Caveat Emptor is Latin for “let the buyer beware.” Caveat Emptor is a doctrine that prevents a buyer from recovering damages on a claim that the property they purchased has some defect. The doctrine is designed to resolve issues of information asymmetry in purchases for real estate. In this situation, information asymmetry refers to the possibility of the buyer and seller holding different information i.e. the seller knows of defects in the house being sold, while the buyer is completely unaware. Thus, the rule is a warning to buyers, standing for the concept that the buyer needs to be aware that the seller is not responsible for replacing, fixing, or otherwise remedying the defects in what they purchased. Instead, this is the buyer’s responsibility. While this doctrine used to preclude claims for all types of property, it no longer applies for personal property. However, the doctrine is alive and well in real estate transactions.
Caveat Emptor bars recovery for a defect when (1) The defect is open to observation, or discoverable on reasonable inspection, (2) the purchaser has had an unimpeded opportunity to examine the property and (3) the vendor did not engage in fraud. Layman v. Binns, 35 Ohio St.3d 176, 519 N.E.2d 642 (1988). We’ll dive into each of these elements, and what they mean for buyers and sellers of real estate, one by one.
Element 1: The defect must be open to observation or discoverable on reasonable inspection
Trying to understand this element poses several questions. First, what is classified as a defect for purposes of this rule? Caveat Emptor concerns two different types of defects. Patent defects are those which are open, observable, and discoverable through a reasonable inspection. These are the types of defects that are openly visible, the type of defect which any reasonable buyer would notice without much difficulty. Latent defects, on the other hand, are much more difficult to discover. By their very nature, they are hidden, or not easily visible. An example of a patent defect would be a hole in the walls of the house. A latent defect, on the other hand, would be a leaking roof, as a reasonable buyer likely would not have discovered this upon inspection (unless it was raining that day of course).
Because of the difference in the difficulty of discovering these types of defects, Caveat Emptor charges the buyer with knowledge of all patent defects in the structure. Thus, Caveat Emptor prevents a buyer from recovering damages from the seller for the patent defects. However, latent defects are an exception to the Doctrine of Caveat Emptor. Because latent defects are inherently hidden, the seller has a duty to disclose them to the buyer. When a buyer breaches this duty to disclose, the buyer may recover damages for the defect, and Caveat Emptor does not apply.
Element 2: The purchaser had the unimpeded opportunity to examine the property
Caveat Emptor imposes on a buyer of real estate a duty to inspect and inquire about the premises in a prudent and diligent manner. While there are defects that are required to be disclosed, namely a material latent defect, a seller is not obligated to reveal all that he or she knows. The buyer has a duty to make inquiry and examination of the premises. This examination must be in a prudent and diligent manner, and as a result, buyers will find patent defects. This is why Caveat Emptor always bars claims for patent defects.
It is important to note that this language simply refers to the opportunity to inspect the property. This is not a requirement that the inspection actually is conducted. If the buyer fails to conduct an inspection at all, while having the opportunity to do so, Caveat Emptor will bar the claim if the other requirements are met. The seller, on the other hand, may not interfere with the ability to inspect the premises. If the seller interferes in any way, then Caveat Emptor does not bar the claim, and the buyer may recover damages for defects in the property.
Element 3: The seller did not engage in fraud.
Caveat Emptor will not bar a claim if the buyer can prove that the seller engaged in fraud. For a showing of fraud, the buyer must prove that there was fraudulent concealment of a defect. To do this, the injured party must show:
- A material concealment
- Which was knowingly concealed by the seller
- With the intent of misleading another into relying upon it
- Actual reliance by the party claiming to be injured upon the concealment, with a right to do so
- Injury resulting from the reliance
A showing of fraud is difficult to prove. The nondisclosure of the defect constitutes fraud when disclosure of the defect is necessary to place the parties on equal footing in the transaction. However, issues may arise when the seller may have engaged in fraud, yet the defect in question is readily discoverable. Non-disclosure of defects in a home does not rise to the level of fraud unless the defects are not discoverable through reasonable inspection. In this case, so long as the purchaser has the opportunity for investigation and determination without concealment or hindrance by the seller, the fraud on the part of the seller is essentially irrelevant, and Caveat Emptor still applies.
So how does this affect buyers and sellers?
Buying real estate is a serious investment. In Ohio or any other state which follows Caveat Emptor, buyers need to take every precaution in conducting their inspections of the real property, following up any potential defects. It is also recommended that buyers hire a qualified inspector to investigate the real property as well. When buyers are thorough in their inspection, and defects still arise, buyers should then reach out to legal counsel, as the defects may be actionable.
Just as buyers should be thorough in their inspections, sellers should be thorough in their disclosures. Sellers of residential property often must fill out a disclosure form before the sale. In completing these forms, sellers should disclose any and all defects that are within their knowledge and reference in the disclosure form, no matter how insignificant they may feel the defect is. This best practice will prevent a buyer from bringing an action against sellers for fraud, or exerting the aforementioned exceptions to Caveat Emptor.
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