Boilerplate Language Upheld in Ohio Storage Lease

By: Stephen D. Richman, Esq.-Senior Counsel-Kohrman, Jackson & Krantz

boil•er•plate (boi l r-pl t ) n.

1. A steel plate used in making the shells of steam boilers.
2. Inconsequential, formulaic, or stereotypical language: The new provisions of the lease renewal were merely boilerplate.

The American Heritage® Dictionary of the English Language, Fourth Edition copyright ©2000 by Houghton Mifflin Company. Updated in 2009. Published by Houghton Mifflin Company. All rights reserved. 

The first type of “boilerplate” defined above is pretty tough stuff. It can be up to twelve (12) inches thick and stop arrows, Greek fire and low caliber ammunition. Tough, one-sided contract and lease language is also referred to by many as “boilerplate”. What is amazing to me is how many tenants, landlords, brokers and dictionary writers believe such language is inconsequential or unenforceable, and how many do not worry about such language because they deem it “merely boilerplate.”

Notwithstanding the above definition, this author would like to caution you to worry, if you ever find yourself on the “wrong side of the boilerplate.” Contrary to “Mr. Heritage’s” beliefs, odds are that boilerplate (at least in a commercial lease/contract) will most likely be enforceable unless it is contrary to statutory law or public policy. Judges assume (rightly or wrongly) that commercial tenants and landlords are on equal footing with equal sophistication in business and lease matters. They believe commercial parties say what they mean and mean what they say in their contracts. Ohio court decisions regarding commercial leases are replete with language like the following: “when reviewing lease provisions, a court is to presume that the intent of the parties is in the language they used, and if the contract is clear and unambiguous, then we must follow the contract’s expressed terms and must not go beyond the plain language of the contract.” Langfan v. Carlton Gardens, 2009 Ohio App. LEXIS 2863. Accordingly, self-help provisions, landlord disclaimers of the duty to mitigate damages, warrants of attorney to confess judgement and disclaimers of warranties are just a few examples of boilerplate language upheld in commercial leases in Ohio.

The primary exception to the general enforceability of boilerplate language in Ohio is Ohio’s Landlord-Tenant Act (ORC Chapter 5301 et. seq.), which governs Ohio residential leases. Specifically, Section 5321.13 (d) of such Act provides that “No agreement by a tenant to the exculpation or limitation of any liability of the landlord arising under law or to indemnify the landlord for that liability or its related costs shall be recognized in any rental agreement or in any other agreement between a landlord and tenant.” Awards of attorney fees and warrants of attorney to confess judgment are also prohibited in residential leases. The Ohio Landlord-Tenant Act was enacted to protect residential tenants who are often in an unequal bargaining position from their landlords, and have a lot more to lose (e.g., their homes).

What about boilerplate language in storage unit leases? Often, such units are utilized to store beds, refrigerators and other furniture and appliances typically found in a residence. Do storage unit tenants have the same protection residential tenants have?

What if such boilerplate language in a storage unit lease goes so far as 1) disclaiming landlord liability (for patent and latent defects, failure  to repair and express and implied warranties); 2) imposing minimal, liquidated damages; and 3) requiring the tenant to indemnify landlord? That’s just inconsequential boilerplate, right Mr. Heritage? 

Not according to the Tenth District Court of Appeals in the recent case of Hopkins v. Car Go Self Storage,2019-Ohio-1793.

In Hopkins, the tenant-appellant entered into a lease agreement with appellee, “Car Go Self Storage” to store her personal belongings, including furniture, in appellee’s storage facility. Appellant testified in court that the facility was dry when the items were moved in, but when such items were retrieved, they were damp and covered with mold. Apparently there was a water leak that allowed water into the unit, causing the mold. Appellant sued appellee for breach of contract, negligence and conversion. The trial court held for appellee on all counts, and appellant appealed.

The court of appeals in Hopkins affirmed the decision of the trial court. The appellate court held that the negligence claim was properly dismissed because it was barred by the two-year statute of limitations. The conversion claim was properly dismissed because appellant admitted she was not prevented from recovering her property.

Regarding the contract claim, appellant claimed that her contract contained an implied warranty that the unit was fit and habitable for storage of property, and that such warranty was breached by the landlord. The 10^th District Court of Appeals apparently agreed with appellant that the elements establishing an implied warranty had been met. However, according to the court, such warranty was disclaimed by the landlord’s exculpatory clause that included a broad, but unambiguous release of liability for damage to property; and a clear, express waiver of implied warranties. Citing precedent (similar cases on point), the court in Hopkins simply applied the “general rule,” namely, that “exculpatory causes in lease agreements are generally valid absent a showing of ambiguity or unconscionability” and “if the court can determine intent from the plain [albeit exculpatory] language of the contract, then the court must apply that language as written and refrain from further contract interpretation.”

It is important to note that the Hopkins court did not preclude future challenges to a  storage lease, as unconscionable. Since appellant did not challenge her lease as unconscionability, however, the court in Hopkins simply concluded that “the court cannot address an argument that was not raised.”

So, what is the moral of this story? All language in a  lease is of consequence; boilerplate or not. The best weapon against boilerplate language is the delete key. Negotiate away boilerplate language before signing the lease. Afterwards, odds are you will be no more successful shooting holes through boilerplate language in court, as you would be shooting holes through the 12- inch- thick steel kind of boilerplate.

Caveat Emptor (“Let the Buyer Beware”) Is Still Alive and Well in Ohio

By: Stephen D. Richman, Senior Counsel, Kohrman, Jackson & Krantz

The doctrine of caveat emptor (“let the buyer beware”) is still alive and well in Ohio, generally precluding recovery in an action by a purchaser against a seller pertaining to a property’s defective condition if:

1) the condition complained of is open to observation or discoverable upon reasonable inspection;

2) the purchaser had the unimpeded opportunity to examine the premises; and

3) there is no fraud on the part of the vendor. Layman v. Binns (1988), 35 Ohio St.3d 176.

While Ohio’s Seller Disclosure Act (R.C. 5302.30; the “Disclosure Act”) still requires sellers of most types of residential property to disclose known defects, the Disclosure Act does not directly modify the doctrine of caveat emptor by creating a new statutory fraud claim or by eliminating existing common law claims. In fact, Section 5302.30 (L) of the Disclosure Act makes it clear that R.C. 5302.30 is not intended to affect any (common law) remedies available prior to its enactment. Nevertheless, if the seller fails to disclose a material fact on the disclosure form with the intention of misleading the buyer and the buyer relies on the form, the seller [has committed fraud and] is liable for any resulting injury. Pedone v. Demarchi, 8th Dist. [Cuyahoga] No. 88667, 2007-Ohio-6809. However, “[w]hen a plaintiff claiming fraud in the sale of property has had the opportunity to inspect the property, he is charged with knowledge of the conditions that a reasonable inspection would have disclosed.”

The Ninth District Court of Appeals in Petroskey v. Martin, 2018-Ohio-445 (Lorain County) and the Eighth District Court of Appeals in Hendry v. Lupica, 2018-Ohio-291(Cuyahoga County) recently reaffirmed the viability of caveat emptor in Ohio. Since the disgruntled buyer in Petrosky v. Martin (Mr./Mrs. Petroskey) and the disgruntled buyer in Hendry v. Lupica (Mr. Angus Hendry) both claimed fraud on the part of the seller, the following summary should prove helpful before evaluating these cases:

In the context of real estate transactions, there are basically two types of fraud: fraudulent misrepresentation and fraudulent concealment (with “fraudulent nondisclosure” sometimes being referred to as either a third type of fraud, or, a type of fraudulent concealment).  The elements of fraudulent misrepresentation are: (a) a false representation concerning a fact material to the transaction; (b) knowledge of the falsity of the statement or utter disregard for its truth; (c) intent to induce reliance on the misrepresentation; (d) reliance under circumstances manifesting a right to rely and (e) injury resulting from the reliance.  Sanfillipo v. Rarden, 24 Ohio App. 3d 164.

The basic elements of fraudulent concealment are: (a) actual concealment; (b) of a material fact; (c) knowledge of the facts concealed; (d) intent to mislead another into relying upon such conduct; (e) actual reliance; and (f) injury resulting to such person because of such reliance.  

Even without an affirmative misrepresentation or “actual” concealment, an action for fraud, commonly referred to as “fraudulent nondisclosure” is also maintainable in Ohio for failure to fully disclose material facts where there exists a duty to speak.  In such regard, the Supreme Court of Ohio has held that a “vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection.”  Binns, 35 Ohio St.3d at 178. 

The facts of Hendry v. Lupica are as follows:

In 2015, Mr. Hendry purchased a home in Olmsted Falls, Ohio from the Lupicas (sometimes referred to herein as the “Sellers”). Prior to closing, the Sellers produced a residential property disclosure form that disclosed dampness and previous water damage in the basement. Mr. Hendry also had the home inspected by a professional inspector. The inspector found several issues with the basement, including foundation wall cracks, holes and signs of water infiltration. The inspector’s report also noted that the condition of the foundation was poor and advised Mr. Hendry to seek additional information about these issues prior to purchasing the property. Mr. Hendry did not follow that advice, and instead, negotiated a price reduction with the Sellers. Not to long after the purchase, Mr. Hendry experience water infiltration in the basement when it rained. He hired a waterproofing company to fix these issues, and then filed suit against the Sellers in September 2015, alleging fraud and mutual mistake, and requesting compensatory and punitive damages, or rescission of the contract.

Mr. Hendry contended that the caveat emptor doctrine did not apply because the Sellers fraudulently misrepresented and/or failed to disclose the extent of water intrusion problems in their basement. The Sellers only disclosed some dampness and some water damage that occurred prior to their ownership of the home.  Mr. Hendry further argued fraudulent concealment because the Sellers did not divulge that they had recently painted a wall in the basement. The trial court held for the Sellers and Mr. Hendry appealed.

The Eighth District Court of Appeals upheld the trial court’s ruling for the Sellers, easily coming to the conclusion that there was no fraud or misrepresentation.   The appellate court reasoned that the evidence clearly established that Mr. Hendry had actual knowledge of water infiltration in the basement through his professional home inspection. The inspection reported large cracks and holes in the foundation, and other problems and advised further investigation. Rather than investigate further, Mr. Hendry “bought the defects” by negotiating for a price reduction. There was no misrepresentation because the statements made by the Sellers were all true (there was dampness and prior water issues).  Further, there was no fraudulent non-disclosure because there was no duty for Sellers to disclose everything they knew about its property; only latent, not readily observable or discoverable defects.  According to the court, an open and obvious small defect was notice to the buyer that a larger problem may exist. Finally, the painting of one wall was not deemed concealment by the court because it did not conceal the extent of the problem; the cracks, holes and stains were still evident, and the inspection report backed this up.

Petroskey v. Martin is also a recent, “water infiltration in the basement case”, that includes a “scary” inspection report and a buyer that sought to “buy the defect” vs. learn more about the problem. The facts of this case are as follows:

In August, 2013, David Petroskey (sometimes referred to herein as “Buyer”), and Dee Martin (sometimes referred to herein as “Seller”), entered into a purchase agreement for a home in Lorain, Ohio.

In September, 2013, Buyer had the home inspected. The inspection report noted various water issues and concerns about the premises including: 1) evidence of water leakage and moisture in the crawl spaces; 2) the property’s grading was a “[f]lat [i]mproper soil slope towards [the] foundation;” 3) evidence of past water leakage around the skylights and evidence of past or present water staining on the ceilings in all bedrooms, the family room, and the master bathroom; 4) a “mold like substance” in the attic; and 5) loose and damaged trim wood and damaged wood fascia “from past or present leaks.” As was the case in Hendry v. Lupica, the inspector in Petroskey v. Martin also recommended further investigations and inquiries, including securing “[a] qualified roofing contractor to evaluate and estimate repairs.”

The seller in Petroskey v. Martin also completed an Ohio Residential Property Disclosure Form. However, where the Martin Disclosure Form asked, “Do you know of any previous or current leaks or other material problems with the roof or rain gutters? …. (but no longer than the past 5 years),” Mrs. Martin checked the “No” box. In her deposition, Mrs. Martin testified that, at the time she completed the Disclosure Form, she “thought it was about seven years” since they had the roof replaced.

In October, 2013, Mr. Petroskey and Mrs. Martin amended their purchase agreement. The amendment removed the general home inspection contingency and reduced the sale price. After the amendment, Mr. Petroskey (per his testimony) went through the Home “[m]aybe half a dozen” times before finalizing the purchase.”

Shortly after his purchase, Buyer suffered ice damming on the roof, leaking skylights and a leaking roof. In addition, Mr. Petroskey testified that “the front yard did not drain properly and water entered the crawlspace and collected on the floor.” Mr. Petroskey then sued the Seller alleging misrepresentations in the form of Seller’s Disclosure Form declarations that there were no roof leaks at the property. Whereas the Seller in Hendry v. Lupica failed to disclose the extent of the defects (a distinction without a difference according to the Hendry court), the Seller in Petroskey v. Martin denied there were any problems at all.

Accordingly, the trial court and the appellate court in Petroskey v. Martin aptly agreed with the Buyer’s characterization of the “no” answer on the Disclosure Form as a misrepresentation. The courts noted, however, that only a claim for fraudulent misrepresentation was actionable, and the evidence failed to show that the misrepresentation was made with knowledge of its falsity, or with reckless disregard as to whether these statements were true or false (recall that Mrs. Martin testified that she thought the roof repairs were completed over seven years ago vs. within five years as called for on the Disclosure Form).

Like the seller in Hendry v. Lupica, the seller in Petroskey v. Martin argued that there was no fraudulent-non-disclosure because the seller had no duty to disclose material facts which are not latent, and readily observable or discoverable through a purchaser’s reasonable inspection. Clearly, there was no question of past water leakage and water staining in the Lupica home, as well as in the Martin home. Both homes showed signs of the same, and the inspection reports for both properties clearly identified water leakage and staining.

The buyer in both cases argued that the respective defects in their homes were latent. The buyer in Petroskey v. Martin, however did not argue latency regarding the extent of the defect (as the buyer in Hendry v. Lupica unsuccessfully had), but rather, latency regarding the cause of the defect. Mr. Petroskey testified that he had to pay approximately $50,000 for a new roof and argued that the inspection report did not specifically mention ice damming and roof issues as the cause of the water intrusion and leakage.

Citing precedent from the Ohio Supreme Court as well as from other cases heard by the Ninth District, the court in Petroskey v. Martin was not persuaded that these “lack of causation facts” made any difference. As summarized by the Ninth District Court of Appeals in Petroskey: “The Ohio Supreme Court has found that, when determining whether a defect was ‘open to observation,’ the issue is not the ‘cause of the defect’ or the ‘remedial effectiveness of [a repair],’ …similarly, this Court has stated that the cause of the defect, the underlying problem, does not have to be open and obvious. If the defects are open and obvious …, the buyer is on notice to make further inquiry as to the underlying condition.”

Applying the law to the facts, the court of appeals in Petroskey concluded that, “Although the home inspector did not identify the cause of the ‘leaks’ as ‘ice damming,’ he did notify the Petroskeys of evidence of ‘past water leakage,’ ‘past or present water staining,’ and damage ‘from past or present leaks’ in various locations throughout the Home. Thus, the defect was not latent and the Petroskeys were on notice to make further inquiry as to the underlying problem.”

What is the moral of this story?  1) Never waive your rights to inspections; 2) don’t rely on the Disclosure Form, which more often than not turns out to be a “non-disclosure form;” 3) if any defect is uncovered in an inspection report, assume it is a big deal and investigate it further with an expert (per the court in Hendry, an open and obvious small defect was deemed notice to the buyer that a larger problem may exist); and 4) if you decide to “buy the defect”, make sure you know the price to repair it.

In other words, in the words of singer/songwriter/philosopher Kenny Rogers: “You got to know when to hold them, know when to fold them, know when to walk away and know when to run.”

DUE DILIGENCE IS REQUIRED IN RESIDENTIAL TRANSACTIONS; UNLESS YOU FEEL LUCKY

Most investors of commercial real estate understand the importance of “due diligence”; a term often used to describe the process of investigating anything and everything about the property to be purchased. Confirming what property is being received, what condition it is in, what can or cannot be done with the property, and what risks are inherent in its ownership are of critical importance and warrant formal and extensive due diligence inspection rights in the commercial contract.  Title commitments, surveys, environmental

audits, and building inspection reports are the most often utilized tools found in a “diligence tool box.”

There is no need for diligence in a residential transaction, is there? Don’t the broker forms all have inspection rights already in their contract forms? It is not like we are dealing with multi-million dollar properties, right?  

We often hear questions like these, and unfortunately, most often we hear them after the contract has been signed, when it is usually too late to be intelligently preemptive.  The answers are:  (1) yes, there is need for diligence in residential transactions; (ii) yes, the broker forms all have inspection rights already in their contract forms, but thee forms don’t go far enough; and (iii) it doesn’t matter if the property being purchased is for $100,000 or $1,000,000; most real estate issues/problems don’t discriminate based upon price. Actually, buyers of lower priced properties often fare worse than buyer-investors of higher priced real estate because they are less likely to be able to absorb a loss, unwanted litigation or unbudgeted for expenses.

Simply put, diligence is needed in any real estate transaction because the buyer is usually at a disadvantage. More often than not, the buyer has little or no knowledge concerning the property, but must diligently investigate and inspect it or risk understanding, all too well, the still surviving doctrine of “caveat emptor” (let the buyer beware).  Most broker forms, do indeed give the buyer the right to perform inspections, but they are often limited to the following: “General Home Inspection”; “Pest Inspection”; “Radon Inspection” and “Lead Paint Inspection”.  I have yet to see a broker contract form that calls for a title commitment to search for title issues such as liens and easements, or allows for a survey to check for boundary lines and encroachments.

Additionally, with respect to the limited inspection rights that are included within a broker contract, (i) sellers and brokers usually push for tight inspection time frames (3-7 days), and (ii) the canned contract language to deal with a problem is often muddled and more seller than buyer friendly. For example, most broker forms only allow the buyer to terminate, if a “latent, material defect is discovered that was not previously disclosed by seller”. Of course, none of the adjectives are defined in the contract. Moreover, buyer can only get its deposit back if buyer and seller agree and sign a mutual release. Obviously, when issues arise between buyer and seller, they seldom agree with each other.

What Due Diligence is recommended for Residential Transaction?
 

I. "Pre-contract Diligence"

 Talk to neighbors. Find out, for example if they can hear the train from nearby tracks, or commercial activity from the next door commercial property. Visit the property after a hard rain to see if there are visible drainage issues. Observe traffic patterns during rush hour vs. quiet, open-house Sundays. Surf the Net. Crime statistics, sexual predator registries, County Auditor tax information and local issues (such as overflowing street sewers or a new planned highway overpass) can easily be found online these days. Make sure you ask for the state mandated “Property Disclosure Form.” The lack of information should not convince you all is well, but the fact of recent roof leaks, for example may dissuade you, or give you more room to negotiate price. If you are buying a condo, ask to see the Declaration, By-Laws, Rules, Budget, and Statement of Reserves of the Homeowner’s Association. The rules, for example might disallow pets or leasing the condo. The financial information (or lack thereof) might indicate that the old roof may stay old awhile longer. 

 “Pre-contract diligence” may not produce information to discourage a purchaser. On the other hand, if it does, the time, money and stress inherent in the real estate purchase/sale process can be avoided early on. Of course, the purchaser may be happy with the results. While that is “a good thing”, the diligence process, at this point should be considered as just beginning, not ending.

II. “Post Contract Diligence”

Every buyer should have the property they are buying inspected to minimize the risk that they are also buying the property’s problems. Whether or not using a broker form, the purchase agreement should, at a minimum authorize physical inspections, allow for an adequate time period for the inspections and provide remedies/contingencies to the buyer in the event any of the inspection reports reveals defects (i.e. seller’s obligation to cure defects; buyer’s right to cancel the purchase). One way to get beyond the issues with the broker forms discussed above would be to define “material defect” in terms of a dollar threshold to repair.

While a purchaser should certainly be happy if its prospective property is free of physical defects, the buyer should be equally concerned that title to the property is free of defects, or “marketable”, and seek assurance of the same. You wouldn’t buy a car with a lien against it, or if there was a question as to whether or not the seller owned it. The same basic principle is involved when buying a house, except there could be a lot more and different types of encumbrances/claims against the title. For example, your neighbor might have a recorded right to use your driveway to get to his/her house (also generally known as an “easement”).

Most contracts and forms will provide that Seller is to provide buyer with a title insurance policy at closing, but many of those forms state that the title will be subject to items of record, and facts a survey would show. So, if a search of title shows the afore-mentioned driveway easement of record, you get title to the property, but it is subject to that easement. Moreover, if a survey later shows that your neighbor is also using 10’ of your property, as its own, you could be in for costly litigation, after closing to try and get that 10’ back. Can this be prevented? Easily. All you need to do is  add to the contract, that in addition to the physical inspections, you want a Title Commitment and Survey (and a right to terminate if there are defects/encroachments). A “title commitment” is simply a contract by the insurance company to enter into an insurance policy (contract) with the buyer, whereby the title insurance company will guarantee good title, subject to exceptions it finds upon a title search of the property. If your title commitment or survey show problems such as easements and liens having been filed against the property, better to know this sooner vs. later so you can, if you need to, walk away, get your money back and find a property without title/survey issues.

One other way to ensure that you cover your diligence tracks, without having to write in the margins of a form contract is to add an Addendum to the Contract, comparable to the following, sometimes referred to as a “free look”:

“Buyer shall have a period of fifteen (15) days (the “Due Diligence Period”) from the latest date the mutually signed Agreement and this Addendum were signed by a party hereto (the “Effective Date”) to inspect the Property and to perform such investigations, review of title, survey, condominium documents (if applicable) and otherwise engage in such inspections and investigations as desired by the Buyer.  Seller agrees to cooperate with Buyer to allow Buyer and its agents to enter the Property for such inspections and investigations and to assist (without expense to Seller) in obtaining information requested by Buyer.  Should Buyer determine that the Property is not suitable for any or no reason in Buyer’s sole and absolute discretion, Buyer may terminate the Agreement by providing written notice thereof to Seller no later than the last day of the Due Diligence Period.  Upon such termination, all earnest money deposits will be promptly returned to Buyer (without further action of the parties), and the parties will have no further obligations hereunder.  Should Buyer fail to timely terminate the Agreement as described above, Buyer shall no longer have the right to terminate the Agreement under this provision.  The inspections set forth in this Addendum are in addition to, and not in lieu of, the other inspections of Buyer under the Agreement, and in the event of conflict (between any provisions of the Agreement and this Addendum concerning timing, rights of the parties and otherwise re: inspections), this Addendum shall control.

Do you have to go through the above-mentioned diligence process when buying a house or condo? Many buyers purchase property without doing any diligence, and have lived happily ever after, right? The simple answers to the above questions are no, and yes. However, if you are considering buying any real estate without a due diligence process, to quote Clint Eastwood, in the movie Dirty Harry: “You’ve gotta ask yourself one question: “Do I feel lucky? Well, do ya…” As lawyers, we only see the unlucky ones after the sale. 

Real Estate, Haunted Houses and Ohio.

Written on October 31, 2014

It seems appropriate on “All Hallows Eve” to see what Ohio real estate law and haunted houses have in common.

For example, do you need to disclose the presence of spirits (not the distilled kind) prior to the sale of your "psychologically impacted" or otherwise "stigmatized" property? Depending on the state, owners and real estate agents may or may not be required to inform prospective buyers of properties with such issues. Currently, about twenty-one states have property disclosure laws.  Even in such states, however, there is variability in what must be disclosed. In fact, some states like Florida provide, as a matter of law, what need not be disclosed. Florida specifically provides that it is not a material fact that a homicide occurred within a home, and that a failure to disclose such fact would not be actionable in a court of law. Ohio’s disclosure statute merely deals with physical defects such as roof and drainage issues.

Apart from statutory law, however, there is case law on this issue, most notably the 1991, Stambovsky v. Ackley decision out of New York State. In Stambovsky, a buyer of property claimed such property was haunted, and sued to rescind the contract of sale on the premise that the seller knew it was haunted and fraudulently failed to disclose this fact prior to the sale. The court in Stambovsky admitted that there was no duty to disclose the paranormal activities to the buyer, but, according to the court, it thought it appropriate to make an exception to the doctrine of caveat emptor because the court was “nevertheless moved by the spirit of equity [fairness] to allow the buyer to seek rescission of the contract of sale and recovery of his down payment.”

While no case directly on point in Ohio was uncovered by my research, it is interesting to speculate. Based upon case law to date, however, I think we would get the same outcome in the Buckeye State, on facts similar to the facts in Stambovsky v. Ackley.

Basically, the doctrine of caveat emptor in Ohio precludes a purchaser from recovering for a property’s defective condition if the following conditions are met:  1) the property defect is discoverable upon inspection or open observation; 2) the purchaser has an unimpeded opportunity to examine the property and 3) there is no fraud on the part of the seller. Layman v. Binns, 35 Ohio St.3d 176 (1988). 

 In the context of real estate transactions, there are basically two types of fraud: fraudulent misrepresentation and fraudulent concealment (with “fraudulent nondisclosure” sometimes being referred to as either a third type of fraud, or, a type of fraudulent concealment).  If there is no actual statement, made, there is no fraudulent misrepresentation.

 The basic elements of fraudulent concealment are (a) actual concealment; (b) of a material fact; (c) knowledge of the facts concealed; (d) intent to mislead another into relying upon such conduct; (e) actual reliance; and (f) injury resulting to such person because of such reliance.  Even without an affirmative misrepresentation or “actual” concealment, an action for fraud, commonly referred to as “fraudulent nondisclosure” is also maintainable in Ohio for failure to fully disclose material facts where there exists a duty to speak.  In such regard, the Supreme Court of Ohio has held that a “vendor has a duty to disclose material facts which are latent, not readily observable or discoverable through a purchaser’s reasonable inspection”.  Binns, 35 Ohio St.3d at 178. 

In Binns, the Ohio Supreme Court reasoned that a steel bracing supporting a defective wall was readily observable and discoverable; hence no fraud. In a 2013  decision of the Summit County Court of Appeals in Wilfong v. Petrone, 2013-Ohio-2434, the court found that a heater mounted on a ceiling of a lake house supported by stilts in a flood zone (and other observable facts) indicated that water intrusion was observable and discoverable; hence, no fraud was involved.

 In Stambovsky v. Ackley, the haunting of the house was widely known in the area and the house had even received national press attention. Accordingly, it seems that just by talking to the neighbors, and checking with “Mr. Google” online, the buyer could easily have discovered the “stigma”. Based on similar facts, it seems likely the Ohio Supreme Court would say no duty to disclose; hence, no fraud. While the Stambovsky court did not believe the “hauntings” were easily discoverable, the decision is over 20 years old, and the online information age is much more upon us now.

Even though courts have carved out exceptions to the rule, over the years, the moral of this scary story for buyers is still caveat emptor. Don’t pin your hopes on costly litigation and an equitable judge looking to make new law. Certainly hire a broker and a house inspector; but don’t end your due diligence/investigation there. Seek to know exactly what you are buying. Talk to neighbors, go online, don’t be haunted after you buy.

Selling Commercial Real Property “AS-IS” Is Not a "Get Out of Jail Free" Card

It’s not uncommon for property owners today to want to sell their real property ‘as-is” and not remain on the hook for problems that arise later. However, there are limits to what an “as-is” clause covers.

 

“As-is” clauses refer to the physical condition of the property and relieve the seller of a duty to disclose any defect in the physical condition of the property. Including an “as-is” clause does not protect a seller from claims based on fraudulent misrepresentation or fraudulent concealment. This does not mean than a buyer who gets burned on an “as-is” purchase can merely cry fraud and have his or her day in court. Nondisclosure does not equal fraud when the sale is an arm’s length commercial real estate sale and the seller has no fiduciary or other special duty that might otherwise require him or her to speak out about undisclosed conditions. There may arise, however, unique situations where the facts of the case indicate that the seller’s actions go beyond mere nondisclosure and justifies further fact finding by the court. That is exactly what happened in the following case in Washington County, Ohio.

 

In Mar Jul, LLC v. Hurst, 2013 Ohio 479 (4^th Dist. Ct. of App., Washington Cty.), Mar Jul purchased a commercial building with tenants from Hurst and the contract contained an “as-is” clause regarding the condition of the property. After the closing the buyer found several problems with the property, including insufficient water supply, the building being out of square and sinking, and materially inaccurate lease information.  Mar Jul sued Hurst alleging fraud, and related causes of action. The trial court granted summary judgment in favor of the seller based on the “as-is” clause in the purchase agreement.

 

Mar Jul appealed and the appellate court reinstated a portion of the case. The trial court’s dismissal of claims related to the physical condition of the property was upheld, but the appellate court found that Mar Jul did not have adequate opportunity to obtain the lease information regarding the building tenants and its reliance on the seller, Hurst’s, representations in the purchase agreement regarding the lease terms was not unreasonable. The court felt there were sufficient questions of fact that warranted allowing the Mar Jul its day in court to present its fraud claims regarding the leases.

 

When buyers of commercial real property are considering an “as-is” purchase, they need to negotiate adequate time for thorough due diligence prior to any closing or risk suffering substantial financial consequences. A thorough inspection of the premises and review of the leases is time and money well spent. If a seller doesn’t want to cooperate and allow for adequate inspection and review, then walk (or even run) away. Sometimes no deal is better than a bad one.

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