“Caveat Emptor” Buyer Beware

Don't be afraid--Be aware

If you understand the title of this blog, chances are you are in a real estate related business. When buying real estate in Alabama the words “Caveat Emptor” is of utmost importance.  Let’s take a look at the meaning of the term and how it affects Alabama real estate buyers.

Caveat emptor (ˌkæviːɑːt ˈɛmptɔr) is Latin for “Let the buyer beware.”Generally, caveat emptor is the property law doctrine that controls the sale of real property after the date of closing. Under the doctrine of caveat emptor, the buyer could not recover from the seller for defects on the property that rendered the property unfit for ordinary purposes. The only exception was if the seller actively concealed latent defects or otherwise made material misrepresentations amounting to fraud.

Before statutory law, the buyer had no warranty of the quality of goods. In many jurisdictions now, the law requires that goods must be of “merchantable quality.” However, this implied warranty can be difficult to enforce and may not apply to all products. Hence, buyers are still advised to be cautious.

Not all states are Caveat Emptor states. There are three states that I am certain of and they are Alabama, Arkansas, and Virginia. This article only applies to the use of caveat emptor in Alabama. For other states, you must search the statutory law with that particular state.

Since caveat emptor places the responsibility on a buyer to thoroughly examine a parcel of real estate before they close the sale; it also places additional responsibilities on real estate agents representing a buyer. In large a “buyer’s agent” must accept their fiduciary responsibility to assist the buyer in searching out every potential problem that may exist or could occur after a purchase has been finalized.

Charles R. Sowell, General Counsel for the Alabama Real Estate Commission, wrote the following article in the fall of 1993.

Caveat emptor is a latin phrase which means “let the buyer beware.” This phrase is the basis of the controlling legal doctrine in the sale of used houses with material defect. It was most prominently set out by the Alabama Supreme Court in the landmark case styled Cashion v. Ahmadi, 345 So.2d 268 (Alabama 1977) and was further addressed in a case styled Ray v. Montgomery, 399 So.2d 230 (Alabama 1980). Several cases have appeared since 1980 dealing with the principle of caveat emptor. These cases taken together with Cashion and Ray set out the law in this area, and it can be a bit difficult to follow. I am going to try to simplify the cases and explain what they generally mean to sellers, agents, and buyers.

First, it is important to remember that the court in a 1971 case abolished caveat emptor in the sale of new homes, but the court has on several occasions reaffirmed that caveat emptor is the law in used home sales. Caveat Emptor does not apply to the sale of new homes.

In the Cashion case the buyer of a used home sued the seller and the listing agent after the buyer discovered that the basement leaked. The buyer was not successful because the court applied caveat Emptor and said in effect that neither the seller nor the seller’s agent had an affirmative duty to disclose a material defect in the home, unless the defect was known and could adversely affect the health or safety of the buyer. Affirmative duty means voluntary disclosure without being asked. A material defect is best defined as one which would be a significant factor in a buyer’s decision to buy or not buy a particular house.

This case was followed by Ray where the buyer sued the seller after discovering that the used house purchased had termite damage so extensive that it threatened the structural integrity of the house. The house was sold “as is.” The court held in favor of the seller, citing caveat emptor. The court said the damage seemed sufficient to be “health or safety” consideration, but the buyer still had no case because the condition could have been discovered by the buyer with ordinary diligence by inspection of the house.

Most of of the lessons of caveat emptor should be obvious. When a buyer who finds after a sale that the used house purchased has a material defect, neither the seller nor the seller’s agents will be responsible unless the buyer can prove the following:

1) There was a material defect which adversely affects health or safety;

2) The seller or the seller’s agents knew of the defect before the sale;

3) The defect was such that it could not be discovered by due diligence; and

4) The house was not bought “as is.”

A buyer’s agent who knows of material defects is in a very different position. Agents of the buyer have a responsibility under the law of agency to tell the buyer everything known about a transaction. Caveat Emptor does not apply, and offers no protection to agents of the buyer.

It must be noted that the court has used language which seems to indicate that a known, latent defect involving health or safety might not be covered by caveat emptor. A latent defect is one that is hidden or not apparent on the surface and, therefore, cannot be discovered by due diligence.

The principles of caveat emptor do not allow a seller or the seller’s agents to engage in fraud, or deceit, or to make misrepresentations about the condition of the property. The law is clear that when a buyer asks a question about a specific property condition, the answers must be truthful and complete. Likewise, a seller or seller’s agents can be liable for fraud if they knowingly take action to conceal a material fact with intent to deceive or mislead the buyer. Misrepresentations and fraudulent action are very different from simply remaining silent about matters one has no duty to disclose.

Section 24-27-36(a)(3) Code of Alabama 1975, as amended, provides that a real estate licensee may have his or her license revoked for “…failing to disclose to a potential purchaser…any latent structural defect or any other defect known to the licensee…” Does this somehow conflict with all the case law on caveat emptor? The answer is no. It is the job of the courts to flesh out and apply statutes such as this one to real life situations. The courts have spoken specifically to the duties of agents in these cases. The law is what the cases say it is.

Finally, the purpose of this article is to state what the law is, and how it is applied to those having roles in used residential real estate transactions. The Commission is bound by the law in its enforcement actions. Real estate licensees who operate within the law, even if only the minimum requirements of the law, are free to rely upon caveat emptor in their business dealings. Many companies do not agree with the results of the principles of caveat Emptor, only accepting listings on homes where the owner consents to full disclosure about the condition of the house being sold. These companies are certainly free to exercise this business judgment.

You just read where Mr. Sowell brought up another issue that becomes important in a state where caveat emptor prevails. The term “AS-IS” and commonly stated “AS-IS, WHERE IS,” is also a term as equally important to a buyer. I have provided you a link to read the following “AS-IS” from Wikipedia.

As is is a legal term used to disclaim some implied warranties for an item being sold. Certain types of implied warranties must be specifically disclaimed, such as the implied warranty of title. “As is” denotes that the seller is selling, and the buyer is buying an item in whatever condition it presently exists, and that the buyer is accepting the item “with all faults”, whether or not immediately apparent. This is the classic “buyer beware” situation, where the careful buyer should take the time to examine the item before accepting it, or obtain expert advice.

On the other hand, the phrase “as is” does not disclaim express warranties, such as those created by the seller’s description of an item. In other words, the item may be sold “as is,” but if the item does not conform to the seller’s description, the buyer has a right to reject it.

For example, a seller of a used automobile sells his car to a buyer, and puts into the contract of sale the statement: “The buyer accepts the automobile AS IS, WITH ALL FAULTS.” Two minutes after the buyer drives off with it, the engine seizes, and the car stalls. Unless the buyer can show that there was some fraud involved, or the seller breached an express warranty, the buyer is not entitled to a refund.[citation needed] This would be a specific example where fraud in the inducement could outweigh anything in the contract, express or implied: it simply doesn’t matter what disclaimer or limitations may be found in the contract, if the contract is void (or voidable) for any reason.

Disgruntled buyers of real estate, and their respective improvements, may be faced with other complicated property law issues if a deed is conveyed as a result of a contract with an “as is” clause. In real estate, these are the larger potential problems than issues with the structure itself, which can be drawn out with an inspector. Searching public records is often difficult, and often done lazily by the seller; this means that the buyer may be burdened with liens on the home, and face various fees related to things such as public utilities.

In many jurisdictions disclaimer of various implied warranties is void. For instance, laws on consumer protection, and unfair contract terms may limit the ability of a manufacturer or seller to limit or exclude liability for various types of damage. See, for instance, the Unfair Terms in Consumer Contracts Regulations 1999 and Sale of Goods Act 1979

I don’t mean for either of these terms to scare off a potential buyer form purchasing real estate in Alabama, however, you need to be aware of these terms and their affects. Buyers can safeguard against potential problems by securing representation from a real estate brokerage firm. Buyer’s agents are bound by the law to protect the financial interests for their clients.  Every licensed real estate agent in Alabama is required, by law, to disclose the various agency relationships they offer as soon as they meet you. It is to your best interest that you select one of the relationships that provides representation for you best interest.

Should you have specific questions concerning various issues, please let me know and I’ll research the answer for you. I also want to encourage you to subscribe to our “News & Updates” weekly report so you can stay abreast of issues that might affect you when buying or selling real estate. If you haven’t visited my website, please go to www.AlabamaRealEstateInstitute.com  and view previous articles.

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