Fix and Flips – Duty To Disclose Home Defects
In a decision entitled In re the Estate of Gattis, the Colorado Court of Appeals strengthened protection of buyers of used homes which were fixed and flipped.
In the Gattis case, Sellers purchased the residence for repair and resale. Before the purchase, Sellers obtained engineering reports that included discussion of structural problems in the residence resulting from expansive soils. Advance Structural Repair, an entity that Sellers controlled, oversaw the repair work. When the repairs were completed, Sellers listed the residence for sale.
Sellers had no direct contact with Buyer, who purchased the residence from them. The parties entered into a standard-form real estate contract, approved by the Colorado Real Estate Commission: Contract to Buy and Sell Real Estate (Residential).
The Sellers Property Disclosure (SPD) form asked, ” To Seller’s current actual knowledge, do any of the following conditions now exist or have they ever existed: sliding, settling, upheaval, movement or instability of earth or expansive soils on the Property?” Across this entire page, one of the Sellers wrote, ” Seller has no personal knowledge of property / Seller has never lived at property.” The SPD also asked, ” To Seller’s current actual knowledge, do any of the following conditions now exist or have they ever existed: structural problems?” Although one of the Sellers wrote the same statement across this page, the ” Yes” box was checked in response to this question, followed by, ” Repaired by Advanced Structural Repair”. No reference was made to ” ‘ expansive soil’ in any manner. No person ever informed the Buyer or her representatives that the individual Sellers were the principals of Advanced Structural Repair.
Years after having taken title to the residence, Gattis sued Sellers. She pleaded damage to the residence resulting from expansive soils. The trial court held Sellers liable for nondisclosure of material facts. The court explained:
Defendants falsely represented in the [SPD] that they had no personal knowledge of the property, when in fact they were thoroughly familiar with it. They also failed to disclose that they were the principals of Advance Structural Repair. Finally, and most importantly, they failed to disclose that expansive soil underlies the Residence and had already caused serious structural damage to the Residence. Indeed, the [SPD] actively concealed the existence of the expansive soil because it stated … that to Seller’s current actual knowledge, expansive soil had never existed, and did not now exist, on the property.
The Court of Appeals affirmed the trial court, and went even further. It said the the public policies which makes a builder of a new home being liable for latent (hidden, concealed or not apparent) defects should also apply to fix and flippers. These policies include:
• Preventing ” overreaching” by a builder, which is ” comparatively more knowledgeable” and ” is in a far better position to determine the structural condition of a house than most buyers” ;
• A purchaser of a home ” rarely has access to make any inspection of the underlying structural work, as distinguished from the merely cosmetic features”;
• The magnitude of the investment made when purchasing a home;
• A construction professional’s work on a house is, ultimately, for the benefit of homeowners;
• Discouraging misconduct and providing an incentive for avoiding preventable harm;
• Just as home builders are in a better position to know the structural condition of a home, a seller who has actual knowledge of a latent defect occupies a similarly superior position. And where disparate knowledge exists, ” a person has a duty to disclose to another with whom he deals facts that in equity or good conscience should be disclosed”;
• The burden to disclose latent but known defects, and thereby guard against injury to home buyers, is minor because the seller’s duty to disclose known but latent defects would apply to only material defects. (Undisclosed facts are ‘ material’ if the consumer’s decision might have been different had the truth been disclosed.).
The trial court properly awarded Gattis attorney fees, based on the following fee-shifting provision in the Form Contact: ” In the event of any … litigation relating to this contract, the … court shall award to the prevailing party all reasonable costs and expenses, including attorney fees.”