05 Sep Real Estate Deal Gone Wrong
The ageless advice to read, understand, and expect to be bound by language in a contract you sign is as sound now as ever. It is especially important with respect to contracts to buy real property, where the financial stakes are often high. Jerome contracted to buy property, delivering a $5,000 deposit to be credited toward the purchase price. An addendum to the contract agreed to by the parties stated that in the event the seller breached the agreement or defaulted, Jerome was entitled to the return of his earnest money and cancellation of the contract, as his “sole and exclusive remedy.”
When the seller did not close on the deal within the time set by the contract, according to Jerome because there had been a defect in its title to the property that was later remedied, Jerome sued to enforce the contract. That is, he sued to force a sale of the property to him, as he was not content with the prospect of simply getting his $5,000 back, terminating the deal and returning to square one.
A court held Jerome to the terms of the contract addendum, ruling that he was entitled to no more than his money back from the seller. In some cases, an aggrieved party may be relieved of the limitations or burdens of a contract when the unequal bargaining positions of the parties are such as to deprive the aggrieved party of a meaningful choice and where the terms of the contract are unreasonably favorable to the other party. Jerome made this argument in an attempt to rid himself of the limitation on his contractual remedy, to no avail.
The problematic addendum, in bold language no less, warned the parties to read it carefully before signing and included an acknowledgment that Jerome was knowledgeable and experienced in financial and business matters and able to assess the transaction’s merits and risks. The court also declined to find that limiting Jerome to the return of his earnest money deposit was unreasonably tilted in the seller’s favor. It simply restored the parties to their positions prior to signing the contract. In a loose sense, Jerome may have been the “victim” of a broken contract, but he was not such a disadvantaged victim under the law as to be entitled to set aside any of the terms of his contract, including the one that boxed him in when he was seeking a remedy.
No less important than reading and understanding all parts of a real estate sales agreement is the need to be up front with the other party to the transaction about the condition of the property, especially as to a problem that is not obvious. In another case, this was an expensive lesson to learn for a seller of a home who was less than forthright with the buyer about defects in a basement wall.
In the litigation that ensued when the buyer sued the seller for fraud and negligent misrepresentation, the buyer testified that at first he was actually impressed with the finished basement in the house, with its drywall all around and a polished floor you could eat off of. But some months after he moved in, the buyer noticed a worsening problem with water leaking from one of those basement walls. When workers removed the drywall to explore further, they exposed a basement wall that was bowed, had cracks both small and large, and had mold and mildew. Layers of caulking in some of the cracks suggested that someone had tried in vain to fix the problem on the cheap. The new owner then did fix the problem, but at great expense.
Although the seller had answered no on a disclosure form to questions about any known water problems or cracks and settling issues in the basement, other evidence suggested that the real answer should have been yes. The seller claimed that he just happened to put up the drywall in the basement as the last item on a to‑do list, at a time when he was not intending to sell the house. Records showed that there was no drywall when the house was first listed and did not sell, but that the drywall was in place less than a year later for the second listing that resulted in the sale.
For his lack of candor, the seller paid a high price. An appeals court upheld an award of tens of thousands of dollars in damages to the buyer. In addition to damages for mental anguish, there was compensation to the buyer for those costs of repair he incurred for such items as the installation of an exterior drainage system, the repair of the footer drains, and the installation of multiple straps to repair the bowed wall. Last but not least was a significant award of punitive damages, based on the trial court’s conclusion that the seller had acted with “conscious disregard” for the rights and safety of the buyer, where there was a great probability of causing substantial harm. All in all, the case stands as an object lesson: In selling real estate, as in most undertakings, honesty is the best policy.