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Statutory Caveat Emptor Survives…or Does It?

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By:  Matthew P. Fischer

Arizona has codified the concept of caveat emptor (i.e., buyer beware) for three particular circumstances.  Pursuant to A.R.S. § 32-2156, real property sellers are not obligated to disclose:  (1) deaths or felonies that have occurred on the premises; (2) prior occupancy by someone with a non-communicable disease; and (3) nearby sex offender residents.  The constitutionality of § 32-2156 was recently challenged in Lerner v. DMB Realty, et al., 294 P.3d 135 (Ariz. Ct. App. Nov. 27, 2012), specifically with respect to subsection three (click on the case name for the full opinion of the court). 

In Lerner, the buyer unknowingly purchased a home next door to a registered, level-one sex offender.  Upon discovery, the buyer brought claims against the seller for fraud and for negligent misrepresentation, and against the dual-representation real estate broker handling the transaction for breach of fiduciary duty.  The trial court dismissed the case, and the buyer appealed.

The parties appear to have used the standard Arizona Association of Realtors® (AAR) forms for the transaction.  The Residential Seller’s Property Disclosure Statement (SPDS, also commonly referred to in the industry as a “spuds”) provides notice to the buyer that the seller is not obligated to disclose nearby sex offenders (lines 246-248).  The Residential Resale Real Estate Purchase Contract also contains a provision placing the obligation to investigate nearby sex offenders on the buyer (lines 190-192).  The buyer also confirmed in the Purchase Contract that they were not relying on any verbal representations by the seller (the buyer initialed “none” on line 183).  The Real Estate Agency Disclosure and Election (READE), in which the parties agreed to DMB Realty’s role as dual agent, confirms that the broker is not obligated to disclose nearby sex offenders (lines 25-28).  All that said, during the negotiations, the seller asked the buyer why they were selling, and the seller said they wanted to move closer to friends.  But the buyer alleges that the seller’s intention was, in fact, to move away from the sex offender.

On appeal, the buyer argued that A.R.S. § 32-2156 was an unconstitutional abrogation of their right to sue for damages, as provided by Article 18, Section 6 of the Arizona Constitution.  The court disagreed, upheld the constitutionality of the statute, and upheld the dismissal of the buyer’s claim for negligent misrepresentation against the seller.  Because of lines 25-28 in the READE, the court also upheld the dismissal of the buyer’s claim for breach of fiduciary duty against DMB Realty.

But the Lerner panel reversed the trial court’s dismissal of the fraud claim, thereby reinstating the buyer’s action against the seller on that count.  Neither A.R.S. § 32-2156, nor all of the various disclosures and agreements, can serve as a shield for fraud.  Per Lerner – saying you’re moving to be closer to friends, when you’re actually fleeing from the next door sex offender, might constitute fraud. 

SPDS, at lines 232-234, asks, “What other material (important) information are you aware of concerning the Property that might affect the buyer’s decision-making process, the value of the Property, or its use?”  In this case, the seller, perhaps wisely, left it blank.  But had the buyer insisted on a fully completed SPDS, query whether there is any answer the seller could have provided, in which the next door sex offender was not disclosed, but that was also not fraudulent.  Thus, in light of the holding in Lerner, does A.R.S. § 32-2156 provide sellers with any real protection, given the practicalities of how residential real estate transactions are documented in Arizona?

Lessons learned from Lerner:

–  Real Estate Brokers who are not using the AAR READE form should consider including a disclaimer referencing A.R.S. § 32-2156 in dual representation agreements.

–  Sellers should consider avoiding verbal representations to potential buyers, and leaving the selling to their broker.

–  Buyers should consider insisting on a fully completed SPDS, and if it’s material, running a sex offender search.