The Importance of Due Diligence for Oregon Home Buyers

Posted on by Phil Querin

SigningPapersAlthough the deck isn’t exactly “stacked” against home buyers, at a point in time during the purchasing process, the law does shift the burden of responsibility to them.  While it is true that the days of caveat emptor, or “buyer beware,” are long gone, if a seller meets the basic disclosure obligations imposed under Oregon law, there isn’t much more he or she needs to do. The rest is up to the buyer, usually with the aid and assistance of a good Realtor®, inspectors, and experts. 

In other words, it is not a seller’s affirmative duty to disclose more than what is required under the law. Having done that, the ball is, figuratively speaking, in the buyer’s court. While this may sound harsh, it is not only a legal reality – it is the smartest approach for buyers to take when purchasing a home. That is, to assume that once the seller has satisfied the applicable laws of disclosure, the rest of the process is up to the buyer. This responsibility is called “due diligence.”  To put it less delicately, it is foolish for buyers to believe their seller is looking out for anyone’s interest besides their own; it is equally foolish for buyers to believe due diligence is unnecessary, simply because their seller met their disclosure responsibilities.

With that said, let’s review those areas of the law and contract in Oregon that underscore the importance of buyer due diligence when purchasing a home.

Marketing.  There is a pretty clear line between “puffing” and lying. The use of adjectives such as “beautiful” and “amazing” are regarded as subjective, and acceptable advertising.  However, misrepresenting the condition or utility of certain features, is a no-no.  But as discussed below, in most cases, a representation erroneously made, even if the buyer relies on it, is not actionable in Oregon.

This applies not only to the advertising material about the home, but to the listing information as well.  As a part of the buyer’s due diligence, “trust but verify” is a useful axiom.  It’s like crossing the street; just because you have the “walk” sign does not mean you should ignore oncoming traffic and the risk that someone may run a red light. You should still look both ways.[1]

Oregon Property Disclosure Form.  This is this first substantive information that comes directly from a seller. The form consists of a series of questions (some rather poorly drafted and open-ended) that sellers, if not exempted,[2] are required to answer.

However, there are several caveats against relying too heavily on a seller’s responses. First, as explained in the disclosure form, which generally follows the statutory text, a seller’s disclosures do not constitute a warranty or guarantee.  They are provided based upon the seller’s actual knowledge at the time of disclosure [This caveat appears twice in the form]. Buyers are advised to obtain other inspections by qualified specialists, and acknowledge by their signatures the duty to pay diligent attention to any material defects.

The statutory form give sellers a “safe harbor” to answer “Unknown” to questions that they cannot answer with a definitive “Yes” or “No.”  As I have written elsewhere, however, I believe that when seeing one or more responses marked “Unknown,” buyers should ramp up their due diligence if the issue is one you’d expect a seller living in the property, to know.  It’s possible the “Unknown” response could really mean: “I suspect there may be a problem, but am not sure and really don’t want to talk about it, so you’re on your own.”

The take-away here is that while the law requires truthful responses, they are only based upon what the seller actually knows, but has no affirmative duty to investigate. For example, as to the question “Has the roof leaked?” a seller, never having gone into the attic looking for water stains, could legitimately answer “No” even though there might actually be a leak there. As long as the seller was unaware of that leak at the time of the disclosure, the “No” answer would be truthful.[3] Again, sellers do not have a legal obligation to first inspect the home before answering questions about its condition.

Lastly, note that nowhere does the disclosure form ask about off-site conditions.[4] Accordingly buyers are generally left to perform their own due diligence on these issues.

The OREF Residential Sale Agreement. The Agreemen contains a section titled “Seller Representations.” They consist of eleven statements made by the seller about the property, such as “Seller knows of no material structural defects.” However, at the end of the section, the following caveat appears:

Buyer understands that it is advisable to have a complete inspection of the Property by qualified professional(s) relating to such matters as structural condition, soil condition/compaction/stability, environmental issues, survey, zoning, operating systems, and suitability for Buyer’s intended purpose.  Neither Listing nor Selling Licensee is qualified to conduct such inspections and shall not be responsible to do so.  For further details, Buyer is encouraged to review the Buyer Advisory at https://oregonrealtors.org/resources/membership-resources/buyer-seller-advisorieshttp:/www.oregonrealtors.org.

Elsewhere, the Sale Agreement provides:

 “AS-IS”: Except for Seller’s express written agreements and written representations contained herein, and Seller’s Property Disclosure, if any, Buyer is purchasing the Property “AS-IS,” in its present condition and with all defects apparent or not apparent. (Bold appears in text.)

In the Inspection/Environmental Health Conditions section of the Sale Agreement, there is an inspection contingency protocol that permits a buyer, for any reason or no reason, to withdraw from the transaction and obtain a full refund of their earnest money deposit – so long as they do so within the contractually agreed-upon contingency period. Here is what it says:

The following list identifies some, but not all, environmental conditions that may be found in and around all real property that may affect health: Asbestos, carbon monoxide, electric and magnetic fields, formaldehyde, lead and other contaminants in drinking water and well water, lead based paint, mold and mildew, radon, and leaking underground storage tanks. If Buyer has any concerns about these conditions or others, Buyer is encouraged to secure the services of a licensed professional inspector, consultant, or health expert, for information and guidance.  Neither the Listing nor Selling Licensees are experts in environmental health hazards or conditions. Buyer understands that it is advisable to have a complete inspection of the Property by qualified licensed professional(s) relating to such matters as structural condition, soil condition/compaction/stability, environmental issues, survey, zoning, operating systems, and suitability for Buyer’s intended purpose.  Neither Listing nor Selling Licensees are qualified to conduct such inspections and shall not be responsible to do so.  For further details, Buyer is encouraged to review the Buyer Advisory at http://www.oregonrealtors.org/resources/membership-resources/buyer-seller-advisories and the Oregon Public Health Division at http://public.health.oregon.gov/Pages/Home.aspx”  (Bold italics mine.)

And, if a buyer, having had the opportunity to inspect the property, fails to withdraw, the following caveat appears in the Sale Agreement:

If Buyer fails to provide Seller or Listing Licensee with written unconditional disapproval of any inspection report(s) by 5:00 P.M. of the final day of the Inspection Period, Buyer shall be deemed to have accepted the condition of the Property. (Bold appears in text.)

Pursuant to ORS 93.040(2) the following text appears regarding land use restrictions:

THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY NOT BE WITHIN A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS SUBJECT TO LAND USE LAWS AND REGULATIONS THAT, IN FARM OR FOREST ZONES, MAY NOT AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND THAT LIMIT LAWSUITS AGAINST FARMING OR FOREST PRACTICES, AS DEFINED IN ORS 30.930, IN ALL ZONES. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON TRANSFERRING FEE TITLE SHOULD INQUIRE ABOUT THE PERSON’S RIGHTS, IF ANY, UNDER ORS 195.300, 195.301 AND 195.305 TO 195.336 AND SECTIONS 5 TO 11, CHAPTER 424, OREGON LAWS 2007, SECTIONS 2 TO 9 AND 17, CHAPTER 855, OREGON LAWS 2009, AND SECTIONS 2 TO 7, CHAPTER 8, OREGON LAWS 2010. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY THAT THE UNIT OF LAND BEING TRANSFERRED IS A LAWFULLY ESTABLISHED LOT OR PARCEL, AS DEFINED IN ORS 92.010 OR 215.010, TO VERIFY THE APPROVED USES OF THE LOT OR PARCEL, TO VERIFY THE EXISTENCE OF FIRE PROTECTION FOR STRUCTURES AND TO INQUIRE ABOUT THE RIGHTS OF NEIGHBORING PROPERTY OWNERS, IF ANY, UNDER ORS 195.300,195.301 AND 195.305 TO 195.336 AND SECTIONS 5 TO 11, CHAPTER 424, OREGON LAWS 2007, SECTIONS 2 TO 9 AND 17, CHAPTER 855, OREGON LAWS 2009, AND SECTIONS 2 TO 7, CHAPTER 8, OREGON LAWS 2010.[5]   (Underscore added.)

These warnings clearly advise buyers to make inquiry. In those cases in which the seller does not commit fraud (e.g. by intentionally misrepresenting the condition or use of the property), a buyer’s failure to exercise their due diligence responsibility, would likely prevent them from recovering against their seller. As mentioned, even a negligent misrepresentation by a seller (absent a “special relationship”, as explained below) is not sufficient to permit a buyer recovery under Oregon law.

Oregon Case Law.  Under Oregon case law, a seller has no liability for claims of negligent misrepresentation, unless there is a “special relationship” between them.[6] The relationship between the buyer and seller of real property is legally considered to be adversarial in nature and therefore does not give rise to any special duties. Accordingly, although there may be credible evidence that a seller was negligent in his/her disclosures regarding the condition of the property, if it was an arms-length transaction[7] not involving any special relationship, there can be no liability against a seller for making them.[8]

This means that before liability will attach for a seller’s non-disclosure of material information to a buyer, the finder of fact, e.g. the arbitrator(s) or jury, will have to conclude that the seller either: (a) committed fraud, i.e. that they intentionally misrepresented the condition of the home, knowing it to be different than advertised, or (b) breached a contractual duty to the buyer (e.g. the contract contained an express guarantee or warranty that was breached).  However, as noted above, both the statutory seller property disclosure form and the standard OREF Sale Agreement, limit the representations to a seller’s “actual knowledge.” The representations make no guarantees or warranties.

Fraud.  Fraud may be either overt, e.g. by an intentional written or oral misrepresentation, or by an intentional omission (i.e. the failure to disclose a material fact).  Omissions and half-truths are just as actionable as affirmative misrepresentations.

In order to prove fraud, it is necessary to establish the following elements:  (1) a representation; (2) that the representation is false; (3) that it was material; (4) that the speaker is aware the representation was false; (5) that the speaker intended for the hearer to act on the representation and in the manner reasonably contemplated; (6) that the hearer is ignorant of the truth; (7) that the hearer relies on the truthfulness of the representation; (8) that the hearer had a right to rely on the representation; and (9) that the misrepresentation results in a consequent and proximate injury.

Each of the above elements must be established by “clear and convincing evidence”, i.e.   persuasive and unequivocal facts establishing that the seller intended to deceive the buyer, or did so with reckless disregard for the truth. Clear and convincing evidence must be “highly probable.” This is a much higher quantum of proof from the regular civil standard of “preponderance of the evidence.”

One may “puff” only as to subjective expressions of opinion, but not as to objective facts upon which a purchaser might rely as representations.[9]

Breach of Contract.  In most residential transactions, there are two primary documents that form the basis of a contract between buyers and sellers: (a) the Sale Agreement, and (b) the Property Disclosure form.  Both contain affirmative representations by the seller concerning the condition of the property. However, they are only based upon the seller’s actual knowledge; they are not guarantees or warranties. Thus, even if the seller is negligent in making a representation that turns out to be incorrect, it is insufficient for creating liability, unless the seller had a “special relationship” to the buyer.

The result is that most viable buyer vs. seller property disclosure claims need to be based upon fraud to prevail – and prevailing in fraud means carrying the burden of proof by “clear and convincing” evidence. In the vernacular, this usually means having some “smoking gun” evidence, such as a neighbor who corroborates a pre-existing water or mold problem on the seller’s property, or a service company that had been to the property before the sale to repair the same defect the buyer claims was concealed by the seller.

Oregon Statutory Law. And lest a buyer believe that their due diligence obligations must be shouldered by their real estate broker, a review of ORS Chapter 696 is in order.

ORS 696.810(6) provides:

 Nothing in this section implies a duty to investigate matters that are outside the scope of the real estate licensee’s expertise, including but not limited to investigation of the condition of property, the legal status of the title or the owner’s past conformance with law, unless the licensee or the licensee’s agent agrees in writing to investigate a matter. (Underscore  added.)

ORS 696.835 provides:

None of the affirmative obligations[10] of a real estate licensee or agent in a real estate transaction under ORS 696.805, 696.810 or 696.815 relieves a seller or a buyer from the responsibility to protect the seller’s or buyer’s own interests respectively.

ORS 93.275 provides:

 (1) The following are among incidents that are not material facts to a real property transaction:

(a) The fact or suspicion that the real property or a neighboring property was the site of a death by violent crime, by suicide or by any other manner;

(b)The fact or suspicion that the real property or a neighboring property was the site of a crime, political activity, religious activity or any other act or occurrence that does not adversely affect the physical condition of or title to real property;

(c)The fact or suspicion that an owner or occupant of the real property has or had human immunodeficiency virus or acquired immune deficiency syndrome;

(d)The fact or suspicion that a sex offender registered under ORS 181.595, 181.596, 181.597 or 181.609, or resides in the area; and

(e)The fact that a notice has been received that a neighboring property has been determined to be not fit for use under ORS 453.876.

(2)The Legislative Assembly finds that there is no known risk of the transmission of human immunodeficiency virus or acquired immune deficiency syndrome by casual contact.

Conclusion. The difficulty of establishing seller liability for non-disclosure of material defects in a property, or concealing land use limitations, are formidable. Knowing this, and the attendant costs and fees that accompany litigation and arbitration, a buyer’s best advice is to be proactive during the purchasing process. After closing may be too late.

Due diligence means having the property inspected from stem to stern, and being careful to follow up on potential problems, especially water[11] – rather than assuming they are small and manageable issues.  The same holds true of land use limitations.

As noted above, once sellers have made the disclosures required under the law, the burden of responsibility shifts to their buyers to exercise due diligence by fully vetting the information provided; and where additional information becomes necessary, to employ the appropriate experts to follow up. ~PCQ

_____________________________

[1] Based upon my observations over the past few years, apparently the exercise of common sense at cross walks does not apply while using a smart phone.

[2] Exemptions are found at ORS 105.470.

[3] Note, there is a place in the Sale Agreement requiring sellers to update the information in their disclosure form, if later facts develop making the answers incorrect or misleading.

[4] However, the final question of the form asks: “Are there any other material defects affecting this property or its value that a prospective buyer should know about?”  This question is markedly different that the preceding ones in many respects. Although it is limited to “material defects,” it expands the inquiry to those “affecting this property or its value.” In short, the question appears to seek information about off-site conditions, as well as those contained within the property’s legal description. However, reasonable minds can differ regarding the meaning of the question. Does it mean that if the home is in the flight path of an airport, or near a rock quarry, or has busy traffic during rush hour, that all of these issues must be disclosed? Are they “material defects affecting the property”? And who is to say whether the defect actually affects the value of the property?  In short, the question is so open-ended that it is routinely answered “No.” It is similar to asking a witness on the stand: “Is there anything else you want to tell me that I’ve forgotten to ask you about?”

[5] These statutes and laws deal with compensation to land owners for restriction on the use of their real property due to land use regulations.

[6] A special relationship exists when one party has an obligation to pursue another party’s interests and not just their own. For example, if a lawyer sold his or her home to their client, there would be a “special relationship”.

[7] “Arms-length” means that the seller and buyer were not affected by any outside factors, such as duress, or unequal bargaining power. “A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm’s length transaction is to ensure that both parties in the deal are acting in their own self-interest and are not subject to any pressure or duress from the other party.” See, http://www.investopedia.com /terms/a/armslength.asp.

[8] The seminal case is Onita Pacific Corp. v. Trustees of Bronson, 315 Or. 149 (1992).

[9] Note, there is plenty of legal authority in Oregon, and elsewhere, to the effect that sellers cannot shield themselves from liability for false representations through the use of an AS-IS clause.

[10] These affirmative obligations are the statutory  equivalent of “fiduciary duties” under Oregon Common Law, i.e. the case law developed through precedent: e.g. To deal honestly and in good faith; to present all written offers, written notices and other written communications to and from the parties in a timely manner; to disclose material facts known by the agent and not apparent or readily ascertainable to the other party or their agent; exercise reasonable care and diligence; account in a timely manner for money and property received from or on behalf of the principal; loyalty; full disclosure; to advise principals to seek expert advice on matters beyond the agent’s expertise; and confidentiality.

[11] Remember the acronym “WAW” – Water Always Wins.

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