Caveat Emptor by Charles R. Sowell

The following article was written by Charles R. Sowell, General Counsel for the Alabama Real Estate Commission, and originally appeared in the Alabama Real Estate Commission Newsletter: UPDATE, Fall 1993.  The entire article is provided with permission of the author. 

It should be noted that Caveat Emptor and the following article relate ONLY to people buying & selling houses in the state of ALABAMA and their agents.
Caveat emptor is a latin phrase which means "let the buyer beware." This phrase is the basis of the controlling legal doctrine in the sale of used houses with material defect. It was most prominently set out by the Alabama Supreme Court in the landmark case styled Cashion v. Ahmadi, 345 So.2d 268 (Alabama 1977) and was further addressed in a case styled Ray v. Montgomery, 399 So.2d 230 (Alabama 1980). Several cases have appeared since 1980 dealing with the principle of caveat emptor. These cases taken together with Cashion and Ray set out the law in this area, and it can be a bit difficult to follow. I am going to try to simplify the cases and explain what they generally mean to sellers, agents, and buyers.
First, it is important to remember that the court in a 1971 case abolished caveat emptor in the sale of new homes, but the court has on several occasions reaffirmed that caveat emptor is the law in used home sales. Caveat Emptor does not apply to the sale of new homes.
In the Cashion case the buyer of a used home sued the seller and the listing agent after the buyer discovered that the basement leaked. The buyer was not successful because the court applied caveat Emptor and said in effect that neither the seller nor the seller's agent had an affirmative duty to disclose a material defect in the home, unless the defect was known and could adversely affect the health or safety of the buyer. Affirmative duty means voluntary disclosure without being asked. A material defect is best defined as one which would be a significant factor in a buyer's decision to buy or not buy a particular house.
This case was followed by Ray where the buyer sued the seller after discovering that the used house purchased had termite damage so extensive that it threatened the structural integrity of the house. The house was sold "as is." The court held in favor of the seller, citing caveat emptor. The court said the damage seemed sufficient to be "health or safety" consideration, but the buyer still had no case because the condition could have been discovered by the buyer with ordinary diligence by inspection of the house.
Most of of the lessons of caveat emptor should be obvious. When a buyer who finds after a sale that the used house purchased has a material defect, neither the seller nor the seller's agents will be responsible unless the buyer can prove the following:

1) There was a material defect which adversely affects health or safety;

2) The seller or the seller's agents knew of the defect before the sale;

3) The defect was such that it could not be discovered by due diligence; and

4) The house was not bought "as is."

A buyer's agent who knows of material defects is in a very different position. Agents of the buyer have a responsibility under the law of agency to tell the buyer everything known about a transaction. Caveat Emptor does not apply, and offers no protection to agents of the buyer.
It must be noted that the court has used language which seems to indicate that a known, latent defect involving health or safety might not be covered by caveat emptor. A latent defect is one that is hidden or not apparent on the surface and, therefore, cannot be discovered by due diligence.
The principles of caveat emptor do not allow a seller or the seller's agents to engage in fraud, or deceit, or to make misrepresentations about the condition of the property. The law is clear that when a buyer asks a question about a specific property condition, the answers must be truthful and complete. Likewise, a seller or seller's agents can be liable for fraud if they knowingly take actin to conceal a material fact with intent to deceive or mislead the buyer. Misrepresentations and fraudulent action are very different from simply remaining silent about matters one has no duty to disclose.
Section 24-27-36(a)(3) Code of Alabama 1975, as amended, provides that a real estate licensee may have his or her license revoked for "...failing to disclose to a potential purchaser...any latent structural defect or any other defect known to the licensee..." Does this somehow conflict with all the case law on caveat emptor? The answer is no. It is the job of the courts to flesh out and apply statutes such as this one to real life situations. The courts have spoken specifically to the duties of agents in these cases. The law is what the cases say it is. 
Finally, the purpose of this article is to state what the law is, and how it is applied to those having roles in used residential real estate transactions. The Commission is bound by the law in its enforcement actions. Real estate licensees who operate within the law, even if only the minimum requirements of the law, are free to rely upon caveat emptor in their business dealings. Many companies do not agree with the results of the principles of caveat Emptor, only accepting listings on homes where the owner consents to full disclosure about the condition of the house being sold. These companies are certainly free to exercise this business judgment.
Again, it should be noted that Caveat Emptor and the preceding article relate ONLY to people buying & selling houses in the state of ALABAMA and their agents.
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