Real Estate Disclosure Form
CAN FILLING OUT A RESIDENTIAL REAL ESTATE DISCLOSURE FORM SUBJECT A SELLER TO LIABILITY FOR FRAUD?
The Seller’s Residential Real Estate Disclosure Form is a representation of the seller’s knowledge of the condition of the home, not the actual condition of the home. See Hizer v. Holt, 937 N.E.2d 1, 7 (Ind. Ct. App. 2010) (“Sellers can be held liable for errors, inaccuracies, or omissions on the Sales Disclosure Form if the seller has actual knowledge of the defect”). To recover against a seller based on a claim of inaccuracies in the Seller Disclosure Form, the buyer must demonstrate that the seller had actual knowledge that the statement made in the Seller Disclosure Form was not true.
In Harmon v. Fisher, 56 N.E.3d 95 (Ind. Ct. App. 2016), the seller disclosed that the home was connected to city sewer system even though it was not connected. Id. at 97. The buyer sued the seller for fraud and constructive fraud and the Court entered judgment in favor of the seller. The Court of Appeals affirmed, holding that it was the seller’s actual knowledge that was pivotal.
The sale of the house was governed by the provisions of Indiana's real estate sales disclosure statutes. Ind. Code chapter 32-21-5 (2002). As pertains to the issue here, the disclosure form must contain the known condition of the water and sewer systems. Ind. Code § 32-21-5-7(1)(E) (2014). In this case, the form states that the information in the disclosure is correct to the best of the seller's "CURRENT ACTUAL KNOWLEDGE". Exhibit Vol. pp. 12-13. The form is not a warranty by the owner, and the disclosure form is not to be used as a substitute for any inspections or warranties the buyer or owner may later obtain. Ind. Code § 32-21-5-9 (2002). As applicable to this appeal, [*99] in the event the buyer discovers a defect after the sale has been completed, the seller's liability is limited such that the seller "is not liable for any error, inaccuracy, or omission of any information required to be delivered to the prospective buyer under this chapter if the error, inaccuracy, or omission was not within the actual knowledge of the owner." Ind. Code § 32-21-5-11 (2002).
Therefore, Fisher's disclosure verified his "CURRENT ACTUAL KNOWLEDGE" of the water and sewer systems and septic fields and tanks, and the statute limited his liability for inaccuracies, errors, or omissions in the disclosure that were not within his actual knowledge. Exhibit Vol. pp. 12-13. In Johnson v. Wysocki, 990 N.E.2d 456, 466 (Ind. 2013), our Supreme Court held that the seller may be liable for fraudulent misrepresentations made on the disclosure form if he or she had actual knowledge that the representation was false at the time he or she completed the form.
Id. at 98-99.
The decision in Kashman v. Haas, 766 N.E.2d 417 (Ind. Ct. App. 2002) is also instructive. In Kashman, the sellers, on two occasions prior to selling their home, had discovered termite damage and paid a contractor to treat and fix the home. Id. at 418. A year after the second time termite damage was found and remediated, the sellers sold the home and affirmed in the Seller Disclosure Form that there was no termite damage. The buyers subsequently found damage from termites and sued the sellers.
The trial court granted summary judgment in the sellers’ favor and the Court of Appeals affirmed, finding that there was “no designated evidence that reveals that Sellers had actual knowledge of any existing termite damage to the home at the time they completed he Disclosure Form and sold the home to Buyers.” Id. at 422.
The takeaway from these decisions is that sellers who make representations on a Seller Disclosure Form with knowledge that the representations are false open themselves up to liability. On the other hand, sellers who accurately and fully disclose their knowledge of the condition of their homes should not be subject to liability for fraud.
For questions contact a member of Barrett McNagny's Real Estate or Litigation team.
About the Author:
Pat Murphy is an experienced litigator with over twenty years of experience. He assists clients in matters involving contract disputes, real estate, adverse possession, easements, boundary disputes and commercial litigation. He can be reached at (260) 423-8971 or at pat@barrettlaw.com.