Buyer AND Seller Beware: Awareness and Condition Reports Key in Real Estate Transactions

One recurring real estate issue involves the question of misrepresentation when a party purchases property, only later to find issues with the structure or condition of that property. The Court of Appeals has dealt with two separate cases lately which outline the various theories that have been used to recover damages or void the contract.

Section 709.01, Wis. Stats., requires all persons who transfer property located in Wisconsin to complete a Real Estate Condition Report. This report, as outlined in § 709.03, outlines structural and mechanical, environmental, wells, septic systems, storage tanks, taxes, special assessment, permits and land use issues which the seller is aware of. “Aware” means the seller has notice or knowledge.

In the Condition Report, “Defect” is defined as “a condition that would have a significant adverse effect on the value of the property; that would significantly impair the health or safety of future occupants of the property; or that if not repaired, removed, or replaced would significantly shorten or adversely affect the normal life of the premises.” Once a purchaser receives the Condition Report, there are limited time frames to rescind the contract based on the contents of the report.

It should be noted that a buyer may waive a Condition Report in writing under § 709.08 of the Statutes.

The two cases decided by the Court of Appeals both dealt with completed Condition Reports. While the facts in each case mitigated against the purchasers, it is educational to review the theories used by the parties to challenge the contracts.

In Z Fish Shanty, LLC v. Koch, et al., 2017AP2388, the Court found that the facts alleged by Z Fish Shanty did not amount to a “defect” as described in the Condition Report. The Condition Report indicated the seller was not aware of any defects in the heating system. An offer was signed by Z Fish which included a contingency based upon a home inspection. The home inspection indicated that the furnace was old but operable. Z Fish claimed this was a breach. In this case, Z Fish challenged the trial court’s findings that a defect did not exist based on the evidence presented. The Court of Appeals affirmed the trial court after reviewing all of the facts of the case and sided with the defendant that while old, the furnace system was operable.

In Sanders v. Hertel, 2018AP265, Hertel, a widow 80 years of age, provided a Condition Report to Sanders. Hertel had not lived in the property for six years.

The Sanderses admitted that they were looking for property on water, viewed the property numerous times, noticed things that caused concerns, talked to the neighbors, offered considerably less than the purchase price (which Hertel rejected), obtained an inspection, and indicated they were going to remodel the property. Nevertheless, after a modest reduction in the purchase price, they proceeded to purchase the property. Upon commencing the remodeling project, the Sanderses claimed that they discovered defects in the roof, roof leaks, water and moisture intrusion, water damage, and mold.

They alleged claims for breach of contract warranty, intentional misrepresentation, and statutory misrepresentation. With regard to the breach of contract warranty, the Court of Appeals found that the Sanderses’ reliance on the condition report was not reasonable, thus eliminating the breach of contract claim. In reviewing the intentional misrepresentation claim, the Court outlined the requirements of proof and found that a buyer’s reliance has to be justifiable and that in this case it was not. As for the statutory misrepresentation theory, this would also require reasonable reliance, which was not the case here. The Sanderses proceeded with the purchase despite observing conditions directly contrary to what was included in the condition report.

In conclusion, it appears that the courts are looking very closely at the facts surrounding claims for breach of contract and misrepresentation in coming to their conclusions. A buyer must rely on inspections and personal viewing of the premises in determining whether to rescind a contract after receiving a condition report.

Written By:
Attorney Thomas M. Olejniczak