Our earlier post, “AS IS” Purchases, discussed the duty of the seller to disclose latent, i.e., hidden or non-obvious defects, that the seller knows of, even if the property is sold “As Is”. The flip side of that rule is that a buyer is expected to protect his own interests prior to buying a property, regardless of whether it is “As Is” or a standard purchase. For instance, the courts hold that a buyer is presumed a) to have read the contract and related documents if they have been signed, and b) to have understood those documents. In other words, if the buyer doesn’t understand what he is signing, it is no defense to claim he did not read it or did not understand what he was signing. An exception to this rule is “boiler plate”, standard, pre-printed contract such as an insurance policy, where the fine print terms differ from the parties' expectations.
True, the doctrine of caveat emptor - let the buyer beware - has been weakened over the years, but the law still requires diligence from the buyer. For example, Arizona law has long placed upon a buyer the duty of inquiry upon receipt of constructive or actual notice of a fact affecting the property to be acquired. As our Supreme Court related the law in 1910:
“Where one has notice of a fact affecting property which he seeks to purchase, which puts him upon inquiry, he is chargeable with the knowledge which the inquiry, if made, would have revealed; and one is put upon inquiry by notice of a claim which is inconsistent with the title he seeks to obtain, and must exercise due diligence to ascertain the facts upon which the claim is based. [cites omitted] Whatever is sufficient to put a person on inquiry is considered as conveying notice; for the law imputes a personal knowledge of a fact, of which the exercise of common prudence might have apprised him. (emphasis added) When a subsequent purchaser has actual notice that the property in question is incumbered or affected, he is charged constructively with notice of all the facts and instruments, to the knowledge of which he would have been led by inquiry into the incumbrance or other circumstances affecting the property of which he had notice.” Luke v. Smith, 13 Ariz. 155, 162-63, 108 P. 494, 496 (1910)
“Inquiry Notice” means it is the buyer's duty, under the law, to make inquiry. The rule is expressed in the cases as: “Notice of facts and circumstances which would put a man of ordinary prudence and intelligence on inquiry is equivalent to knowledge of all of the facts a reasonably diligent inquiry would disclose.”
An example of the application of Luke v. Smith and similar cases usually appears in the context of the home inspection report. As stated in our last post, “Once the initial inspector issues his report, it should be reviewed carefully. Any item cautioned in the report should be further investigated, employing licensed electricians, plumbers, a/c servicers or roofers, as appropriate.” Should a buyer elect not to followup on questionable items pointed out in the inspection report, either by directly questioning the seller or conducting further expert inspections, he has purchased the house with those defects now his responsibility. Clearly, the observance of a condition in the property, a fact, that raises questions must be pursued by the buyer or he is precluded from later going after the seller. The simple example of interior water stains indicating a roof integrity problem must be delved into by the buyer by specific inquiry or a roofer inspection. The stains are an obvious red flag that a prudent, diligent person would consider “notice” and for which further inquiry is required.
A note of caution: inquiry should be made through the real estate agent, with instructions to submit the inquiry to the seller or the seller’s agent. A competent agent will not attempt to answer a property defect question, but will endeavor to get the answer from the seller, through the listing agent. It goes without saying that all such queries should be in writing, dated and signed - with a copy for the file. The firm has seen many instances where the client merely asked his agent questions, trusted the agent to know or be truthful, only to find out later that the agent was not the best source of information about the property’s physical aspects. Verbal communications are problematic down the road if proof is required.
What if after inspection and inquiry, the buyer agrees to make the necessary repairs, replacements or corrections, in writing, as part of the Buyer’s Inspection Notice and Seller’s Response form, the “BINSR”? So far so good, but bear in mind that if escrow closes before the repairs are made, the seller’s obligation to perform is extinguished when escrow closes and title passes. If the repair agreement is not completed, demand an extension of closing to allow time for completion, or have the seller sign an acknowledgment that the obligation to repair survives the close of escrow. As a practical matter, most people will not want to take possession with a seller’s workers still accessing the house, so an extension of the closing date is preferable.
Some sellers will offer a dollar consideration reflected in the price or closing costs to cover the items in question, which is always a viable option. Common sense tells us that the seller’s motivation to effect professional repairs, e.g., handy man vs. licensed contractor, is not as strong as the buyer’s, so having your own contractor do the work is desirable.
In summary, the law expects a buyer to be diligent, make inquiry and to read and understand the contracts before signing them.