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To receive full credit, identify the section of the law that applies and/or refer to the page in the text, or the precise subsection in the text, you are using as the basis for your answer. Your answer should be based on the law as expressed in the text. Answer the parts of the question sequentially and refer to each section of your answer by the appropriate letter, e.g. (1), (2), (3), etc.
Assume the following:
Phillip agrees to sell his mixed-use property in Bedford Falls to Nancy for $2,000,000. Phillip is aware that there was an oil spill on the property, which can only be discovered by drilling down thirty feet into the soil. Phillip says nothing about this to Nancy. In addition, there is a bed-bug infestation. Phillip and Nancy enter into a contract of sale but there are several contingencies. Nancy is applying for a mortgage from Bailey Building & Loan (BBL) at a rate of interest of 5%. Also, the contract is contingent on an assessment of the condition of a 30-year-old oil burner, which must show it is in good working order. Also, there is a mechanics lien against the property for $40,000 for a brick pointing that Phillip disputed with the contractor because he thought it was not done properly. Nancy has deposited 20% of the purchase price in an escrow account and a closing date is set for three months in the future. Nancy fails to have the inspection performed and in addition, BBL can only offer her a mortgage at a 6% rate.
(1)Based on the above facts, on which legal bases can Nancy cancel the contract and why? You must recite the legal principle or example in the text to receive credit for your answer.
(2)What if the lien was not discovered before the closing on the property? How could Nancy have protected herself? Explain.
(3)What if Nancy went through with the sale anyway, and only discovered the oil spill ten years after the closing. Would she have any recourse? Explain the underlying legal principle and support your answer by citing to the text.
(4)Assume Nancy does not remediate the conditions in the building. Could her residential tenants sue her?
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Chapter 28: Real Property and Landlord-Tenant Law: 28–3a Real Estate Sales Contracts
Book Title: Business Law: Commercial Law for Accountants
Printed By: Hilmi Durmaz (hdurmaz1@ramapo.edu)
© 2018 Cengage Learning, Cengage Learning
28–3a Real Estate Sales Contracts
In some ways, a sale of real estate is similar to a sale of goods because it involves a
transfer of ownership, often with specific warranties. A sale of real estate, however, is a
more complicated transaction that involves certain formalities that are not required in a sale
of goods. In part because of these complications, real estate brokers or agents who are
licensed by the state assist the buyers and sellers during the sales transaction.
Usually, after substantial negotiation (offers, counteroffers, and responses), the parties enter
into a detailed contract setting forth their agreement. A contract for a sale of land includes
such terms as the purchase price, the type of deed the buyer will receive, the condition of
the premises, and any items that will be included.
Unless the buyer pays cash for the property, the buyer must obtain financing through a
mortgage loan. Real estate sales contracts are often contingent on the buyer’s ability to
obtain financing at or below a specified rate of interest. The contract may also be contingent
on certain events, such as the completion of a land survey or the property’s passing one or
more inspections. Normally, the buyer is responsible for having the premises inspected for
physical or mechanical defects and for insect infestation.
Closing Date and Escrow
The contract usually fixes a date for performance, or closing (An argument made at a trial
after the plaintiff and defendant have rested their cases. Closing arguments are made prior
to the jury charges.) , that frequently is four to twelve weeks after the contract is signed. On
this day, the seller conveys the property to the buyer by delivering the deed to the buyer in
exchange for payment of the purchase price.
Deposits toward the purchase price normally are held in a special account, called an
escrow account (An account generally held in the name of the depositor and escrow
agent. The funds in the account are paid to a third person on fulfillment of the escrow
condition.) , until all of the conditions of sale have been met. Once the closing takes place,
the funds in the escrow account are transferred to the seller.
Marketable Title
The title to a particular parcel of property is especially important to the buyer. A grantor
(seller) is obligated to transfer marketable title (Title to real estate that is reasonably free
from encumbrances, defects in the chain of title, and other matters that affect title, such as
adverse possession.) , or good title, to the grantee (buyer). Marketable title means that the
grantor’s ownership is free from encumbrances (except those disclosed by the grantor) and
free of defects.
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If the buyer signs a purchase contract and then discovers that the seller does not have a
marketable title, the buyer can withdraw from the contract.
Example 28.13
Chan enters into an agreement to buy Fortuna Ranch from Hal. Chan then
discovers that Hal has given Pearl an option to purchase the ranch and the option
has not expired. In this situation, the title is not marketable, because Pearl could
exercise the option and Hal would be compelled to sell the ranch to her. Therefore,
Chan can withdraw from the contract to buy the property.
The most common way of ensuring title is through title insurance (Insurance commonly
purchased by a purchaser of real property to protect against loss in the event that the title to
the property is not free from liens or superior ownership claims.) , which insures the buyer
against loss from defects in title to real property. When financing the purchase of real
property, almost all lenders require title insurance to protect their interests in the collateral
for the loan.
Implied Warranties in the Sale of New Homes
The common law rule of caveat emptor (“let the buyer beware”) held that the seller of a
home made no warranty as to its soundness or fitness (unless the contract or deed stated
otherwise). Today, however, most states imply a warranty—the implied warranty of
habitability (An implied promise by a seller of a new house that the house is fit for human
habitation. Also, the implied promise by a landlord that rented residential premises are
habitable.) —in the sale of new homes.
Under this warranty, the seller of a new house warrants that it will be fit for human habitation
even if the deed or contract of sale does not include such a warranty. Essentially, the seller
is warranting that the house is in reasonable working order and is of reasonably sound
construction. The seller can be liable if the home is defective. In some states, the warranty
protects not only the first purchaser but any subsequent purchaser as well.
Seller’s Duty to Disclose Hidden Defects
In most jurisdictions, courts impose on sellers a duty to disclose any known defect that
materially affects the value of the property and that the buyer could not reasonably discover.
Failure to disclose such a defect gives the buyer a right to rescind the contract and to sue
for damages based on fraud or misrepresentation.
There is normally a limit to the time within which the buyer can bring a suit against the seller
based on the defect. Time limits run from either the date of the sale or the day that the buyer
discovered (or should have discovered) the defect.
Example 28.14
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Ian Newson partially renovates a house in Louisiana and sells it to Jerry and Tabitha
Moreland for $87,000. Two months after the Morelands move in, they discover
rotten wood behind the tile in the bathroom and experience problems with the
plumbing. The state statute specifies that the Morelands have one year from the
date of the sale or the discovery of the defect to file a lawsuit. Therefore, the
Morelands must file suit within twelve months of discovering the defects (which
would be fourteen months from the date of the sale).
In the following Spotlight Case, the court had to decide whether the buyer of a house had
the right to rescind the sales contract because he was not told that the house was allegedly
haunted.
Spotlight on Sales of Haunted Houses: Case 28.2
Stambovsky v. Ackley
Supreme Court, Appellate Division, New York, 572 N.Y.S.2d 672, 169 A.D.2d 254 (1991).
Background and Facts Jeffrey Stambovsky signed a contract to buy Helen Ackley’s home in
Nyack, New York. After the contract was signed, Stambovsky discovered that the house was
widely reputed to be haunted. The Ackley family claimed to have seen poltergeists on
numerous occasions over the prior nine years.
What are poltergeists?
The Ackleys had been interviewed and quoted in both a national publication (Reader’s
Digest) and the local newspaper. The house was described as “a riverfront Victorian (with
ghost)” when it was part of a walking tour of Nyack, New York. When Stambovsky
discovered the house’s reputation, he sued to rescind the contract and recover his down
payment. He alleged that Ackley and her real estate agent made material
misrepresentations when they failed to disclose Ackley’s belief that the home was haunted.
What are some examples of “material misrepresentations”?
What does rescinding a contract mean?
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Ackley argued that, under the doctrine of caveat emptor, she was under no duty to disclose
to the buyer the home’s haunted reputation. The trial court dismissed Stambovsky’s case.
Stambovsky appealed.
In the Language of the Court
Justice RUBIN delivered the opinion of the court.
****
While I agree with [the trial court] that the real estate broker, as agent for the seller, is under
no duty to disclose to a potential buyer the phantasmal reputation of the premises and that,
in his pursuit of a legal remedy for fraudulent misrepresentation against the seller, plaintiff
hasn’t a ghost of a chance, I am nevertheless moved by the spirit of equity to allow the
buyer to seek rescission of the contract of sale and recovery of his down payment. New
York law fails to recognize any remedy for damages incurred as a result of the seller’s mere
silence, applying instead the strict rule of caveat emptor. Therefore, the theoretical basis for
granting relief, even under the extraordinary facts of this case, is elusive if not ephemeral
[short-lived].
What was the issue in this contract rescission dispute?
****
The doctrine of caveat emptor requires that a buyer act prudently to assess the fitness and
value of his purchase and operates to bar the purchaser who fails to exercise due care from
seeking the equitable remedy of rescission. * * * 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 Terminix man on an inspection
of every home subject to a contract of sale. It portends [warns] 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 exorcised from the body of legal precedent and
laid quietly to rest. [Emphasis added.]
****
In the case at bar [under consideration], defendant seller deliberately fostered the public
belief that her home was possessed. Having undertaken to inform the public at large, to
whom she has no legal relationship, about the supernatural occurrences on her property,
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she may be said to owe no less a duty to her contract vendee. It has been remarked that
the occasional modern cases, which permit a seller to take unfair advantage of a buyer’s
ignorance so long as he is not actively misled are “singularly unappetizing.” Where, as here,
the seller not only takes unfair advantage of the buyer’s ignorance but has created and
perpetuated a condition about which he is unlikely to even inquire, enforcement of the
contract (in whole or in part) is offensive to the court’s sense of equity.
What was the rule of law in this contract rescission dispute?
Application of the remedy of rescission, within the bounds of the narrow exception to the
doctrine of caveat emptor set forth herein, is entirely appropriate to relieve the unwitting
purchaser from the consequences of a most unnatural bargain.
Critical Thinking
Ethical In not disclosing the house’s reputation to Stambovsky, was Ackley’s
behavior unethical? If so, was it unethical because she knew something he
did not, or was it unethical because of the nature of the information she
omitted? What if Ackley had failed to mention that the roof leaked or that the
well was dry—conditions that a buyer would normally investigate? Explain
your answer.
Legal Environment Why did the court decide that applying the strict rule of
caveat emptor was inappropriate in this case? How would applying this
doctrine increase costs for the purchaser?
Chapter 28: Real Property and Landlord-Tenant Law: 28–3a Real Estate Sales Contracts
Book Title: Business Law: Commercial Law for Accountants
Printed By: Hilmi Durmaz (hdurmaz1@ramapo.edu)
© 2018 Cengage Learning, Cengage Learning
© 2022 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 28: Real Property and Landlord-Tenant Law: 28–6 Landlord-Tenant Relationships
Book Title: Business Law: Commercial Law for Accountants
Printed By: Hilmi Durmaz (hdurmaz1@ramapo.edu)
© 2018 Cengage Learning, Cengage Learning
28–6 Landlord-Tenant Relationships
A landlord-tenant relationship is established by a lease contract. A lease (Under Article 2A of
the UCC, a transfer of the right to possess and use goods for a period of time in exchange
for payment. In the context of real property, an agreement by which a property owner
(landlord) agrees to give another party (the tenant) the exclusive right to possess the
property for a limited time.) contract arises when a property owner (landlord) agrees to give
another party (the tenant) the exclusive right to possess the property for a limited time. In
most states, statutes require leases for terms exceeding one year to be in writing. The lease
should describe the property and indicate the length of the term, the amount of the rent, and
how and when it is to be paid.
State or local law often dictates permissible lease terms. For instance, a statute or
ordinance might prohibit the leasing of a structure that is in a certain physical condition or is
not in compliance with local building codes. As in other areas of law, the National
Conference of Commissioners on Uniform State Laws has issued a model act to create
more uniformity in the law governing landlord-tenant relations. Twenty-one states have
adopted variations of the Uniform Residential Landlord and Tenant Act (URLTA).
Chapter 28: Real Property and Landlord-Tenant Law: 28–6 Landlord-Tenant Relationships
Book Title: Business Law: Commercial Law for Accountants
Printed By: Hilmi Durmaz (hdurmaz1@ramapo.edu)
© 2018 Cengage Learning, Cengage Learning
© 2022 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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Chapter 28: Real Property and Landlord-Tenant Law: 28–1a Land and Structures
Book Title: Business Law: Commercial Law for Accountants
Printed By: Hilmi Durmaz (hdurmaz1@ramapo.edu)
© 2018 Cengage Learning, Cengage Learning
28–1a Land and Structures
Land includes the soil on the surface of the earth and the natural products or artificial
structures that are attached to it. Land further includes all the waters contained on or under
its surface and much, but not necessarily all, of the airspace above it. The exterior
boundaries of land extend down to the center of the earth and up to the farthest reaches of
the atmosphere (subject to certain qualifications).
Chapter 28: Real Property and Landlord-Tenant Law: 28–1a Land and Structures
Book Title: Business Law: Commercial Law for Accountants
Printed By: Hilmi Durmaz (hdurmaz1@ramapo.edu)
© 2018 Cengage Learning, Cengage Learning
© 2022 Cengage Learning Inc. All rights reserved. No part of this work may by reproduced or used in any form or by any means graphic, electronic, or mechanical, or in any other manner – without the written permission of the copyright holder.
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