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Leogrande v. Soave

BER-L-6374-02 (N.J. Super. Law. Div. 2005) (Unpublished)

DEEDS; MERGER—Although there is a doctrine in real estate transactions that, unless reserved, all warranties and representations made in connection with a sale are merged into the deed, the implied warranty of habitability for a home is an exception.

About three years after a house had been sold, the buyer’s attorney notified the sellers of a claim that the septic system was seriously flawed and that the defects in the system must have been known to the sellers. The suit that followed alleged that knowledge of the condition was a deliberate withholding of critical information concerning the value of the house. The seller responded that because the buyer had engaged a septic tank inspection firm prior to closing, the buyer could not have been reasonably relying upon any statements made by the seller, even if such statements were knowingly false. Reasonable reliance by the party alleging fraud is a required element of the cause of action. The Court restated that “[i]n instances in which a party undertakes an independent investigation and relies on it, there can be no reliance” (emphasis added by the Court). But, according to the Court, “the simple fact that the [claimant] had an inspection conducted is not sufficient to bar [its] fraud claim. The [claimant] must have relied on the investigation and the reliance must have been reasonable.” Here, the Court was not convinced that the buyer had an “ample opportunity to ascertain the truth of the representations.” The inspection company’s report “even indicated that because of the design and construction of the septic system, ‘any further information pertaining to the system would require the aid of a backhoe to determine the elevation of the septic effluent in the seepage area.’” The very disagreement that the parties had about the extent of the inspection “implicate[d] the reasonableness of the reliance on [the seller’s] representations.” The Court also felt that it was “plausible that the [buyer] relied on the [seller’s] alleged representations that the system was ‘fully functional,’ especially considering that the [inspection] report indicated that [its] findings were ‘not a warranty as to the ultimate service life of the septic system, which could only be extended through regular maintenance pumpings.’” The inspection report recommended that pumpings be conducted every three years. The buyers were aware that the seller had been pumping the system twice as often. Consequently, the Court believed that a jury needed to consider whether the buyer should have known that the system was inadequate based upon the seller having conducted more pumpings.

The seller also argued that the cause of action was barred by the doctrine or merger. According to that doctrine, “in real estate transactions, all warranties and representations made in connection with a sale, unless specifically reserved to hold over after the passage of title, are merged into the deed.” One of the exceptions is that a “properly working septic or sewer system is an item included within the implied warranty of habitability” and “an implied warranty of habitability should [] apply to the sale of a ‘used’ home.” Therefore, according to the Court, the law of merger did not apply.

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