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.”

Zoning 101, Grandfathered Uses and Ohio Liquor Control Law vs. Municipal Zoning Ordinances

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

When buying a particular piece of real estate, it is not enough to understand its physical and economic characteristics and constraints. The prospective buyer of realty must also make itself aware (prior to purchase), that there may be controls, or limits on how a particular property can be used. Land use is generally controlled and regulated through public controls (e.g., zoning laws) and private controls via deed restrictions. Generally, zoning ordinances are local laws regulating and controlling the use of land and buildings, within certain zones or districts. Typical zoning ordinances are those which regulate lot size, building heights, setbacks (i.e., minimum distances of structures from streets and other structures) and type of use allowed (e.g., residential, commercial, industrial or agricultural).

The potential real estate buyer can protect itself from zoning surprises by: 1) investigating zoning as part of its due diligence; 2) insisting on a contingency in the purchase agreement that its intended use be permitted under current zoning; and 3) purchasing a zoning endorsement as part of an owner’s title insurance policy. Otherwise, for example, the buyer of a one-half acre lot in Pepper Pike may discover that it cannot build a house on less than an acre; and a buyer of a warehouse building in an area of Mentor zoned “M-2” (manufacturing) may discover it cannot renovate same for a restaurant.

What if a prospective buyer does all of its required diligence and its use complies with zoning at the time of purchase, but a municipality’s zoning laws change after the purchase, rendering the use, now “nonconforming?” A nonconforming use is a use that was legal at the time it was created but which has since become disallowed because of a later modification or adoption of a zoning ordinance.

Generally, zoning ordinances and land use regulations are not supposed to be retroactive; they ordinarily apply only to new or modified uses of land. The Supreme Court of Ohio has held that land-use restrictions may not apply retroactively to prohibit the lawful use of real property, unless such use creates a nuisance affecting the public health, safety, morals or general welfare.  See City of Akron v. Chapman,116 N.E.2d 697(Ohio 1953). Accordingly, when a new zoning law restricts or outlaws existing uses that would otherwise be lawful, these nonconforming uses are “grandfathered” and “may be continued, although such use does not conform with the provisions of such ordinance or amendment…” See O.R.C. § 713.15.

However, this protection is not absolute. There are at least two significant limitations. First, if the use is abandoned, it may be lost. Second, most zoning ordinances provide that while nonconforming uses may continue in their present form and scope, they will not be allowed to expand.

In the recent case of Mentor v. Sines, 2015-Ohio-5546, neither party took issue with the general rule of “grandfathering.” Additionally, both parties agreed upon the theory that a non-conforming use may not be expanded. However, both sides disagreed as to whether or not the store owner’s (Sines’s) sale of alcoholic beverages was an unlawful expansion of the grandfathered use of retail sales (of gasoline, automotive and grocery products) in an area newly zoned residential, or just the addition of a different kind of carry out beverage to inventory.

The facts are as follows: Sines Inc. (“Sines” or “Appellant”) owns a gas station on Johnnycake Ridge Road in Mentor, Ohio. Appellant's station has service bays, a retail sales area, an office, two gas pumps and a second floor apartment. Sines has operated the station since the early 1960s, before the property became a part of the City of Mentor, and before the city enacted a zoning ordinance calling for residential use only in an area that includes the gas station. In 2002, Sines applied for but was denied a variance to enlarge the retail area of the station. In 2012, Sines applied for and was granted a permit (from the Ohio Division of Liquor Control) for the carryout sale of beer, wine and pre-mixed beverages. Mentor appealed the division's decision to the Ohio Liquor Control Commission, which affirmed the division's order. The city thereafter appealed the commission's order to the court of common pleas and that court reversed the commission's order, claiming that the sale of alcoholic beverages was an unlawful extension of Sines' non-conforming use (of a gas station with retail sales of gasoline, automotive and [non-alcoholic] grocery type products). Sines than appealed the trial court’s decision to the Tenth District Court of Appeals of Ohio.

Sines alleged that the sale of alcoholic beverages was not an unlawful extension of its existing, non-conforming use, but merely an extension of inventory; from milk and coke bottles, to milk, coke, beer and wine bottles.  Sines also contended that its “inventory vs. use expansion” would neither increase traffic, nor create any concern for the health, safety or welfare of the community.

Mentor argued that the sale of intoxicating beverages by Sines, pursuant to its Ohio liquor permits, constitutes an expanded use of the property, based on beverages already sold by Sines at that location,  and that the city’s ordinance precludes such an expansion of use. Pursuant to Section 1139.01(b) of the City of Mentor Ordinances, “a non-conforming use shall not be extended or enlarged after passage of this Zoning Code by … the addition of other uses, of a nature which would be prohibited generally in the district involved.” The city also argued that increased activity at the location would create safety concerns.

In arriving at its decision to overturn the trial court’s ruling, the 10^th District Court of Appeals first looked to precedent (prior case law on point). Citing cases from the 12^th, 2^nd and 8^th appellate districts, the court concluded: "[a]n increase in the volume of business alone does not constitute an unlawful extension of a nonconforming use where the nature of the land is virtually unchanged," (citing Hunziker v. Grande, 8 Ohio App.3d 87, 89 (8th Dist.1982) and that "Nonconforming use restrictions are meant to apply to the area of the use and not to inventory," (citing State ex rel. Zoning Inspector of Montgomery Cty. v. Honious, 20 Ohio App.2d 210, 212 (2d Dist.1969).

The court of appeals in Sines emphasized, however, that it did not need the benefit of precedent to decide the case, because they were dealing with the sale of  state controlled liquor sales, and in such matters they need only follow “clear instruction from the legislature in O.R.C. 4303.292. “

  

O.R.C. 4303.292 provides:

(A) The division of liquor control may refuse to issue, transfer the ownership of, or renew, and shall refuse to transfer the location of, any retail permit issued under this chapter if it finds * * *: (2) That the place for which the permit is sought: (a) does not conform to the building, safety, or health requirements of the governing body of the county or municipal corporation in which the place is located. As used in division (A)(2)(a) of this section, "building, safety, or health requirements" does not include local zoning ordinances…”

In other words, according to the court in Sines,“a municipality may not regulate the sale or use of alcoholic beverages at these operations in the guise of zoning.” Or, stated another way, state liquor control law trumps city municipal zoning law. Accordingly, the appellate court in Sines held that the common pleas court impermissibly used Mentor's zoning ordinance as a basis for reversal (of the granting of liquor permits), contrary to R.C. 4303.292(A)(2)(a).

So what is the moral of this story? If you are buying real property, understand and recognize that zoning laws limit use of property, and accordingly, make sure before you buy that your intended use is lawfully permitted. If you own property that is grandfathered, don’t abandon the grandfathered use, and understand that approval of expansion plans may result in an increase in size of your building, but (without consent of the municipality) may not increase the size of your nonconforming use.  Finally, don’t forget that local “grandfathering laws” may be subject to and usurped by the laws of a higher authority (i.e., state and federal governments).

As With Many Things in Life, Timing is Everything.

If I had to pick one issue that perpetually appears in term sheets and letters of intent negotiated by clients on real estate purchases, it is the issue of timing. In short, the self-imposed deadlines agreed to by the parties are often disconnected with reality.

Understandably, the seller in a real estate transaction wants to close as soon as possible, and the buyer may also be faced with pressures that dictate a tight deadline. However, there are certain realities that come into play and cannot, or should not, be ignored.

First, a buyer needs to allow adequate time to conduct a thorough diligence review of the property. In some counties, a title examination might be completed in a week, depending on the time of year, but more often than not, plan on at least two weeks. In certain counties it can take even longer, or if the title on a particular parcel or parcels is complicated more time will be required by the title agent. Timing for a survey depends on the type of survey. A mortgage location survey can be completed in the one to two week time frame and typically costs a few hundred dollars. While a location survey may be sufficient to remove the survey exception from the title policy, it doesn’t provide all of the information that an ALTA/NSPS survey covers. Also, most lenders, depending on the size of the mortgage loan, will require the more comprehensive ALTA/NSPS survey. This can take several weeks (more than 30 days) to be completed; particularly if being completed during a harsh winter.

All purchase agreements provide a limited time frame in which a buyer may object to information in the title report. If there is any likelihood that a survey will be completed as part of buyer’s due diligence, then buyer’s objection period should not start until buyer has received both the title report and the survey. It is more efficient to review these two items in tandem.

Environmental diligence is another key item that can slow down a deal. A Phase I environmental review can take 4-5 weeks as well. If the Phase I report identifies any significant issues that warrant testing or further review, then several more weeks will be required. Allow for extensions of the diligence period to complete this review if needed.

Second, if the purchase will involve financing, allow time for the lender to conduct its diligence and underwriting on the loan. In addition to title, survey and environmental, a lender will typically require an appraisal, zoning letters, and other financial and leasing information on the borrower and the property.  Appraisals can take a few weeks and zoning letters may not be quickly obtained depending on the responsiveness of the local government providing the letter. Keep in mind that an older property may be categorized as ‘legal, nonconforming’. This means the zoning has changed but the property is grandfathered and not held to the new zoning requirements. This often happens with older multi-family residential properties or older office buildings where local codes have changed requiring more parking spaces than were required when the building was constructed.

Additional work is needed in these situations to determine what will happen if there is a casualty that damages all or a substantial portion of the property.  In many instances the local municipal code (or the state statute, if the local government defers to Ohio law) allows a property to rebuilt along its same footprint and retain its ‘legal, nonconforming’ status so long as the property is rebuilt within certain time frames. It can be as short as 6 months or as long as 2 years. A lender will want to confirm what is or is not required in these situations (as should any prudent buyer) and may require the buyer to carry additional insurance to cover any changes in the zoning and building codes that would drastically impact the cost of rebuilding after a casualty.

Keeping all of the foregoing in mind, potential buyers should allow sufficient time in their purchase agreements so they do not have to go back to the seller and request (frequently at significant cost) extensions of time to close.  Third party providers and lenders are not bound by the deadlines in a purchase agreement and will take the time they require to properly complete their work. Acknowledging that reality can spares parties to an agreement a lot of heartburn.
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