Psychological Faults on Residential Real Estate Left to Caveat Emptor – Commentary

Introduction
Facts
Decision
Comment

Introduction

Applicable law may often require a seller of residential real estate to disclose known material defects to prospective buyers. Although the disclosure of material defects usually involves structural and physical defects, some buyers may be more concerned about psychological and reputational defects. Recently in Milliken vs. Jacobo (2012 PA Super 284) Pennsylvania Superior Court considered whether psychological damage caused to a residential property by the past occurrence of a home murder-suicide in the property was considered a material defect that should have been disclosed by the seller to buyer.

Facts

A buyer and seller entered into a purchase agreement for the sale of the seller’s residential property in which a murder-suicide had previously occurred. Neither the purchase contract nor the information statement given by the seller to the buyer mentioned murder-suicide as a known material defect. Shortly after purchasing the property, the buyer became aware of the murder-suicide and sued the seller alleging that the seller failed to disclose the defect.

The trial court ruled that the seller had no duty to disclose the murder-suicide and granted the seller’s motion for summary judgment.

Decision

On appeal, the purchaser argued that the murder-suicide was a material defect because it had a material adverse effect on the value of the property. The court said that under Pennsylvania’s Real Estate Seller Disclosure Law, a “material defect” is defined as “a problem with residential real estate or any part of it that would have a material adverse effect on the value of the property or which involves an unreasonable risk to persons on the property”. The buyer said the term “material defect,” as defined by law, required the seller to disclose the murder-suicide to a residential property buyer. The Pennsylvania Superior Court disagreed and said applicable Pennsylvania law identifies particular categories of defects that must be disclosed to the buyer, all of which relate to structural problems, legal deficiencies or to the presence of hazardous materials. The appeals court further stated that the legislature clearly did not require the disclosure of psychological harm to residential property because the legislature limited the required disclosures to the aforementioned categories.

The appeals court listed three additional problems with the buyer’s argument:

  • The court focused on the question of how far the seller had to be from the date of the murder for disclosure to be required. The court emphasized that the psychological (reputational) damage inflicted on a residential property by the occurrence of events such as a murder will diminish over time as the memory of the murder fades from public knowledge. The court further held that requiring a seller to disclose this information could then force the seller to sell the residential property below market value, allowing the buyer to realize a bargain when the value of the ownership increases after the memory of the murder fades. The court further pointed out that the passage of time does not have a similar healing effect on structural damage, legal deficiencies or hazardous materials.
  • The court wondered how a specific monetary value could be assigned to the psychological damage caused by a murder-suicide when the psychological effect varies so much from person to person.
  • The court felt that requiring disclosure of a murder-suicide would create a long list of other, more subjective elements that would also have to be disclosed. The court was not inclined to create such a slippery slope and reiterated that sellers should only be required to disclose material defects relating to the physical structure of a residential property, legal deficiencies on the property and hazardous materials. who are there.

Comment

The Pennsylvania Superior Court’s interpretation of applicable Pennsylvania law places the responsibility on the buyer to determine whether the purchased residential property suffers from psychological defects or is stigmatized in any way.

Other states, including Illinois and North Carolina, have similar laws regarding defects that a seller of residential property is required to disclose to potential buyers. For example, the Illinois Residential Real Property Disclosure Act(1) requires sellers of residential property to disclose material defects to buyers and defines the term “material defect” as a condition that would have a material adverse effect on the value of residential real estate or which would materially harm the health or safety of future occupants. While the definition of “material defect” under applicable Illinois law states that any defect that substantially affects the value of the property must be disclosed, the law is very specific when it comes to objective matters. which must be disclosed. Under Illinois law, sellers of residential properties in Illinois must disclose a specific list of 22 items, all of which are related to structural issues, legal deficiencies, or hazardous materials. Perhaps more telling, the Illinois Real Estate Licensing Act of 2000(2) strengthens the state’s position on disclosure of non-physical defects of residential real estate by removing liability from real estate licensees for failing to disclose “that the property was the site of an act or event that had no effect on the physical condition of the property or its surroundings or the structures thereon.” Similarly, the North Carolina Residential Property Disclosure Act(3) requires a seller of residential property to disclose structural and legal defects, but does not specifically address psychological defects affecting a residential property.

Some other states, including New York and Texas, have gone further and enacted laws specifically excluding certain psychological defects from matters that a seller of residential property is required to disclose to buyers. Under applicable New York law,(4) for example, “it is not a material defect…that the property is, or is suspected to have been, the site of a homicide, suicide or other accidental or natural death, or any crime punishable as a felony”. While New York law allows the buyer to submit a written request to the seller of residential property for this information, the seller is not obligated to respond to the request. Similar to New York, Texas applicable law(5) provides that a seller of residential property is not required to disclose “information relating to whether a death from natural causes, suicide or accident unrelated to the condition of the property has occurred on the property”. However, the law does not address disclosure of a felony death.

However, under applicable California law(6) a seller of residential property is required to disclose the death of an occupant of the real estate property or the manner of death if the death occurred within three years of the date the buyer offers to purchase the real estate property.

Although applicable law often requires sellers of residential real estate to disclose physical defects in the property, such as the court of Milliken held, psychological defects are usually left to caveat emptor.

For more information on this, please contact Elizabeth Dominguez or Devan H Popat of Katten Muchin Rosenman LLP by phone (+1 312 902 5200), fax (+1 312 902 1061) or email ([email protected] Where [email protected]).

Endnotes

(1) 765 Ill Comp Stat 77 (2012).

(2) 225 Ill Comp Stat 454 (2012).

(3) NC Gen Stat § 47E (2012)

(4) NY Real Prop Law § 443-a (McKinney 2012).

(5) Tex Prop Code Ann § 5.008 (West 2012).

(6) Cal Civ Code § 1710.2 (West 2012).

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