"Murder on Main Street" – The duty of sellers to disclose "property defects" to their buyers

[Update:  As we predicted, the Superior Court opinion in this matter has been vacated and reargument has been granted. 2012 Pa. Super. LEXIS 30 (2012)]

The house with four bedrooms, 2-1/2 baths, two car garage and a white picket fence seemed to be the young couple’s dream home, and – from all appearances – it was.  Or was it?  Not if you overheard the whispers of the neighbors.  Or read the front page of the local newspaper from over a year ago.

In Milliken v. Jacono, 2011 Pa. Super. 254, __ A.3d __ (2011), the Pennsylvania Superior Court held that sellers of residential real estate and their agents should have told their buyer that a previous owner had murdered his wife in the house, and then committed suicide.  [The full opinion of the Court can be found at http://lawyersusaonline.com/wp-files/pdfs-3/milliken-v-jacono.pdf.  The case seems certain to provoke litigation concerning the extent of a seller’s obligation to disclose non-physical property defects unless the Pennsylvania legislature steps in and joins the many other states which have addressed the question of stigmatized property with statutory language.

While property can be sold by its sellers in an “as is condition”, i.e., with all of its faults, the era of “caveat emptor” (or “buyer beware”) is largely gone.  This case certainly advances the trend toward requiring disclosures.  With very limited exceptions, sellers of residential real estate in Pennsylvania are required by the Real Estate Seller Disclosure Law to disclose to their prospective purchasers “any material defects with the property known to the seller.” The statute lists 16 subjects of mandatory disclosure, 12 of which relate to the physical condition of the property such as its roof, plumbing, heating, air conditioning, and the presence of insect infestation or hazardous substances.  (Other questions relate to the seller’s expertise in “areas related to the construction and conditions of the property and its improvements”, the duration of seller’s possession, and legal matters such as title, condominium, and use limitations).  Sellers are required to deliver to their prospective buyers a written, signed, and dated disclosure statement before an agreement of sale is signed.

To assist the real estate industry in complying with this law, the General Assembly directed the Pennsylvania State Real Estate Commission to prepare a form for these disclosures.  The Commission did so, but in addition to the specific disclosures required by the statute, it included in its form a final question for each seller: “Are you aware of any material defects to the property, dwelling or fixtures which are not disclosed elsewhere on this form?”  The form defines a “material defect” as “a problem with the property or any portion of it that would have a significant adverse impact on the value of the residential real property or that involves an unreasonable risk to people on the land.”  [The Commission’s form is at http://www.pacode.com/secure/data/049/chapter35/s35.335a.html.] The statutory emphasis on the physical conditions of property – and the omission of any reference to non-physical, non-legal matters – was accepted by many lawyers and real estate agents as not requiring disclosure of other property characteristics that might affect value, including those which fall within the real estate agent’s mantra, “location, location, location.”

But in holding otherwise, the Superior Court stated that the failure to disclose not only violated the requirements of the disclosure law, but constituted common law fraud because of the affirmative misrepresentation that there were no other “problems” with the property.  To prove the “materiality” of the failure to disclose, the buyer was prepared to introduce testimony from two real estate appraisers that the crimes had diminished the value of the property by ten to fifteen percent.  Notably, the Court chastised the sellers and the real estate agents for making inquiries to the Pennsylvania Real Estate Commission and the Pennsylvania Association of Realtors for advice in deciding whether they were required to disclose the murder/suicide to the buyers (both said “no”), stating “Instead of expending this effort, they would have been better served by simply acting in good faith and disclosing this fact.”  This language is of particular concern to attorneys, suggesting as it does that if a question regarding disclosure is important enough to require legal consultation, then disclosure is required.

The Court did acknowledge there would be concerns that it was “proceeding down a slippery slope.” In her dissenting opinion, Judge Kate Ford Elliott walked us down that slope by questioning whether a seller must disclose lesser crimes such as burglaries, or the proximity of sex offenders, or that there is a sewage plant across the way that can be smelled on humid days.  She even raises the circumstance of a house erected on ancient Indian burial grounds.  Such a seller might be advised to bring Ghostbusters through the home before putting it on the market so as to remove the “defect.” Or find the buyers who will say, “I ain’t afraid of no ghosts.”

The concerns associated with the sale of stigmatized properties are prevalent enough that the National Association of REALTORS® has produced an entire “Field Guide” on the subject for the guidance of its members.  See http://www.realtor.org/library/library/fg703.  The association defines “stigmatized property” as one which ‘‘has been psychologically impacted by an event, which occurred or was suspected to have occurred on the property, such event being one that has no physical impact of any kind.”

We will be not be surprised if this decision is reversed on a motion to reconsider, or on appeal to the Pennsylvania Supreme Court.  Moreover, not only is the Pennsylvania real estate sales industry certain to press for a legislative “bright line” concerning a seller’s obligation, but also for immunity to sellers and their agents for failure to disclose non-physical “defects”.

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