Seller Beware: Understanding the Obligations of a Seller of Residential Real Estate under Indiana Law
Over the last several years, we have seen an increase in the amount of litigation initiated by buyers against sellers of residential real estate. Much of this litigation involves a buyer alleging that a seller committed fraud by failing to fully disclose defects in the Seller’s Residential Real Estate Disclosure Form. While both buyers and sellers of residential real estate are becoming increasingly aware of the general requirement that a seller must truthfully fill out a Seller’s Residential Real Estate Disclosure Form when selling a residential property, buyers and sellers harbor some misunderstandings concerning when a seller is required to provide a buyer with a Seller’s Residential Real Estate Disclosure Form.
Indiana Courts generally apply the rule of “caveat emptor,” or “buyer beware,” in connection with sales of residential real estate. This common law rule puts the burden on the buyer to conduct due diligence when purchasing a property and removes from the seller any obligation to voluntarily disclose conditions in the property. The Indiana General Assembly, however, through in Indiana Code § 32-21-5, has established one significant exception to the buyer beware rule. That exception takes the form of a Seller’s Residential Real Estate Disclosure Form, a document that, subject to certain exceptions detailed below, must be truthfully filled out by a seller of residential real estate in connection with the sale.
A seller of residential real estate that fails to truthfully fill out a Seller’s Residential Real Estate Disclosure Form, based on his or her actual knowledge at the time of completing the same, is potentially liable for fraud. Further, given that the majority of purchase agreements used in connection with the sale of residential real estate contain a prevailing party attorney’s fees provision, a seller is potentially liable for not only actual damages but also the attorney’s fees incurred by a buyer in pursuing the fraud action against the seller.
The general rule establishes that a seller must provide a buyer with a Seller’s Residential Real Estate Disclosure Form in the event of a sale, exchange of, an installment sales contract, or a lease with an option to buy residential real estate that contains not more than four residential units. There are some exceptions to the general rule, but those exceptions are fairly narrow. Exceptions include transfers of residential property in the administration of an estate, a foreclosure, or bankruptcy; transfers of one co-owner to another co-owner; and transfers to a spouse. Notably, there is no exception for the sale of a residential property by a seller that never lived in the home being sold.
One other common misconception with respect to exempt transfers concerns the sale of a residential property where the buyer is purchasing the property “as is” and has waived his right to inspect the property. The Supreme Court of Indiana has held that such transfers are not exempt from the requirement of providing a buyer with a truthfully completed Seller’s Residential Real Estate Disclosure Form. In Johnson v. Wysocki, 990 N.E.2d 456 (Ind. 2003), the Indiana Supreme Court made clear that a seller’s affirmative duty to disclose any known material latent defects exists even when a buyer waives the right to inspection or signs an “As Is” Addendum. See id. at 464-66. In fact, the Indiana Supreme Court and the Indiana Court of Appeals, in cases such as Johnson and Boehringer v. Weber, 2 N.E.3d 807 (Ind. Ct. App. 2014), have recognized that fraudulent misrepresentation suits generally involve situations in which the buyer waived his right to an inspection or agreed to purchase property “as is.” In this respect, the courts recognize that reliance on a seller’s misrepresentation that there are no known material latent defects is precisely what induces a buyer to waive an inspection. See Johnson, 990 N.E.2d at 466; Boehringer at 812. The Supreme Court explained that “[t]he General Assembly has simply relieved the buyer of needing to initiate a specific inquiry in order to get honest disclosure about significant features of a purchase and, by the same token, it has forced the seller’s affirmative duty to initiate disclosure—and therefore full and honest disclosure—about those same features.” Johnson, 990 N.E.2d at 465.
As detailed above, the exceptions to the general requirement that a seller of residential real estate must provide a buyer with a Seller’s Residential Real Estate Disclosure Form are very limited. Sellers of residential real estate and residential real estate brokers should be sure to familiarize themselves with the requirements of Ind. Code § 32-21-5 to prevent a situation where a seller incorrectly asserts that a sale of residential real estate is exempt from the same.
For questions regarding the sale of a property, please contact the author Mark Bains or a member of Barrett McNagny's Real Estate Law team.