Anybody who buys or sells residential real estate (as well as the agents and brokers who assist in structuring and evaluating offers) should be aware of the significant consequences of changes made to the standard MLS Purchase and Sale Agreement form.

It has long been the law in Washington that a seller of real estate who knows of a material defect in the property he is selling but fails to disclose its existence on the Form 17 Seller Disclosure Statement is liable to a buyer for the tort of fraud.

In 2007, the Washington Supreme Court issued its decision in Alejandre v. Bull, which concerned the types of remedies buyers could have against sellers who made misrepresentations on the Form 17. In response to the Alejandre decision, the MLS amended its Form 21 Purchase and Sale Agreement. Those amendments require that the parties to a purchase and sale agreement specify in the “Specific Terms” section of the agreement whether the seller will be liable for economic losses resulting from the seller’s negligent errors or omissions in the Form 17.

This newly created right — the ability of buyers to sue sellers for unintentional errors and omissions in the Form 17 — vastly expanded the situations in which sellers could be sued by buyers where previously they could not. Sellers need to be made aware that even innocent errors or inaccuracies are potentially actionable depending on how the MLS form is completed.

Section 9 of the Specific Terms in the MLS Purchase and Sale Agreement, reads:

Disclosures in Form 17: Buyer [ ] will [ ] will not have a remedy for Seller’s negligent errors, inaccuracies,  or omissions in Form 17.

If the parties check the “will” box in Section 9 and execute the purchase and sale agreement, the buyers then have a contractual right to recover damages from the seller for errors that were merely negligent.

A “negligent error or omission” occurs when the seller fails to disclose a defect of which a reasonable person in the seller’s position would have known, even if the particular seller completing the form 17 is unaware of the defect. So checking the first box in the revised portion of the form vastly expands the situations in which a seller could be held liable for errors and inaccuracies in the form 17.

The significance of the revisions in the purchase and sale agreement form is amplified by the fact that the Form 17 itself has not been changed. In the Form 17 itself, the seller is repeatedly instructed to complete the form based on the seller’s actual knowledge. Likewise, the Form 17 repeatedly requires the buyer to acknowledge that the Form 17 is based only on the seller’s actual knowledge, and that there are conditions that might exist of which the seller is not aware, and that accordingly the buyer should get his or her own independent inspection of the property.

Example: A person lives in a house with a main level, some bedrooms upstairs, and a partially finished basement. There are three bathrooms in the home: one upstairs, one on the main level, and one in the basement. Suppose that the owner primarily uses the bathroom that is located upstairs, and occasionally uses the bathroom on the main floor, but rarely if ever uses the bathroom in the basement. Suppose further that there are significant problems with the plumbing in the basement bathroom, but the seller does not honestly know about those problems because he simply does not use the facilities in the basement. Finally, suppose that if the seller were to use the basement bathroom, the plumbing problems would be apparent. The owner lists the house for sale, and in connection with the listing, completes the Form 17 (as he would be required by law to do). The seller indicates that to the best of his knowledge, there are no plumbing problems. A buyer receives and reviews the Form 17, makes an offer, and ultimately purchases the house. Shortly after closing, the Buyer uses the restroom in the basement, and discovers the significant plumbing problems.

 

Prior to the amendment of the purchase and sale agreement form, the purchaser would have no basis to sue the seller unless there was evidence that the seller had actual knowledge of the plumbing problems which the seller failed to disclose.

In the revised purchase and sale agreement form, however, the result would be different if the parties agreed that the buyer would have a remedy for seller’s negligent errors, inaccuracies, or omissions in the Form 17. That is because the buyer in the example above could make a valid argument that even if the seller did not actually know of the plumbing problems, a reasonable person in the seller’s position would have known of the problems. Hence, in the Form 17, the seller denied that there were plumbing problems, even though it turned out that there were plumbing problems. The error or inaccuracy, while not intentional, was arguably negligent.

Unfortunately, the previous rule of thumb — that sellers completing a Form 17 are on safe ground as long as they complete the Form 17 to the best of their actual knowledge — no longer holds true.

If you are contemplating the purchase or sale of real estate, it is imperative that you consult with someone who has expertise in the area who can advise you how best to structure your agreement. Proper precautions on the front end of a transaction can save you significant expense (and grief) after the transaction is complete.

Look for upcoming articles by David Ruzumna on how best a seller should complete a Form 17, and what advice an agent should give when discussing the Form 17 with a seller.