A recent published opinion by Washington’s Division I Court of Appeals emphasizes that the law in Washington is that prospective homebuyers “must beware” if any evidence of a defect is discovered prior to closing. The opening line of the opinion reads, “When prospective homebuyers discover evidence of a defect, the buyers must beware. They are on notice of the defect and have a duty to make further inquiries.”[i]
While this rule of law may appear reasonable at first glance, the facts of the case illustrate that the application of this rule may not be so fair. In Douglas v. Visser, the homebuyer’s pre-purchase inspection identified a small area of rot and decay near the roof line and caulking that suggested a previous roof leak in that area, and an area of rotted sill plate beneath the home. The inspection report stated that this did not pose a structural threat, but should be repaired if the condition degraded.
The buyer did not discuss this report with the seller and proceeded with closing the sale without inquiring further. However, after moving into the home, the buyer noticed a damp smell and a constant presence of potato bugs around the perimeter of the house and in the bathroom. This lead to further investigation, including removal of a ceiling tile, which resulted in insulation and water to come down when the ceiling tile was removed. A mold abatement company could not guarantee removal of all mold, opining that the house presented pristine mold growing conditions.
Further investigation revealed extensive structural damage: the rim joists and sill plate had 50-70% wet rot and pest damage. This investigation further revealed that siding had been installed by the seller and that the extent of damage to the rim joists and sill plate could not have occurred since installation of the siding. The inspector concluded that whoever installed the siding would have known of the structurally damaged framing and that insulation had been installed in the crawl space stud bays to conceal the rotted framing.
Based on this evidence of concealment, the buyer sued the seller for breach of contract, fraudulent concealment, negligent representation, violation of Washington’s Consumer Protection Act, and a claim that the seller, a real estate agent, violated statutory duties applicable to real estate agents. During discovery, one of the contractors that had performed work for the seller testified that wood was too soft to install screws in certain areas and that he had advised the seller to rip out plywood and inspect joists underneath. Instead, the seller instructed the contractor to find a way to attach screws into the soft wood and to cover up rotted wood underneath the bellyband of the exterior of the house.
Based on this evidence of concealment, the trial court ruled in the buyer’s favor and awarded significant damages. However, the Division I Court of Appeals reversed, holding that because the buyer should have been on notice of potential defects due to its pre-closing inspection report that revealed the evidence of rot near the roof line and the area of rotted sill plate, the buyer had a duty to make further inquiry:
“The [seller’s] efforts in concealing the defects of the house they were selling are reprehensible, even more so because [seller] is a licensed real estate agent. Nonetheless, the law retains a duty on a buyer to beware, to inspect, and to question. We caution that the [buyer] did not have a duty to perform exhaustive invasive inspection, or endlessly assail the [seller] with further questions. They merely had to make further inquiries after discovering rot or at trial show that further inquiry would have been fruitless. The only evidence of when the [buyer] first learned of rot in the house is the report issued after [inspector] conducted his prepurchase inspection. Despite that discovery, on top of the [ seller’s] previous evasive and incomplete answers and the [seller’s] on-going failure to provide their own prepurchase inspection report, either of which should have caused concern and further inquiry, there is no evidence that the [buyer] made any inquiries whatsoever after the inspection. They obtained no finding from the trial court that further inquiry would have been fruitless. Under Dalarna, the [buyer’s] failure means they were not entitled to maintain these claims.”
This resulted in the Court of Appeals dismissing all of the buyer’s claims. Adding insult to injury, because the transaction was seller financed and the buyer had stopped paying on the promissory note upon discovery of the defects, the Court of Appeals concluded that the buyer had defaulted on the promissory note, was obligated to pay default interest of 18%, and owed the seller reasonable attorneys’ fees based on a prevailing party fee provision in the purchase and sale agreement. It is likely these fees were significant based on the full trial at the trial court level and subsequent appeal.
Comment: This is rough. Based on this case, if a pre-closing inspection reveals any evidence of defects, a buyer must inquire further and seriously consider whether to close the transaction, as a claim of fraudulent concealment related to that defect, even with strong evidence of actual knowledge and the concealment that occurred in this case, and even if the resulting damage is much more extensive than what the inspection identified, will fail.