with a truck, Wis. Admin. Code § ATCP 110.05(5)
• Starting work without obtaining the required permits, especially when the building inspector would have stopped the work, Wis. Admin. Code § ATCP 110.03(1)
• Failing to provide notice of an impending delay in contract performance, especially when the contractor leaves a roofing job to go deer hunting without protecting the exposed areas and does not warn the homeowner.

Please contact me at rudolphkuss@stevensandkuss.com if your contractor has abandoned you, has performed improper work, or is threatening to sue you for nonpayment.

Wisconsin Court of Appeals: Property Owners May Testify On The Value Of Their Property

Last week, the Wisconsin Court of Appeals filed its decision in Mueller v. Harry Kaufmann Motorcars, Inc. Ms. Mueller contended that the defendant had misrepresented the condition of the car that it sold her and attempted to testify on what the car was really worth to her in light of its true condition. The Milwaukee County Circuit Court barred Ms. Mueller from sharing this testimony with the jury. This resulted in dismissal of Ms. Mueller's claim because she presented no other evidence that she was damaged by the defendant's misrepresentations.

The Court of Appeals reversed the dismissal of Ms. Mueller's claim, holding that the trial court erred in barring her from testifying on the value of her property. The Court of Appeals noted that it had previously held in D'Huyvetter v. A.O. Smith Harvestore Products that testimony from a farmer's wife that a silo was worth "nothing" was credible evidence that the silo's actual value was $0.00. This established "benefit-of-the-bargain" damages measured by the difference between the purchase price (the value of the silo as represented) and $0.00 (the actual value of the silo).

This issue comes up in residential real estate misrepresentation cases all the time. Granted, cost of repairs are usually our clients' best evidence of damages. If my client's basement leaks due to a hampered drain tile system, I usually seek the cost of a new drain tile system. If my client's roof leaks, I usually seek the cost of replacing the shingles. However, diminished value is the best measure of damages in a residential real estate misrepresentation case under some circumstances:

• When my client insists that numerous conditions were misrepresented and I do not want to bore the judge or jury with twenty different repair proposals;
• When I am concerned that the wrong judge or jury will reject the proposed repairs as extreme, such as moving the home or raising its foundation.

Under these circumstances, I would argue, as I did here, that my clients' property is worth less than what they paid for it and that this difference is their measure of damages. Contrary to the arguments that I typically hear from defense counsel, one does not need to be qualified as an appraiser to testify on the actual value of his property. See Trible v. Tower Insurance Co.; Swedowski v. Westgor. Furthermore, this testimony need not be based on independent financial data. See D.L. Anderson's Lakeside Leisure Co., Inc. v. Anderson; Mayberry v. Volkeswagen of Am., Inc.; Accuweb, Inc. v. Foley & Lardner.

My only caveat is that residential real estate cases are not lemon law cases; your property is not worth "nothing." Even if your home is permanently plagued with toxic black mold and your doctor has urged you to move out immediately, the land still has value. In most circumstances, a homeowner can convincingly testify that he or she would have paid 10-20% less for their property had the seller fully disclosed the defects affecting it.     

  

Stevens & Kuss To Wisconsin Supreme Court: Overrule Linden V. Cascade Stone Company

For the first time since December of 2006, I petitioned the Wisconsin Supreme Court to review a Court of Appeals' decision. Once again, it was a decision holding that my clients' claims are barred by the economic loss doctrine. Admittedly, I telegraphed my pitch to the Wisconsin Supreme Court in a post from January. As I said back then:

Unfortunately for homeowners, the Wisconsin Supreme Court held in Linden v. Cascade Stone Co., 2005 WI 113, that negligence claims against builders and their subcontractors are barred by the economic loss doctrine. Wisconsin law does nothing to deter slipshod and shoddy construction work by builders and their subcontractors, and it does nothing for homeowners (like the Liebls) who have been victimized by such carelessness. Deterring contractor negligence is an important public safety issue, as homeowners, renters, and their children are all endangered by sloppy construction practices. As discussed in the Milwaukee Journal/Sentinel article, the quality of residential construction has been declining for years, and construction professionals are seeing more and more mold cases as a result.

At some time in the future, the Wisconsin Supreme Court will be presented with another negligent construction case. When that day comes, our supreme court needs to consider the interests of all present and future homeowners and the public health, safety and welfare, instead of just considering the private interests of contractors and their insurance companies. The time has come for the Wisconsin Supreme Court to overrule Linden and bring back the negligent construction claim.

The time has come for someone to put their foot down, and that foot is me:

This court needs to overrule Linden and return the economic loss doctrine to its U.C.C. and product liability origins. See Wis. Stat. (Rule) § 809.62(1)(e). Before Linden, negligence claims against contractors and other service providers survived the economic loss doctrine - a common law doctrine that was intended to save the legislatively-enacted Uniform Commercial Code from common law products liability claims.  Since repair and construction contracts are not covered by the U.C.C., there was no reason to deprive victims of negligently-provided services their tort claims.  See Ins. Co. of N. Am. v. Cease Elec. Inc., 2004 WI 139, ¶ 35, 274 Wis. 2d 361, 683 N.W.2d 462. That all changed in Linden, in which this court held that the economic loss doctrine was available as a defense to certain homeowner tort claims against subcontractors. See Linden, 283 Wis. 2d 606, 699 N.W.2d 189, ¶ 32. This court’s Linden decision relied upon a Florida Supreme Court decision, which that court has recently overruled. See id., ¶ 28 (citing Casa Clara Condominium Ass’n, Inc. v. Charley Toppino & Sons, Inc., 620 So. 2d 1244 (Fla. 1993), overruled by Tiara Condominium Ass’n, Inc. v. Marsh & McLennan Cos., Inc., 110 So. 3d 399, 407 (Fla. 2013)). This court should join the Florida Supreme Court in returning the economic loss doctrine to its principled roots in U.C.C. and products liability law.  The residential construction industry desperately needs the deterrence from negligent workmanship that only tort law can provide.  

While I also argue that the Court of Appeals' decision should be reversed because it is in conflict with Linden, I appear to be the first attorney in a long time to expressly ask the Wisconsin Supreme Court to overrule Linden. I fully understand that Linden has been the law for nine long years and that the Wisconsin Supreme Court only grants about 5% of all petitions for review, but nothing is going to change for Wisconsin homeowners unless someone challenges Wisconsin Supreme Court precedent every once in awhile.    

Buyers Should Always Hire Their Own Inspectors

Home inspections are the most common type of pre-closing inspection in residential real estate transactions. In the WB-11 Residential Offer To Purchase, the buyer's offer can be made contingent on a licensed home inspector completing an inspection that does not report any defects in the property. Assuming that the seller does not have the right to cure, the buyer may be able to back out of the purchase if the home inspector reports any defects - any conditions that would significantly reduce the value of the property, impair the health of its occupants, or reduce its expected life. Home inspections have helped buyers back out the purchase of properties with sinking foundations, sagging roofs, black mold, and other defects.  

Buyers select, contract with, and pay for their home inspector. If a home inspector fails to report on any defects, he may be liable to the buyer. Consequently, the home inspector has an incentive to do a thorough inspection for the buyer.

Properties not served by municipal water and sewer are often contingent on inspections of the well system and the private sanitary (septic) system. However, these contingencies are a different animal. The standard Addendum A To Residential Offer To Purchase normally requires the seller to select, contract with, and pay for well and septic system inspectors. These contingencies are deemed satisfied unless an inspector reports that one of these systems is disapproved for current use.

Trouble is, a lot of failed well and septic systems have not been disapproved for current use. Buyers want a well that doesn't run dry and a septic system that doesn't result in wastewater backing up in their sinks, toilets, and basements. The standard contingencies only address disapproval for current use.

Even worse, well and septic inspectors hired by the seller owe their loyalty to the seller; they may be inclined to say "move along people, nothing to see here!" While well and septic inspectors hired by the seller could be liable to the buyer, these inspectors have legal and factual defenses based on their lack of a contractual relationship with anyone other than the seller.

A new well can cost over $10,000, and a sanitary mound system can run you over $20,000. For that reason alone, buyers should make their offers contingent on well and septic system inspections completed by inspectors that they select, contract with, and pay for. These contingencies should only be deemed satisfied if and only if these inspectors do not report on any defects in these systems. Otherwise, the buyer risks purchasing a property with a legal well that only produces two gallons of water per minute and a legal septic system that occasionally fills the basement with wastewater.