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Monday, October 30, 2006

A SCARY STORY ABOUT RESIDENTIAL REAL PROPERTY DISCLOSURES

It is common knowledge that, with few exceptions, the seller of residential real property is required by law to provide the buyer with a list of 22 possible “material defects,” indicating with a “yes” or a “no” whether the seller has knowledge of the defect. Many of these are familiar at this point: knowledge of flooding, leaking, septic issues, underground storage tanks, etc. But what about specters, banshees, apparitions or poltergeists??? Wouldn’t the known presence of otherworldly entities constitute a material defect? One New York appellate court thinks so, and one terrified and unhappy buyer was permitted to rescind a purchase contract because of it.

Before looking at this very interesting case from New York, though, this would be an excellent opportunity for a quick overview of the Illinois Residential Real Property Disclosure Act, which has been on the books since 1994. Some aspects of the Act can seem a bit counterintuitive.

The Act applies to any transfer or exchange of residential real property, including not only sales but also options to purchase, ground leases and installment land sales contracts. However, sellers are exempt from making the disclosures under certain circumstances. For example, if the transfer is pursuant to a court order, such as in probate, the seller is exempt. Likewise, if a homeowner is deeding the property to a mortgage lender to avoid foreclosure. If the transfer is to someone who is already a co-owners, or if it is from one spouse to another, there is no disclosure requirement. There are other, similar exceptions. But one other exception that is worth noting comes up regularly in residential real property transactions: the seller of newly constructed property is exempt from disclosure. So builders of new homes, condominiums and coop properties are exempt.

What the Act requires is that the seller provide the buyer with the familiar form that lists 22 possible defects, in the nature of those described above, with a “yes,” “no” and “n/a” column to the left. The Act specifically requires the seller to complete all 22 items that are applicable. The seller must check “yes” for any listed defect of which he or she has actual “knowledge.” The word “knowledge” is placed in quotes because a seller can know of a past defect but can still check “no” if he or she reasonably believes the defect has been remedied or if he or she has been so informed by a licensed engineer, land surveyor, structural pest control operator, or contractor, where the matter is within the scope of said expert’s occupation.

One important aspect of the Act is that it requires that the disclosure be made by use of the form we all know. Even if the seller otherwise disclosed the defect and the buyer admits that he or she had actual knowledge thereof prior to sale, the seller remains liable for damages under the act if he or she failed to use the form.

The Act requires that the seller deliver the signed disclosure to the buyer prior to contract formation, but the disclosure of a material defect does not prevent the parties from entering into a contract or from closing on that contract. However, if the disclosure comes after the parties have entered into a sales contract, the buyer has 3 business days to terminate, in which case any earnest money or down payment must be returned.

If a seller violates the Act by either failing to provide the disclosures or by making disclosures that are untruthful, the seller is liable for any damages that the buyer can prove resulted directly from the seller’s violation of the Act. In the law, these are termed “actual damages.” In addition, the buyer can recover court costs and attorney fees. What this might normally entail is the seller being liable to pay the buyer’s bill for remediating whatever defect went undisclosed.

A buyer must file any suit under the act within one year of possession, occupancy or recording of deed, whichever is earlier. However, the passing of one year does not relieve the seller of all possible liability for his or her failure to disclose known defects. This is because the Act does not limit other legal remedies the buyer may have, such as breach of contract or fraud, which have much longer statutes of limitation.

This is one other aspect of the Act that can operate a bit counter-intuitively. As stated, the Act does not impair other legal remedies a buyer may have against a seller arising out of the transaction. Therefore, if a buyer can prove that some un-listed material defect existed, that the seller knew about it but concealed it, and that the defect, if disclosed, might have caused the buyer to back away, then the buyer may have a cause of action for fraudulent conveyance, even though the seller provided the form disclosure. For example, mischievous spectral entities are not on the Act’s list of know defects. Yet, their playful misdeeds have undone at least one real estate transaction.

In the New York case of Stambovsky v. Ackley, a buyer sued a seller and the seller’s broker when the buyer “to his horror, discovered that the house he had recently contracted to purchase was widely reputed to be possessed by poltergeists, reportedly seen by defendant seller and members of her family on numerous occasions over [many] years.”

The case was quickly but “reluctantly” dismissed by a lower court that held the buyer had no remedy at law. However, a court of review found that the facts of the case “clearly warrant[ed] a grant of equitable relief to the buyer who, as a resident of New York City, [could not] be expected to have any familiarity with the [local] folklore.”

The house in question was an elderly, 18-room Victorian mansion at 1 Laveta Place, Nyack, New York, reportedly reminiscent of the home at 1313 Mockingbird Lane once occupied by Herman and Lilly Munster. Nyack, New York, for those who don’t know, is located about 20 miles north of New York City, directly across the Hudson River from the real Sleepy Hollow that inspired Washington Irving’s famous Halloween tale of the same name.

From the late 1960s to 1991, the house was occupied by the Ackley family. During their years there, they reported many strange experiences and sightings. The Ackleys believed the house to be occupied by three ghosts; an old man, a lady and a Revolutionary War soldier, all of them good-natured and friendly.

Mrs. Ackley often spoke publicly about the house’s other-worldly occupants. So much so that the house was well known as a haunted place, finding its way into news print and a feature article in Reader’s Digest, one of the worlds most widely-read publications.

According to the Ackleys, the ghosts were a lively crew. There were the usual swaying lamps, footsteps on unoccupied stairs, and closing doors. More unusual was the ghost (they weren’t sure which one) who would wake the children for school by shaking their beds. During spring break, Mrs. Ackley would loudly announce that it was spring break and no one needed to get up for school, and the shaking would stop. Mrs. Ackley claimed to have actually conversed with one ghost, the dapple-cheeked old man, while painting a room during substantial renovations. She asked if they liked what the family was doing with the house, and he reportedly nodded yes. The ghosts also loved to give gifts, often leaving baby rings and small silver objects with the family’s other personal effects.

When the Ackleys listed the house for sale in 1991, Jeffery Stambovsky, a New York City Bond trader, fell in love with it and offered $650,000, which the Ackleys accepted. Shortly thereafter, Mr. Stambovsky was visiting the house when a neighbor walked by and asked, “so, you’re buying the haunted house?” Mr. Stambovsky investigated further and discovered the house’s paranormal reputation. Although he did not believe in ghosts, his pregnant wife did and refused to move in.

Mr. Stambovsky cancelled the closing and demanded his deposit back. “We were the victims of ectoplasmic fraud,” he would tell the press. The Ackleys refused, asserting the well-known legal maxim “caveat emptor.”

Thus followed the law suit. While the higher court held that the Stambovsky’s “[hadn’t] a ghost of a chance” of recovering from the broker, it held that the Ackleys were equitably estopped from denying that the house was haunted, due to the fact that they had so publicly promoted it as such over a long period of time. As a result, the court reasoned, the Ackleys had caused the house to acquire a reputation that could affect its resale value, and which a non-local buyer would be unable to discover upon reasonable inspection. Regarding conditions of this nature the court asked, “who you gonna’ call?”

Therefore, the court stated that it was “moved by spirit of equity” to allow the buyer to seek rescission of the sale contract, holding as follows:

“Applying the strict rule of caveat emptor to a contract involving a house possessed by poltergeists conjures up visions of a psychic or medium routinely accompanying the structural engineer and the Terminix man on an inspection of every home subject to a contract of sale. It portends that the prudent attorney will establish an escrow account lest the subject of the transaction come back to haunt him and his client - or pray that his malpractice insurance coverage extends to supernatural disasters. In the interest of avoiding such untenable consequences, the notion that a haunting is a condition which can and should be ascertained upon reasonable inspection of the premises is a hobgoblin which should be exorcized from the body of legal precedent and laid quietly to rest.”


Prepared by: Douglas Oliver © 2006. Staff Attorney
Freedman, Anselmo, Lindberg & Rappe, LLC.
Thomas Anselmo, Real Estate Practice Partner

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