In many situations with distressed properties, the property owner wishes to wipe his hands clean of the property. In these situations, the property owner will agree to sell the property only if the prospective buyer acquires the property in “as is” condition.
The Superior Court of Pennsylvania in Phelps v. Caperoon, 2018 Pa. Super. LEXIS 674 (June 18, 2018) for the first time issued a written opinion as to whether the language of “as is” condition contained within a residential agreement of sale alters the statutory obligation of a seller to disclose material defects regarding the subject property under Pennsylvania’s Real Estate Seller Disclosure Law (RESDL), 68 Pa. C.S. Sections 7301-7315.
In Phelps, the seller owned a 165-year-old single-family home on almost eight acres of land in Lower Paxton Township, Dauphin County, Pennsylvania, the opinion said.
After negotiating, the parties in Phelps entered into a written agreement of sale providing that the buyer would first lease the property for six months and, after the lease term expired, the buyer would then purchase the property from the property owner, the opinion said.
Prior to entering into the agreement of sale, the buyer inspected the property several times without the aid of a duly licensed inspector, the opinion said.
Furthermore, according to the buyer, as to the then condition of the property at the time, the seller indicated to him that “everything was fine” and that “there was nothing to be concerned with.”
The seller did not provide the buyer with a property disclosure statement under the RESDL disclosing any material defects that the seller knew at the time about the property.
According to the opinion, the buyer knew a seller in Pennsylvania should provide such a property disclosure statement to a prospective buyer under the RESDL but that he did not find it unusual that his seller did not do so under the circumstances.
Furthermore, the agreement of sale in Phelps contained a clause in which the buyer certified that he had personally inspected the property, that the property is in satisfactory condition and repair to him, that the buyer acknowledged he is purchasing the property in “as is” condition, and that the buyer waived any and all warranties associated with the condition of the property, the opinion said.
After residing in the property for the duration of the lease term, the buyer purchased the property from the seller, the opinion said.
Soon after the purchase, the buyer stated that “he discovered numerous deficiencies, including a deteriorated septic system requiring replacement; a cracked furnace heat exchanger; leaky roof; flawed electrical wiring; water damage from a never-connected washer drain; and various issues associated with the improper removal of load-bearing walls and heating ducts.”
The buyer indicated that “he did not discover these deficiencies during his six-month lease term because they were “hidden,’” the opinion said.
The buyer then filed a complaint against the seller for the ensuing damages under the RESDL, among other theories.
In response, the seller, among other things, argued that the buyer agreed to accept the property in “as is” condition and, thus, he essentially had no obligation to provide the buyer with a completed property disclosure statement under the RESDL.
The trial court disagreed and entered partial summary judgment in favor of the buyer and against the seller on seller’s liability under the RESDL for failure to provide a completed property disclosure statement to the buyer, reasoning that the “provisions of the RESDL cannot be waived.”
A bench trial eventually took place and the trial court judge awarded damages of $39,062.02 to the buyer for the seller’s violation of the RESDL.
The parties then both appealed the trial court’s ruling to the Superior Court on different grounds.
On appeal, one of the issues that the Superior Court dealt with was whether the trial court “erred in granting the buyer’s motion for partial summary judgment when it found, as a matter of law, that the inclusion of an ‘as is’ clause in the agreement to purchase real estate was not sufficient to put the buyer on notice that there may be liabilities attendant to the purchase and relieve the seller of the obligation to provide a seller’s disclosure form.”
In addressing this issue, the Superior Court in Phelps discussed the relevant sections of the RESDL.
Overall, with a few exceptions, the RESDL applies to all residential real estate transfers in Pennsylvania.
Under Section 7303 of the RESDL, a seller “who intends to transfer any interest in real property shall disclose to the buyer any material defects with the property known to the seller by completing all applicable items in a property disclosure statement.”
However, under Section 7308 of the RESDL, “the seller is not obligated … to make any specific investigation or inquiry in an effort to complete the property disclosure statement.”
In other words, a seller is only statutorily obligated to disclose to a prospective buyer any material defects with the property in which he and she has actual knowledge and has no affirmative duty by way of the RESDL to investigate the then current condition of the property at the time the property is being listed and marketed for sale.
In reviewing the language of the RESDL, the Superior Court in Phelps placed significant emphasis on the term “shall” being utilized in Section 7303 of the RESDL when describing the obligation of a seller to disclose to a prospective buyer any material defects with the property by way of a property disclosure statement.
Quoting the Pennsylvania Supreme Court’s ruling in Koken v. Reliance Insurance, 893 A.2d 70 (Pa. 2006), the Superior Court in Phelps noted that “the Pennsylvania Supreme Court ‘has recognized that the term ‘shall’ is mandatory for purposes of statutory construction when a statute is unambiguous.’”
Notwithstanding the foregoing, the seller argued that the as is clause contained in the agreement of sale entered into by the parties negated the disclosure requirement set forth within RESDL.
In doing so, the seller relied upon the Superior Court’s ruling in PBS Coals v. Burnham Coal, 558 A.2d 562 (Pa. Super. 1989).
In PBS Coals, the Superior Court found that, “when something is accepted ‘as is’ the buyer is put on notice that there may be liabilities attendant to the purchase” and, as such, “the buyer of the real property was obligated to resolve the discharge because it purchased the property on an ‘as is’ basis.”
The Superior Court in Phelps noted that PBS Coals predated the enactment of the RESDL and, as such, did not address any statutory disclosure requirement.
According to the Superior court in Phelps, “RESDL, which was enacted over a decade after PBS Coals, contains mandatory language: ‘Any seller who intends to transfer any interest in real property shall disclose to the buyer any material defects with the property known to the seller.’”
Since the “RESDL contains no exceptions to the disclosure requirements, including the presence of an ‘as is’ clause in an agreement to transfer residential real estate,” the Superior Court concluded that the seller did not establish that he does not have to comply with RESDL’s disclosure requirement because of an ‘as is’ clause in an agreement of sale.”
The Superior Court’s ruling in Phelps clarified that, while a buyer of a residential property may waive his inspection rights contained in an agreement of sale, the seller must always disclose any material defects that the seller knows of at the time, as statutorily required under the RESDL.
Even if the seller fails to provide the buyer with a property disclosure statement prior to closing, the buyer still must establish that the seller knew of the alleged material defects prior to closing and the buyer must also establish the ensuing damages incurred as a result of the undisclosed material defects.
Next month, I intend to discuss the other portion of the Superior Court’s ruling in Phelps where the Superior Court addresses the proper way of calculating damages due to a violation of the RESDL.
Reprinted with permission from the July 17, 2018 edition of The Legal Intelligencer © 2018 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.